ufp_ps3_12_sol

# Similarly if fixed investments into communities are

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and better life some place else. Similarly, if fixed investments into communities are large than we may want to main- tain that value of previous investments in infrastructure using place-based policies. If the infrastructure is old and falls apart, it might be more sensible to tear down the place and start over again. An example is a run-down public housing project. Finally, a place based policy is promising if the place has a natural comparative advantage that is typically based on its geographic location. If the location does not have a comparative advantage, it might be time for younger households to relocate to a different place.

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(d) We would call this a place-paced policy since it primarily affected the workers and managers that work for GMM and Chrysler. Many of these workers live in the “Rust Belt.” Problem 2: Tiebout Sorting (40 percent) (a) Suppose all individuals live in community 1, then we know that ¯ y 1 = Z 1 0 x f ( x ) dx = 0 . 5 (1) since f ( x ) = 1 if x U [0 , 1]. Consider the richest person with income equal to 1. His utility from staying is U = (1 + 1) (1 + 0 . 5) - c 1 = 3 - c 1 (2) If he moves to community 2 that mean income will be equal to one, i.e. ¯ y 2 = 1 and the utility in community 2 will be: U = (1 + 1) (1 + 1) - c 2 = 4 - c 1 - Δ (3) The pay-off in community 2 is higher if Δ < 1.
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