1.   Consider a country with two regions that are separated by a river. Initially, there are no cities in the country. Suppose that a bridge is constructed, decreasing travel costs between the two regions. Under what conditions will the bridge cause the development of trading cities? Be   specific. ( 10p)

•    Trade must be beneficial

o  Comparative advantages

o  Low trading costs

•    TRADING firms must be subject to economies of scale

2.   Explain how a factory city is created.(10p)

•    Production of a good is subject to economies of scale

•    Firms are created to take advantage of profit opportunities

•    Firms locate at a strategic location and demand workers

•    Workers demand land near the factory and price of land rises as a result

•    As prices of land go up, workers demand less land

•    A densely populated area near the firm is created: a factory city

3.   Consider a manufacturing firm in a rectangular city that produces 10 tons of output per day    and transports 1/5 of its output via a highway 4 miles east of the city center and transports the remaining 4/5 on airplanes that leave from an airport 7 miles east of the city center.                Intraurban transportation is via trucks, with a unit cost of $20 per ton per mile. The firm does not engage in factor substitution as the price of land changes. Draw the firm’s bid-rent curve  for land from the city center to 10 miles east. Be very specific in your graph or write a table   explaining how you derived the graph. (10p)

You needed to use the fact that changes in transportation costs = changes in the firm’s       willingness to pay for the land they occupy. For example, assume that the revenue of the    firm is R. Then the total transportation costs and related bid for the land can be computed as follows:

We can make a graph where, in the x-axis we plot distance from the center and in the y-axis the willingness to pay for land. Notice that, in such graph, the slope of the rent-bid curve is  as follows:

From 0 to mile 4: slope = 200

From 4 to 7: slope = 120

From 7 to 10, slope = -200

4.   In the early 1800 hundreds, there were few urban areas in the US. As we mentioned in our    first class, cities were small and only about 10% of the population lived in urban areas. Some of these cities were “factory cities” that hosted several industries. Let us take a look at the     textile industry. It has been well documented by economic historians that there were many    textile factories in the US at that time. It was not uncommon, however, that many families     (especially in rural areas) did not buy their clothing from the factories but made their own     clothing, instead. Please, use the “factory-city” model to explain the following two events     that happened as time went by:

•    The growth of industrial urban areas

•    The “extinction” of clothing self-production

Use a graph (martini-glass), and a detailed explanation. (20p)

Technological advances in the early 1800’s lead to:

1.   Decrease in transportation costs (TC), and

2.   Reduction in production costs due to improvements in technology (industrial revolution)

If you focus on (1), a decrease in TC leads to a “flatter” and “wider” martini-glass which determines a greater market area. This is turn leads to bigger cities (growth of industrial urban areas) and fewer people producing clothes for themselves. You need to show these changes in a detailed graph.

If you focus on (2), a decrease in production costs leads to lower prices. As prices go down, the “height” of the base of the martini glass decreases. Because opportunity   costs are constant, the market area of the city increases. This is turn leads to bigger cities (growth of industrial urban areas) and fewer people producing clothes for       themselves. You need to show these changes in a detailed graph.

Either (1) OR (2) are needed to get full credit.

5.    The next questions refer to the economic model of land rent explained in class.

a) What does economic theory predict about land prices and population density as we move away from the center? (make a graph) (5p)

Our land rent model predicts that land prices decrease exponentially as we move away from the center of the city. The same is true for population density. Look at graph in the old exam solution key.

b) Use the model of land rent (standard urban model) to explain why in certain cities such as Detroit, land within the city is being used for agricultural purposes. Make sure you use  a graph showing the rent bid as a function of distance to the center to explain your answer. (15p)

Look at your class notes from Tuesday 6/9/2015.

6.   City A and city B are two identical cities with a population of 6 million workers each. In both cities, workers commute to the center of the city, and there are significant congestion              problems. City A receives a terrorist attack that destroys its subway system and dramatically  increases congestion (as more residents use the roads). What are the effects of the destruction of the subway system on intercity migration? What are the effects on the regional per-worker utility? Please use the utility model we covered in class to EXPLAIN your answer. Be clear   and concise. (10p)

Effects: i) Residents from A migrate to B; thus, city A shrinks and city B grows. ii) utility per worker DECREASES in both cities (negative shock in one city spreads out across the region)

Explanation: Clearly, once new subway is destroyed, congestion problems in city A increase and, thus, urbanization economies diminish. In our model, this implies that the utility per    worker curve in city A shifts down (see graph). If 6M residents would remain in each city,   the utility per worker of residents in city A, would be lower than that in city B; that is          Ua<U0. To achieve locational equilibrium, workers in city A would migrate to city B until   the same level of utility U* is reached in both cities. Clearly, U* < U0, thus residents in both cities are harmed from the terrorist attack.

Utility

per

worker

($U)0    

U*

Ua

A’

6M

B’

Population