Quiz 2

Question 1

What is the bid-rent model?

Answer 1

Urban von Thunen with land substitution.

Question 2

What is the difference between von Thunen and the bid-rent model?

Answer 2

Land/capital substitution
Urban/rural

Question 3

What is an isoquant?

Answer 3

A curve representing the relationship between inputs to produce a fixed amount of output.

Question 4

What is the marginal rate of technical substitution?

Answer 4

MRTS is an ouptut isoquant for an individual firm.

Question 5

p = ?

Answer 5

price per unit of output

Question 6

m = ?

Answer 6

Marketable units of output

Question 7

i = ?

Answer 7

Input cost per-unit

Question 8

K = ?

Answer 8

The number of units of composite capital inputs

Question 9

r = ?

Answer 9

rent in $/land unit/time unit

Question 10

S = ?

Answer 10

Size of the land in units.

Question 11

t = ?

Answer 11

transportation cost /km/unit of output

Question 12

d = ?

Answer 12

haulage distance in units

Question 13

MP = ?

Answer 13

Marginal Product

Question 14

What is the marginal rate of substitution?

Answer 14

Domestic utility isoquant.

Question 15

What part of the MRS is implied by cost minimization?

Answer 15

Question 16

What are the 5 assumptions for the bid-rent model?

Answer 16

• constant t
• homogeneity
• isolation
• monocentricity
• substitution

Question 17

When rents fall with distance, what is the shape and orientation of the line?

Answer 17

Negative slope
Curved for bid-rent
Straight for vT

Question 18

In what manner do rents change with increased distance from the market in bid-rent theory?

Answer 18

Rents fall at a decreasing rate, i.e. curved and downwards sloping line the further away from CBD we get.

Question 19

What does a higher position of the full bid-rent curve mean?

Answer 19

Higher positions of the entire bid-rent curve mean lower profits for the firm paying rent, because they’re paying more rent for any given S.

Question 20

Who does the money go to if a firm paying rent adopts more flexible technology?

Answer 20

The residual will actually just end up going to pay a higher rent.

Question 21

Which type of firm is which line?

Answer 21

Flexible technology firm is the curved blue line, fixed tech firm is the straight red line.

Question 22

Which area is the budget effect?

Answer 22

The budget effect is in pink

Question 23

Which area is the substitution effect?

Answer 23

Yellow = substitution effect

Question 24

Why is the bid-rent curve above the budget line?

Answer 24

Flexible technology increased the marginal productivity of the land, allowing us to move beyond the budget line.

Question 25

What is the formula for the commercial bid-rent gradient?

Answer 25

Question 26

What are three implications of the bid-rent gradient?

Answer 26

- Higher p = closer (rent increases faster than distance decreases) - Higher S = further - Higher t = closer

Question 27

Why will p be higher closer to CBD for the same product?

Answer 27

Because rent increases faster than distance decreases.

Question 28

Why does the bid-rent curve become shallower with distance?

Answer 28

Substitution: As land becomes cheaper, we want to use more of it and less of other inputs (substitution), so S becomes larger, and since it's rise/run, that's also shallower. slope = delta r/ delta d =-t/(S/m)

Question 29

How do we prove that the bid-rent for residential is the same as for commercial?

Answer 29

Derive the two rent equations with respect to d.

Question 30

What is the difference between the MRS curve and the bid-rent curve?

Answer 30

MRS: - Individual consumer - Isoquant of utility Bid-rent: - aggregate - not an isoquant - WTP

Question 31

What are 5 critiques of the bid-rent model?

Answer 31

- Amenities - Constant t - Isolated - Monocentric - Opportunity cost of time

Question 32

What happens when we factor in opportunity cost for wealthy residents?

Answer 32

We get a steeper slope with them being more attracted to CBD

Question 33

What are 3 public goods?

Answer 33

Public goods - Healthy environment - Safety - Schools

Question 34

What does the residential bid-rent look like when there's an amenity a ways out from the CBD?

Answer 34

There will be a little spike in it.

Question 35

What does the residential bid-rent look like when there's derelict land?

Answer 35

There's a hole in it, and it's a bit less steep closer to the land, then it takes a little to get back to almost the original slope.

Question 36

What does the residential bid-rent look like with a heavily polluted downtown core?

Answer 36

The curve will be less steep to the point where the pollution stops, then rejoin what it would have been without the pollution.

Question 37

Why is the bid-rent line a curve?

Answer 37

Because S rises with distance due to substitution, the angle of the line also gets shallower. This is partly because landlords have substituted capital instead of land closer to CBD in order to economize on rare land and build upwards (*not exponential - the shape of the curve is due to slope=-t/S)

Question 38

Why are rents higher closer to the CBD from the landlord's point of view?

Answer 38

- Land becomes more scarce & therefore expensive - Landlords substitute capital instead of land by building upwards