Economics 312: Urban Land Economics University of Victoria Midterm Examination #1 VERSION 2 SOLUTIONS Spring 2018 Instructor: Martin Farnham

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1 Economics 312: Urban Land Economics University of Victoria Midterm Examination #1 VERSION 2 SOLUTIONS Spring 2018 Instructor: Martin Farnham Last name (family name): First name (given name): Student ID Number: Please read the following instructions for the midterm: 1) DO NOT TURN THE PAGE UNTIL AN INVIGILATOR TELLS YOU TO DO SO. 2) All notes, papers, and electronic devices other than non-programmable calculators must be put away out of view. Please turn off any device that could make noise. 3) Please fill out the information needed at the top of this page (name, ID, signature). 4) This exam contains 10 pages (including the cover sheet) numbered The 10th page is left blank for scratch work. When you are told to begin the exam, first check to make sure all pages are there. Immediately raise your hand if a page is missing. 5) PACE YOURSELF. There are 50 minutes available for this exam and the exam is worth 50 points. Questions are not necessarily ordered according to difficulty, so if you have trouble with a question, move on and save it for later. 6) Answer Section 1 questions on the bubble form. Answer Section 2 in the space provided. 7) If at any time you do not understand a question, please raise your hand to ask an invigilator for clarification. If an invigilator is not immediately available, keep your hand up while working on other problems. 8) POINTS WILL BE DEDUCTED FROM STUDENTS WHO DO NOT IMMEDIATELY STOP WRITING WHEN TIME IS CALLED. 9) Have your Student ID out on your desk for invigilators to inspect. 1

2 10) Be respectful of other students taking the exam. If you finish early, you may leave early if you can do so quietly and without disrupting other students. 2

3 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 replaced railroads in upstate New York. B) It caused the market area of NYC firms to increase. C) It caused people to move from the Great Lakes area to NYC. D) It caused more trade between the Great Lakes region and Europe to pass through NYC. E) Both B and D 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 central governments who worked effectively to fight disease outbreaks. B) early urbanizers had developed stronger immune systems than less developed society, due to dense living. C) early urbanizers had developed science that showed that disease was spread by germs, so they could better manage the spread of disease. D) early urbanizers had developed medicines to effectively resist disease. E) A and B 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 early rise of bureaucracy in Eurasia B) the presence of many domesticable plants and animals in Mesopotamia C) the early rise of dense settlements in Eurasia D) early technological advancements in Eurasia E) all of the above 3

4 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 will definitely rise. B) Employment will definitely fall, and wage may rise or fall. C) Employment will definitely rise, and wage will definitely fall. D) Wage will definitely fall, and employment may rise or fall. E) Wage will definitely fall and employment will definitely fall. 5) In which of the following settings are we least likely to see agglomeration externalities? A) Rural areas. B) Downtown farmers markets. C) University campuses. D) Dating websites E) Nightclubs. 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 and II only B) II and III only C) I only D) II only E) 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. A) II and IV only B) I, II, III, and IV C) II only D) III only E) IV only 4

5 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) II and III only B) I and III only C) II and IV only D) I and IV 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) Jobs created to build the stadium generally come from outside the city. B) Local taxpayers are usually asked to pay much of the bill for the stadium. C) Stadiums displace customers who would have visited other local businesses within the city. D) Jobs created to build the stadium generally only last a few years; ongoing jobs tend to be part time. E) All of the above 5

6 11) Start-up companies tend to thrive in industrially diverse cities because A) they often don t know what their labour needs will be in the future. B) they often don t know what their supplier needs will be in the future. C) they often don t know what business partners (e.g., design or advertising firms) they re likely to need in the future. D) they rely heavily on localization economies. E) A, B, and C 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 phone manufacturer and an airline share the same local advertising agency to run their national advertising campaigns. B) A coffee shop (that doesn t sell baked goods) and a bakery (that doesn t sell coffee) locate next door to each other. C) A men s clothing store and a men s shoe store locate in the same shopping mall. D) A drug company and a tech firm draw from the same diverse local pool of skilled managers. E) Two architectural design software development companies benefit from information spillovers, by locating on the same block. 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: 6

7 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. 7

8 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. 8

9 2) 16 points total Consider a region in which shirts are either produced at home (at high production cost) or in a single factory (at low production 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 production. Suppose, unless stated otherwise, that constant returns to scale are present in the factory s production 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 an increase in transport costs on market area, holding other things constant. Production plus transport costs (hours) Home production costs (hours) Factory production costs (hours) 0 Distance from Factory 9

10 Dotted lines show situation before the change; solid lines show situation after the change. The increase in transport costs makes it harder for the factory to outcompete distant home producers, thereby decreasing 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 a decrease in factory production costs on market area, holding other things constant. Production plus transport costs (hours) Home production costs (hours) Factory production costs (hours) 0 Distance from Factory The solid lines show the situation before the change; dotted lines show situation after the change. The reduction in production costs makes it easier for the factory to outcompete home producers. This leads to an increase in market area. 10

11 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 production. Clearly illustrate the effect of an increase in home production cost on market area. Production plus transport costs (hours) Home production costs (hours) Factory production costs (hours) 0 Distance from Factory The solid lines show the situation before the change; dotted lines show situation after the change. 11

12 The increase in home production costs makes it easier for the factory to outcompete home producers. This leads to an increase in market area. The increase in market area is magnified by the fact that the per unit cost at the factory falls due to it producing more output when home production costs rise. Therefore the market area expands more under increasing returns to scale than under constant returns. End Section 2. END OF EXAM. 12