Martin Farnham Duration: 3 hours

Transcription

1 UNIVERSITY OF VICTORIA FINAL EXAM April 2015 Page 1 of 15 Last Name: First Name: STUDENT NUMBER: V00 Course Name & Number Econ 312: Urban Land Economics Section(s) A01 CRN: Instructor: Martin Farnham Duration: 3 hours This exam has a total of _15_ pages including this cover page and _0_ pages of separate handout(s). Students must count the number of pages and report any discrepancy immediately to the Invigilator. This exam is to be answered: o NCS Answer sheets (Section 1) o On the paper (Section 2) Marking Scheme The exam is worth 120 points Materials allowed Non- programmable calculator

2 Page 2 of 15 You must answer all questions from both sections of this exam. Unless otherwise stated, assume that markets are competitive. Section 1. Multiple choice (3 points each) For each question, select the most appropriate answer from among the answer choices and fill the answer in on your NCS Bubble form. 1) Which of the following statements about policy to assist the homeless is FALSE: A) A local approach to addressing homelessness (rather than a regional, provincial, or federal approach) makes the most sense from an efficiency perspective. B) Policies to assist the homeless in one city may cause homeless to migrate in from other cities. C) Policy to assist the homeless can be justified on equity grounds. D) Policy to assist the homeless can be justified on efficiency grounds. E) Housing can be made more affordable by allowing development to occur at a rapid rate. 2) Which of the following is NOT a problem with rent control? A) It causes deadweight loss. B) It discourages developers from building low- income housing. C) It encourages landlords to convert residential space into other space (such as non- rent- controlled retail or office space). D) It causes excess demand for low- cost housing. E) It causes excess supply of low- cost housing. 3) Suppose each family in Victoria values sewage treatment at $300 a year. For simplicity, assume all families are renters and are the same size. Suppose sewage treatment actually costs $1200 per year per family and each family living in Victoria will be billed that amount (i.e., assume no provincial or federal financial support). Assume that the housing stock remains fixed over time. If the CRD goes ahead with sewage treatment, then what would you expect would happen to annual rents in Victoria? A) They would fall by $1200. B) They would rise by $1200. C) They would remain the same. D) They would rise by $300. E) They would fall by $900.

3 4) Consider the following neighbourhood sorting diagram: Page 3 of 15 r A -r B rent premium curve for poor rent premium curve for rich # rich in neighborhood A This is meant to illustrate the number of rich residents in neighbourhood A. The city is assumed to have two identical neighbourhoods of equal size (1000 housing units per neighbourhood) and an equal number of rich and poor residents (1000 of each). Neighbourhoods are identical to each other except along the dimension of how many rich residents there are. The question is how those rich and poor sort across neighbourhoods, and whether they integrate or segregate. What is the sorting outcome you expect to observe in a stable equilibrium in this scenario? A) There is no stable equilibrium. B) The neighborhood will be partly integrated. C) The neighborhood will be completely integrated. D) The neighborhood will be completely segregated. E) The neighborhood could end up either completely segregated or completely integrated, depending on where we start.

4 Page 4 of 15 5) If you are an urban policymaker, and you are interested in reducing population in your city but increasing wages for those who stay, which of the following policies would you prefer? A) Increased enforcement of local environmental laws, to lower pollution. B) Encouraging the Federal government to locate a new university in your city. C) Reducing public services to residents (parks and festivals, for instance), without reducing their tax bill. D) Raising taxes on firms, without changing service levels to firms. E) Reducing public services to firms (roads and infrastructure, for instance), without changing the taxes firms pay. 6) According to Ed Glaeser in Triumph of the City, urban poverty I. is not all bad. Cities may have large poor populations because they provide economic opportunities that attract the poor. II. should be addressed by targeting aid at poor people, not poor places III. should be addressed by Federal redistributive policies, not local redistributive policies. A) I only. B) II only. C) III only. D) I and III only. E) I, II and III. 7) Consider a region in which consumption goods are either produced at home (at high production cost) or in a factory (at low production cost). If consumers purchase goods 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. Which of the following is LEAST likely to cause a decrease in the market size of a factory in the region? A) An increase in the price of gas, which is used to transport goods. B) A decrease in home production costs. C) A simultaneous increase in costs (of equal dollar amount) in both home and factory production. D) A technological breakthrough that lowers per unit production costs at the factory, while leaving home production costs unchanged. E) An increase in traffic congestion.

5 Page 5 of 15 8) For which of the following industries/businesses are agglomeration externalities least likely to play an important role? A) Internet match/dating websites B) Auto dealers C) Farms D) Information tech firms E) Nightclubs 9) Which of the following is NOT a negative externality associated with driving? A) Pollution B) Congestion C) Injuries to pedestrians, cyclists, and other drivers. D) Injuries to drivers themselves (assuming a public health system is in place) E) The time costs imposed on drivers themselves (as opposed to other drivers) 10) Which of the following is NOT a good explanation for why firms will choose to locate near other firms. A) Supplier sharing may lower costs. B) Labour pool sharing may provide better hiring flexibility. C) Labour pool sharing may allow clustered firms to pay a lower wage to workers. D) Shoppers for goods that are perfect substitutes like to comparison shop, and clustering lowers the transportation costs of consumers. E) Information spillovers between firms may lower costs. 11) In the monocentric city as modeled in class, convexity in the housing price function occurs because A) commuting is costly. B) residential users have a preference for downtown amenities. C) residential users prefer to live in the suburbs. D) residential users engage in consumer substitution. E) developers engage in factor substitution.

6 Page 6 of 15 12) Which of the following is NOT a negative externality associated with suburban sprawl? Assume that suburban residents work downtown. A) Loss of open space B) Increased air pollution due to longer commutes C) Increased noise pollution due to longer commutes D) Increased taxes due to higher agricultural subsidies E) Increased traffic congestion in the region 13) If there is a negative externality associated with a market, such as the market for trips down a congestible road, which of the following is TRUE? A) Too little of the good will tend to be produced. B) Marginal social cost will exceed marginal social benefit at the equilibrium. C) The equilibrium quantity produced will maximize social welfare. D) Marginal private cost will not equal marginal private benefit at the equilibrium. E) Social welfare at the equilibrium will always be negative. 14) According to Glaeser, high real wages in a city suggest that A) the city should do more historic preservation B) workers have high education C) workers are overpaid D) the city is an undesirable place to live E) none of the above 15) Which of the following statements about a city s labour market is TRUE? Consider the model of labour markets used in class. Assume that labour supply slopes up and labour demand slopes down. A) An increase in labour supply along with a decrease in labour demand will definitely decrease the wage. B) An increase in labour supply along with an increase in labour demand will definitely increase the wage. C) A decrease in labour supply along with an increase in labour demand will definitely increase employment. D) A decrease in labour supply along with an increase in labour demand will definitely decrease employment. E) A decrease in labour supply along with a decrease in labour demand will definitely lower the wage.

7 Page 7 of 15 16) Which of the following is NOT thought to be a source of urbanization economies? A) Labour pool sharing reduces turnover costs. B) Shopping externalities reduce transport costs. C) Labour pool sharing improves matching of workers to needed skills. D) Supplier sharing lowers costs of inputs. E) Knowledge spillovers lower costs. 17) In Triumph of the City, Ed Glaeser argues that I. Cities are environmentally friendlier than suburbs. II. Historic preservation is never justified. III. Height restrictions should be placed on skyscrapers. A) I only. B) II only. C) III only. D) I and II only. E) I, II and III. 18) Which of the following is not a standard explanation for why urban clusters exist? A) Firms with no economies of scale tend to attract large numbers of workers to live nearby. B) Internal economies of scale lead to big production facilities with population clustered around them. C) External economies of scale lead firms to prefer locating near other firms. D) Shopping externalities make retailers like to cluster. E) Economies of scale in transport costs make cities useful trading centers.

8 Page 8 of 15 19) Consider the market for farmland. Suppose that the price of grain falls on world markets due to favorable weather elsewhere in the world. Nothing else changes. Assume the Leftover Principle holds and that farmers rent their land from landowners. Which of the following statements is/are true? I. Local farmers non- land profits per acre will fall in equilibrium. II. Local farmers overall profits per acre (after rent is paid) will fall in equilibrium. III. Local landlords will suffer from the grain price decline. A) I only. B) II only. C) III only. D) I and III only. E) I, II and III. 20) According to Ed Glaeser, in Triumph of the City, which of the following statements is/are true? I. Allowing low- rise historic buildings to be replaced with high- rise apartment buildings will lower the cost of living. II. No historic buildings should ever be preserved, when it is profitable to replace them with newer buildings. III. Restrictions on development in anti- development cities will lead to sprawl in pro- development cities. A) I only. B) II only. C) III only. D) I and III only. E) I, II and III. END SECTION 1

9 Page 9 of 15 SECTION 2. Short Answer Questions. 1) 29 points total The diagram below illustrates the market for car trips between a city and suburb. Marginal private costs and marginal private benefits of a trip are reflected in curves in the diagram. P!! 12.50! 10.00! MPC! 7.50! 5.00! 2.50! Off0Peak! Demand! 50! 100! 150! 200! 250! 300! 350! 400! Q!

10 Page 10 of 15 a) 3 points Add a marginal social cost curve to the above diagram to illustrate the problem associated with the negative congestion externality from driving. Assume, in your drawing, that the marginal external cost of driving is increasing in the number of trips taken. b) 4 points In the diagram, clearly label the equilibrium off- peak number of trips. Also clearly label the efficient number of off- peak trips. Numbers aren t required. c) 3 points Shade in the area denoting deadweight loss in equilibrium. d) 3 points Clearly denote the optimal off- peak toll in the diagram above. e) 3 points Add a curve denoting peak demand for road use. Assume that peak demand is different from off- peak demand. f) 4 points Clearly label the equilibrium and efficient number of peak trips in the diagram above. Make sure your labels for these quantities are distinguishable from your labels for the equivalent off- peak quantities (from part (b)). g) 3 points Clearly denote the optimal peak toll in the diagram above.

11 Page 11 of 15 h) 6 points Suppose that a region is divided into two cities (City A and City B). The population of the region is 2.3 million, and residents must either live in one city or the other. There is free migration between the cities. Suppose that City A implements optimal congestion pricing to manage its traffic congestion externalities. Clearly illustrate the effect of this on equilibrium population of the two cities in the region. Assume the improvement in City A is small enough that City B still exists in the new equilibrium. In your answer it should be clear which city grows and which shrinks, and how utility per worker changes for each city following the policy change in City A.!! Utility!per!worker!!!! City!A! u!!! b! a! City!B! 1!million! 1.3!million! Workers!

12 Page 12 of 15 2) 8 points Consider the neighbourhood sorting model discussed in class. Suppose that everyone prefers rich neighbours to poor neighbours. Assume that there are 20,000 residents in a city, 10,000 of whom are rich and 10,000 of whom are poor. Suppose that there are 2 neighbourhoods with 10,000 identical housing units in each neighbourhood. All residents of the city must live in one of the two neighbourhoods. Draw a set of rent premium curves (one for rich people and one for poor people) that leads to complete income segregation in equilibrium. Clearly label the axes of your diagram and clearly label each rent premium curve. Vague or messy diagrams may lose points.

13 Page 13 of 15 3) 15 points total The diagram below illustrates the market for subway transit in a major city. Demand for rides is given, as are marginal revenue, long- run marginal cost and long- run average cost curves for the transit provider. Assume transit is provided by a private firm that is a monopolist. Assume the monopolist cannot price discriminate (it sets 1 price for all subway tickets). Assume there is no externality from transit use. $ MR D LRAC LRMC Number of Rides a) 4 points In the above diagram, label the equilibrium number of rides (Qeq) that the profit- maximizing, unregulated monopolist would provide. What is the equilibrium price it would charge per ride? b) 2 points Clearly label (Q0) the highest number of trips a regulator (working for the city) could force the monopolist to provide without causing the monopolist to exit the market. c) 2 points Clearly label (Qeff) the efficient number of rides.

14 Page 14 of 15 d) 2 points How much would consumers need to be charged per ride to induce them to purchase the efficient number of rides? e) 2 points What would the monopolist s profit margin be on a ride if they produced the efficient quantity, assuming they receive no subsidy from the city? f) 3 points Suppose the city has the authority to regulate the monopoly subway ride provider. Now suppose that the city requires the monopolist to produce the efficient quantity and offers a top- up subsidy per ride to keep the monopolist from closing down. What is the minimum per ride subsidy the city would have to offer, in order to induce the monopolist to stay in business? 4) 8 points Using a carefully labeled supply and demand diagram, illustrate the short- run effect of imposing binding rent control on the market for rental apartments. Carefully label equilibrium price and quantity (before rent control is implemented); price and quantity after rent control is implemented; and any excess demand or supply that results from the policy. END SECTION 3 END OF EXAM

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