Economy homework

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HOMEWORK 1 (CHAPTERS 1 – 5 & THE ISOLATED STATE)

DUE DATE: WEDNESDAY SEPT. 30TH

(SUBMITTED IN CLASS OR BY E-MAIL BEFORE 2:00 PM)

Problem 1: Consider a model like the one introduced by Johan Heinrich Von-Thünen in which every unit of land surrounding a Central Business District (CBD) has the same productivity and can produce either 1000 units of grain or 300 units of vegetables per week requiring a single unit of labor. Now assume that each unit of vegetables can be traded for 10 units of grain, all laborers can earn the equivalent of 300 units of grain per week (or 30 units of vegetables) working at the city center and that transportation costs are 100 units of grain to transport grain per mile and 60 units of vegetables to transport vegetables per mile. If all crops have to be transported to the CBD at the end of each week find and illustrate using a graph:

a. the bid rent curve (the maximum rent the land owner can extract for each lot) for vegetable production

b. the bid rent curve for grain production c. the distance from the CBD at which crops should change.

(Hint: you will first need to choose your currency unit) (20 points)

Problem 2: Briefly describe:

a. Why the existence of increasing returns to scale in production can lead to the creation of factory cities.

b. How differences in worker productivity can lead to the creation of trading cities. (20 points)

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Problem 3: Consider the following figure that illustrates the benefits (profits for each firm) from clustering in the beer industry.

a. Can you predict how many firms there will be in each cluster? b. Is it possible that clusters with fewer firms, than what you found above, will also

be created? c. Is it possible that some firms will want to remain isolated?

(Briefly justify each answer) (20 points)

Problem 4: Using the model of equilibrium in an urban labor market explain what will be the effects from the construction of a new series of parks, museums and other common areas of a city on the average wage in the city, total employment in the city and total utility the city’s residents will enjoy. Use a graph to support your answers.

(20 points)

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Problem 5: Consider the following figure that illustrates utility as a function of worker population in the only two cities (city A and City B) of the same country. Assume also the country does not have any non-urban residents.

a. If currently the equilibrium level of utility in this country is U*, how many workers

does each city have and what is the country’s total population? b. Using the same figure illustrate the effects on the population of each city and on

the overall level of utility in the country from an increase in agglomeration economies (e.g. due to technological innovation) in the large city.

(20 points)