Urban Economics
M. Finkler
Spring 2005
Final Exam
Answer four of the questions below. Each question is worth 40 points; thus, the in-class portion
of the final exam accounts for a maximum of 160 points. No books, notes, or other assistance
may be used during the examination. Be sure to show your work. Please reaffirm the Lawrence
University Honor Code.
“The ultimate prognosis for cities depends on whether the changes in the benefits accruing to
cities from informational spillovers and the division of labor will be greater than the changes in
the congestion and social costs of cities. I believe that the death of cities is far from imminent.”
– Edward L. Glaeser
1.
Define five of the following concepts and indicate how each helps analysts understand
urban economies. (8 points each)
a.
Location quotient
b.
Rank-size rule
c.
Left-over principle
d.
Agglomeration economies
e.
Monopolistic competition
f.
Present value
g.
Edge city
2.
Location Theory
a.
What are bid-rent functions? Show how the ability of an industry to substitute
capital for land affects its bid-rent function.
b.
Describe household bid-rent functions. Use these bid-rent functions to explain
how low income households “outbid” high income households per square foot for
land fairly close to the center city.
c.
Explain how bid-rent functions can be used to determine the land-use
configuration of an urban area.
d.
Use location theory to evaluate the argument that employment has moved to the
suburbs because CBD land values have gone so high that employers can no longer
afford to locate there.
3.
Labor markets can be used to understand economic growth in particular urban areas.
Assume a perfectly competitive of labor market to determine the effects on wages and
employment of the following circumstances:
a.
Increased demand for a city’s exports.
b.
A city establishes an industrial park and provides roads and public utilities to it.
c.
City efforts to improve the quality of the urban environment are successful.
d.
The rate of crime in a city rises.
Be sure to show graphics and indicate the effects for each part.
4.
Property Market
a.
Assume that a particular parcel of property generates real net income of $2000/
month for the foreseeable future. If property markets are competitive and the real
interest rate is 5%, what would be the market price for this property?
b.
What would happen to the value of the property if a land tax of $100/ month
for the foreseeable future were imposed?
c.
Indicate how the "leftover" principle plays a role in the answer to part b.
d.
How does the character of the production function affect how much is left to pay
to landowners?
5.
Firm location
a.
For firms for which transportation costs are important, illustrate and discuss why
some firms locate near a natural resource while others locate near their market.
b.
Why is beer likely to be produced near its customers while wine is produced near
its natural resources?
c.
Distinguish between localization economies and urbanization economies and
indicate how each of these factors affects decision-making.
d.
The decline in transportation costs has reduced this factor as a locational decisionmaking variable. Name two factors that typically rank at the top of the list of
determinants for their influence on where firms will locate.
6.
Firm location
Assume three firms (A, B, C) produce ice cream, and each acts as the sole seller
(monopoly) within its market area. The cost of production for A, B, and C are $1.00,
$.70, and $1.30 per cone, respectively. The cost per mile to obtain the cone is $.10.
Provide a diagram to support your answers to parts a - c.
A
B
C
0 miles
5 miles
10 miles
15 miles
20 miles
a.
b.
c.
d.
Assume that firms are located as indicated along the linear spectrum above and
that population is uniformly spread across the spectrum, determine the market for
each firm.
If firm C discovered how to make ice cream for $.50 a cone, how would the
results change?
If transportation costs fell to $.05 per mile, how would the results in a. change?
Indicate two reasons why the monopoly assumption might be questioned.