EC438 Exam 2
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EC438
Exam 2
1.
(15 pts) Over a hundred cities bid for Amazon’s second headquarters. The winners, New York City and Crystal City, Virginia, were reported to have given out millions of dollars of subsidies or tax breaks to Amazon. Policies that aim at promoting economic development in a certain region is often called “place-based policies.”
(a) (5 pts) Proponents of place-based policies often cite “local job multiplier” as a reason to
support such policies. Explain, in less than 50 words, what is the “local job multiplier?”
(b) (5 pts) Explain how the existence of local agglomeration economics could be a reason to support such policies?
(c) (5 pts) List at least 3 arguments against such location-based policies. Explain briefly.
2. (30 pts) This exercise uses the Rosen-Roback model to analyze changes in the local housing price and wage after a change in local tax polices.
Housing price : p
Wage : w
(a) (5 pts) In the diagram draw workers’ indifference curve. Is it upward or downward
sloping? Briefly explain why.
(b) (5 pts) Draw firms’ iso-cost curve in the same diagram. Is the iso-cost curve upward or
downward sloping? Briefly explain why.
(c) (5 pts) Suppose local government decide to increase business taxes, and use the rev- enues to build a library for local residents. Suppose the library has no impact on firms’ production, but it increases’ the amenities for workers. What would happen to work- ers’ indifference curve? What would happen to firms’ iso-cost curve?
(d) (10 pts) How will the equilibrium wage change? How will the housing price change? What is the underlying migration flow?
(e) (5 pts) Now analyze the scenario described in part (c) in the framework of local labor
markets. Draw the local labor demand curve and the local labor supply curve. Show how the demand curve and the supply curve change. Explain how wage and employ- ment will change.
3. (30 pts) Suppose a city has all its economic activity on a linear line, as is shown in the figure below. There are 7 blocks, A-G, evenly distributed along the linear line. D is the downtown block. The transportation cost between any pair of contiguous blocks is $1. That is, traveling from D to E costs $1, from D to F is $2, and so on. Now suppose a business consulting firm is considering to put its office in one of the blocks. There is one customer in each block. The consultant needs to visit each customer once every month. In each visit, the consultant starts from the office, visit the customer, then return to the office.
(a) (5 pts) What is the total monthly transportation cost if the firm chooses to locate in block
D?
(b) (15 pts) Calculate the total monthly transportation cost if the firm chooses to locate in each of the other locations.
(c) (10 pts) Suppose now the monthly rent in block A or G (at the boundaries of the city) is $10. For the consulting firm, except for the cost in transportation, other operational cost is the same at any location. Calculate the bid rent for the firm in each location.
4. (25 pts) This question illustrates residential distribution with segregated equilibrium (where the high-income and the low-income live in different neighborhoods) and integrated equilib- rium (where the high-income and the low-income live in the same neighborhood). Suppose the high-income households have a wage of $20 per unit of time, the low-income households have a wage of $10 per unit of time. Suppose both the low-income and the high-income go to work by bus. It takes the bus one unit of time to cover 1 mile. Suppose the low-income households have a marginal benefit curve MBL = 20 − d, where d is the distance between where they live and where they work (downtown). The high-income households have larger demand for housing, their marginal benefit curve is MBH = 60 − 2d.
(a) (10 pts) What is the distance between where the low-income households live and the
downtown? What is the distance between where the high-income households live and the downtown? Is it a segregated equilibrium or an integrated equilibrium?
(b) (5 pts) Now suppose that the demand for housing for the low-income households in- creases, the marginal benefit for the low-income households becomes MBL = 30 − d.
Re-calculate the residential location for the low-income households.
(c) (5 pts) Now suppose that the high-income households drive to work. Car is twice as
fast as bus. What is the new marginal cost for the high-income households? What is the new residential location for the high-income households?
(d) (5 pts) Now suppose that the wage of high-income households increases. Suppose their demand for housing does not change. Without solving for the new residential location for the high-income households numerically, answer how does it affect the marginal cost curve for the high-income households? Will they choose to live closer or farther away from the downtown?
2022-04-28