2- Assignment Paper

1
Midterm Exam #1
Section 1: Multiple Choice (2 points each)
1- Which of the following is/are examples of agglomeration externalities?
I. Firms experience lower costs by sharing local suppliers.
II. Firms experience lower costs by sharing a large local pool of labour.
III. Firms experience knowledge spillovers that boost productivity.
a) I only.
b) II only.
c) III only.
d) I and II only.
e) I, II, and III.
2- Which of the following is NOT an example of an agglomeration economy?
A) A firm produces output at lower cost per unit when it produces at a large scale.
B) A computer programmer at Firm A learns a productivity-enhancing coding trick
from a programmer friend at Firm B when they meet at a bar after work.
C) Firms face lower costs in a big city because there’s lots of competition between
their local input suppliers.
D) Firms face lower recruiting costs when there’s a large pool of qualified labour
nearby.
E) Two auto companies can obtain parts at lower cost by locating near a parts
supplier, which can then produce at larger scale.
3- Which of the following needed to be true in order to allow early towns to form?
A) Local farmers had to be able to produce enough food for themselves *and* the
residents of the city.
B) Agglomeration economies had to exist.
C) Internal economies of scale had to be present.
D) Large temples needed to be present.
E) All of these needed to be true in order to allow early towns to form
4- In countries that were early to industrialize (such as those in North America and
Europe), if you compare cities today with cities from 100 years ago, you would
find:
I. Cities today have a population density that falls off more quickly as you move
away from the center.
II. Cities today tend to have smaller housing units.
2
III. Cities today tend to have a larger share of the manufacturing sector located
away from the center.
A) I only.
B) III only.
C) I and III only.
D) I and II only.
E) I, II, and III.

5- Consider the basic urban model from your textbook, and a city that exists in
isolation (no migration in or out). Suppose commuting cost per km declines.
Which of the following is NOT an effect this will have on the city’s spatial
equilibrium?
a) The city will sprawl outward.
b) Building heights will decrease near the center and increase in the suburbs.
c) Average housing unit size will increase at the center.
d) Commute lengths (distance) will increase.
e) Housing rents per square foot will fall throughout the city.
6- Consider the basic urban model, and a city that exists in isolation (no migration in
or out). Suppose income increases. Which of the following is NOT an effect this
will have on the city’s spatial equilibrium?
a) The city will grow in size (area).
b) Building heights will rise at the center.
c) Average housing unit size will increase at the center.
d) The residential bid-rent curve, rH, will pivot counterclockwise.
e) Housing developers will substitute from non-land inputs toward land near the
center.
7- Consider the basic urban model, and a city that exists in isolation (no migration in
or out). Suppose agricultural profitability increases around the city. Which of the
following is NOT an effect this will have on the city’s spatial equilibrium?
a) The city will shrink (in area).
b) Building heights will increase near the center.
c) Average housing unit size will increase near the center.
d) Commute lengths (distance) will decrease.
e) Housing rents per square foot will rise throughout the city.
3
8- What effect does a decrease in commuting cost per km, t, have on the housing
price curve, p(x)?
a) The decrease in t rotates p(x) clockwise.
b) The decrease in t rotates p(x) counterclockwise
c) The decrease in t shifts p(x) up.
d) The decrease in t shifts p(x) down.
e) The decrease in t has no effect on p(x).
9- The slope of the housing price curve in the basic urban model is given by
a) t/q
b) -t/q
c) q/t
d) -q/t
e) None of these is the slope of the housing price curve.
10- The housing price curve will be flatter when
I. q is smaller.
II. t is smaller.
III. Commuting costs are higher.
a) I only.
b) II only.
c) III only.
d) I or II.
e) II or III.
11- The housing price curve gets steeper as we move toward the center of the city
because
a) consumers substitute toward less housing when the price of housing rises.
b) producers substitute toward using less land when the price of housing rises.
c) consumers substitute toward less non-housing consumption when the price of
housing rises.
d) producers substitute toward using fewer non-land inputs when the price of
housing rises.
e) None of these is the reason the housing price curve gets steeper as we move
toward the center of the city.
4
12- Which of the following are assumptions of the basic urban model?
I. Commuting is costly.
II. Firms are all located at a single point at the center of the city.
III. Producers of housing can substitute between land and non-land inputs.
a) I only.
b) I and II only.
c) I and III only.
d) II and III only.
e) I, II, and III.
13- Which of the following is a condition that must hold in equilibrium in the basic
urban model, with multiple cities and migration possible between those cities?
I. Equal utility at all locations within each city.
II. Equal utility across all cities.
III. Equal non-housing consumption across all locations.
a) I only.
b) II only.
c) III only.
d) I and II only.
e) II and III only.
14- Which of the following contributed to manufacturers locating near city centers in
places like North America 100 years ago?
I. Manufacturers relied on being close to a central rail terminal to receive inputs
and ship outputs.
II. Manufacturers’ workers lived close to the center of the city.
III. Manufacturers needed to locate next to highways near the city center.
a) I only.
b) II only.
c) III only.
d) I and II only.
e) I, II, and III.
5
15- In the basic urban model, as one moves away from the center of the city, which of
the following is/are TRUE in equilibrium?
I. Population density rises.
II. Size of housing units rises.
III. Ratio of land to non-land inputs in the production of housing rises.
a) I only.
b) II only.
c) III only.
d) II and III only.
e) I, II, and III.
16- Consider the market area model. This model suggests that which of the following
will lead to a decrease in the market size of a factory:
I. A rise in the cost of transporting goods.
II. A rise in factory production costs.
III. A rise in the cost of home production of the good.
a) I only.
b) II only.
c) III only.
d) I and II only.
e) I, II and III.
17- As one moves toward the center of the city in the basic urban model, which of the
following is/are TRUE in equilibrium?
I. Population density falls.
II. Residence size falls.
III. Price per square foot of housing rises.
a) I only.
b) II only.
c) III only.
d) I and II only.
e) II and III only.
6
18- Suppose everyone has the same preferences but some people earn high incomes
and some people earn low incomes. If high income people face a lower
commuting cost per km than low income people, then
a) Low income people will locate nearest the center and high income people will
locate nearest the edge.
b) High income people will locate nearest the center and low income people will
locate nearest the edge.
c) High and low income people will mix throughout the city.
d) Without more specific information about preferences and income differences, the
model cannot predict what will happen.
19- Consider the model of the market area of a factory. A simultaneous decrease in
the per unit cost of factory production of the good and a decrease in per km
transport cost will
a) cause the market area of the factory to rise.
b) cause the market area of the factory to fall.
c) cause the price of the good to rise.
d) cause no change in the market area of the factory.
e) from the information given, we cannot tell what the effect on market area will be.
20- Consider the market area model. This model suggests that which of the following
will lead to an increase in the market size of a factory:
I. A decline in the cost of home production of the good.
II. A decline in factory production costs.
III. A decline in the cost of transporting goods.
a) I only.
b) II only.
c) III only.
d) II and III only.
e) I, II and III.
7
Section 2: Short Answers.
Question 1- (1 marks) Consider the market area model.
a. Start by completing the diagram below. What does the market area look like?
Determine the market area in the graph.
b. (3 marks) Gasoline is an important input into factory production and is also used
in transportation. Suppose the price of gasoline decreases. What is the effect of
the price decrease in the market area of the factory? Show the new market area in
your graph in part a.
Market Area
0
Per unit home
production cost
Production plus
Transportation
cost ($)
Per unit factory cost
8
Due to the decrease in gasoline prices, the transportation cost decreases and the slope of
the graphs will decrease outward. Also, the unit cost of factory production deccreases
which leads to a shift in the factory unit cost of production. Hence, consumers would
rather to buy from the factory. This results in an increase in the market area of the
factory.
Question 2- Consider the bid-rent curve.
a. (1 marks) Draw the residential bid-rent curve, rH, and the agricultural bid-rent
curve, rA for a city in equilibrium. Denote the edge of the city in your diagram.
Market Area
0
Per unit home
production cost
Production plus
Transportation
cost ($)
New Market Area
9
a) (2 marks) Consider the city in isolation that experiences an increase in commuting
costs. Draw the change in spatial equilibrium that results. Explain what happens
to the density of the city, the size and the height of the housing near the city and
in the suburbs.
The residential bid-rent curve, rH, will pivot counterclockwise.
r(x)
x
rH
rA
x*
r(x)
x
rH
rA
x*’ x*
rH’
10
1. The increase in commuting costs causes r(H) to sharpen and causes the edge of the city to
move left (inward).
2. Note from above that p(x) would shift similarly: price of housing would increase in the
center and decrease in the suburbs).
3. The rise in commuting costs would also increase building heights near the center and
decrease them in the suburbs.
4. The size of housing units would decrease near the center, due to the rise in p(x) near the
center and increase in the suburb area.
11
b. (2 marks) Now assume that the city we’re considering is one of many cities in the
world. Migration between cities is possible and the city under consideration is
*small* relative to the rest of the world. Redraw your answers for b and show the
new edge of the city. Explain the in or out migration.
People respond to increase in commute cost by moving out of the city. That pushes the r(H)
curve down a bit further, to rH”. Remember that this is a parallel shift to rH’. The fact that outmigration occurs emphasizes the shrinking of the city’s footprint.
r(x)
x
rH
rA
x*’ x*
rH’
rH’’
X*’
’