Economics 312: Urban Land Economics University of Victoria Midterm Examination #1 VERSION 1 SOLUTIONS Spring 2018 Instructor: Martin Farnham Midterm Exam #1 Section 1: Multiple Choice (2 points each) Unless otherwise stated, assume markets are competitive and that supply slopes up and demand slopes down. 1) The Erie Canal (completed 1825 in New York State) connected Lake Erie (part of the Great Lakes which gave access to areas in the center of North America) to the Hudson River which flows to New York City (NYC) on the US east coast. This contributed to the growth of New York City because A) It caused the market area of NYC firms to increase. B) It caused people to move from the Great Lakes area to NYC. C) It caused more trade between the Great Lakes region and Europe to pass through NYC. D) It replaced railroads in upstate New York. E) Both A and C are correct answers. 2) According to the Guns Germs and Steel hypothesis of Jared Diamond, by the 1400s, early urbanizers in Eurasia were better equipped to resist disease than less developed societies around the world because A) early urbanizers had developed stronger immune systems than less developed society, due to dense living. B) early urbanizers had developed science that showed that disease was spread by germs, so they could better manage the spread of disease. C) early urbanizers had developed medicines to effectively resist disease. D) early urbanizers had central governments who worked effectively to fight disease outbreaks. E) A and D are correct. 3) According to the Guns Germs and Steel hypothesis of Jared Diamond, which of the following factors contributed to the early rise of written language in Eurasia relative to the rest of the world? A) the presence of many domesticable plants and animals in Mesopotamia 1
B) the early rise of dense settlements in Eurasia C) early technological advancements in Eurasia D) the early rise of bureaucracy in Eurasia E) all of the above 4) An increase in labour supply and a decrease in labour demand should have which overall effect on the local labour market? A) Employment will definitely fall, and wage may rise or fall. B) Employment will definitely rise, and wage will definitely fall. C) Wage will definitely fall, and employment may rise or fall. D) Wage will definitely fall and employment will definitely fall. E) Employment will definitely fall, and wage will definitely rise. 5) In which of the following settings are we least likely to see agglomeration externalities? A) Downtown farmers markets. B) University campuses. C) Dating websites D) Nightclubs. E) Rural areas. 6) Which of the following statements about urbanization is/are TRUE? I. An agricultural surplus is essential to urbanization. II. An agricultural surplus facilitates technological advancement. III. An agricultural surplus is sufficient to cause urbanization. A) I only B) II only C) III only D) I and II only E) II and III only 7) Which of the following were key to the Industrial Revolution in Europe and North America? I. Agricultural innovations. II. Manufacturing innovations. III. Construction innovations. IV. Transportation innovations. 2
A) II only B) III only C) IV only D) II and IV only E) I, II, III, and IV 8) Consider a basic model of supply and demand in the real estate market and in the labour market. If an urban area experiences an increase in positive amenities (becomes a nicer place to live, say due to an improvement in weather), then holding other things constant which of the following should happen? I. Real estate prices should rise in the now nicer place. II. Real estate prices should fall in the now nicer place. III. Wages should rise in the now nicer place. IV. Wages should fall in the now nicer place. A) I and III only B) II and IV only C) I and IV only D) II and III only E) None of the above. 9) Which of the following statements about the inverted U-shape of the utility per worker curve is true? A) Income only rises with population (due agglomeration externalities) when a city is small. B) Rents only rise with population (due to crowding of land) when a city is large. C) Congestion only rises with population (due to crowding of public spaces and roads) when a city is large. D) The rise of income dominates the rise of rents and congestion when the city is small. E) The rise of income dominates the rise of rents and congestion when the city is large. 10) Stadiums don t generally yield great economic net benefits to a city because A) Local taxpayers are usually asked to pay much of the bill for the stadium. B) Stadiums displace customers who would have visited other local businesses within the city. C) Jobs created to build the stadium generally only last a few years; ongoing jobs tend to be part time. D) Jobs created to build the stadium generally come from outside the city. E) All of the above 3
11) Start-up companies tend to thrive in industrially diverse cities because A) they rely heavily on localization economies. B) they often don t know what their labour needs will be in the future. C) they often don t know what their supplier needs will be in the future. D) they often don t know what business partners (e.g., design or advertising firms) they re likely to need in the future. E) B, C, and D are all correct. 12) Which of the following is NOT an example of a situation where urbanization economies are likely to be at play between 2 firms? A) A coffee shop (that doesn t sell baked goods) and a bakery (that doesn t sell coffee) locate next door to each other. B) A men s clothing store and a men s shoe store locate in the same shopping mall. C) A drug company and a tech firm draw from the same diverse local pool of skilled managers. D)Two architectural design software development companies benefit from information spillovers, by locating on the same block. E) A phone manufacturer and an airline share the same local advertising agency to run their national advertising campaigns. End Section 1. Section 2: Short Answers. 1) 10 points total Consider a region with a population that is divided across two cities. The questions below ask you about different possible configurations of this region. Utility per worker curves are given for each city in the diagrams below. Recall that utility per worker is increasing in income and decreasing in congestion and rental costs. Consider the following two cases: 4
a) 5 points This region has a population of 6 million distributed across 2 cities. One city has a population of 2 million. The other city has a population of 4 million. Utility per worker Utility per worker 2 Population 4 Population (millions) (millions) Is this an equilibrium? If so, is it stable? Are the cities at their socially optimal size? Note that I didn t ask for an explanation, so simple (correct) yes/no answers to each question were sufficient for full credit. It s an equilibrium, because utility per worker is the same in both cities, so no one has an incentive to move. It s unstable, because if we were to perturb the system by taking a few people from City A and moving them to City B there s no guarantee that the system would return to the original equilibrium. The cities are not at their socially optimal size because neither city is at the peak of its utility per worker curve. 5
b) 5 points This region has a population of 6 million distributed across 2 cities. Both cities have a population of 3 million. Utility per worker curves are given for each city in the diagram below. Is this an equilibrium? If so, is it stable (assume the curves are symmetric on either side of the peak)? Are the cities at their socially optimal size? It s an equilibrium, because utility per worker is the same in both cities, so no one has an incentive to move. It s unstable, because if we were to perturb the system by taking a few people from City A and moving them to City B there s no guarantee that the system would return to the original equilibrium. The cities are at their socially optimal size because both cities are at the peak of their utility per worker curve. 6
2) 16 points total Consider a region in which shirts are either produced at home (at high cost) or in a single factory (at low cost). If consumers purchase shirts from the factory, they must incur transport costs (which are increasing in distance travelled) to obtain the goods. There are no transport costs associated with home. Suppose, unless stated otherwise, that constant returns to scale are present in the factory s technology. Assume that the factory serves at least some customers before and after the changes described below. Using the market area diagram from lecture, clearly illustrate the effect of the changes described below on the market area of the factory. Note that you should do your before and after pictures on the same diagram, rather than on side-by-side diagrams (this will make your answer easier to clearly interpret). a) (5 points) Clearly illustrate the effect on market area of a decrease in transport costs on market area, holding other things constant. Production plus transport costs (hours) Home Factory 0 Distance from Factory 7
Solid lines show situation before the change; dotted lines show situation after the change. The decrease in transport costs allows the factory to outcompete home producers over a larger area, thereby increasing the market area. b) (5 points) Start with a new diagram that shows the same before situation as you had in part (a). Illustrate the effect of an increase in factory costs on market area, holding other things constant. Production plus transport costs (hours) Home Factory 0 Distance from Factory The dotted lines show the situation before the change; solid lines show situation after the change. The increase in costs makes it harder for the factory to outcompete home producers. This leads to a decrease in market area. 8
c) (5 points) Start with a new diagram that shows the same before situation as you had in part (a). Assume now that there are internal economies of scale in. Clearly illustrate the effect of a decrease in home cost on market area. Production plus transport costs (hours) Home Factory 0 Distance from Factory The dotted lines show the situation before the change; solid lines show situation after the change. The decrease in home costs makes it harder for the factory to outcompete home producers. This leads to a decrease in market area. The decrease in market area 9
is magnified by the fact that the per unit cost at the factory rises due to it producing less output when home costs fall. Therefore the market area shrinks more under increasing returns to scale than under constant returns. End Section 2. END OF EXAM. 10