ECON 5822: Urban EconomicsSpring 2014: Assignment #1 Due Thursday 2/06. Undergrad. 104 points. Answer all questions completely and neatly. Partial credit will be given.

1. a. (5) Suppose a factory produces umbrellas at $3/unit. It costs approximately $15 for an individual to produce an umbrella at home. If the population is uniformly distributed, and the costs of the traveling to the umbrella factory are $0.20/round trip mile, how large is the market area of the umbrella factory? Illustrate with a graph.

b. (5) Suppose two new umbrella factories that produce umbrellas at $3 unit open up: one 10 miles west, another 15 miles east of the original factory. What are the market areas of each umbrella factory? (Note: each firm’s market area is the area over which its net price is less than the net price of the other firm). Illustrate with a graph.

c.(4)Suppose all factories see their traveling costs decrease to $0.15/mile. How does this change the market area of each factory?

2. Consider a firm that delivers pizza to its customers. The spatial distribution of customers is as follows: 10 pizzas are delivered to location W, 10 miles due west of the city center; 50 pizzas are delivered to location E, 1 mile due east of the city center and 45 pizzas are delivered to point F, 2 miles east of the city center. Production costs are the same at all locations.

a.)(6) Use a diagram to show where the firm should locate. Explain why you think the firm should locate there.

b.)(3) Assume that location W was 20 miles due west of the city center rather than 10 miles. Where should the firm locate now?

3. Consider the model of labor pooling, with each firm locating either in an isolated site or in a cluster with other firms. Suppose that good times (high demand) and bad times (low demand) are equally likely. The table shows wages and workforces in different times and locations.

Isolated Cluster

WageWorkforceWage Workforce

Good times $40 50 $30 60

Bad times $20 50 $30 40

a. (6) Use a figure like the one used in class (or Figure 3-3 in the book) to illustrate the situation.

b. (3) During good times, what is the benefit of being in the cluster compared to being isolated?

c. (3) During bad times, what is the cost of being in the cluster as opposed to being isolated?

d. (3) Where should this firm locate, in the isolated site or in the cluster, and why?

4. Go to search for “Youngstown Economy at a Glance” and it should direct you to this webpage).This site shows Youngstown-Warren’s employment composition in different sectors and year over year changes in each sector. Use it to answer the following questions about the Youngstown MSA economy (3 points each).

a. The unemployment rate declined in Dec. 2013 even though the number of employed workers declined. How is this possible (explain what had to happen for the unemployment rate to decline).

b. What was the largest sector in terms of total employment and what percent of total non-farm employment did that represent?

c. What sector has seen the largest 12 month percentage gain in employment and what does that percentage gain equal?

d. Using the browse bar to the left of the screen look up the economy at a glance for the state of Ohio. What was the largest employment sector for the state and what percentage of total non-farm employment did that represent?

e. What sector has seen the largest 12 month percentage gain in employment in Ohio and what does that percentage gain equal?

f. What was the unemployment rate in Ohio and what is the national unemployment rate?

5. Assume the country above has only three cities, whose utility curves are represented above as a function of the population in the city. City 1 is currently at point A on its utility curve, while city 2 is currently at point B and city 3 is currently at point C.

a. (6) What do you expect as far as migration between cities 1 and 2 and 3?

b. (6) Estimate the equilibrium populations and utility levels in each city.

6. a.(6) Consider a city that has a population of 200,000 residents. If the largest city in this nation has 4,000,000 residents, and the “rank size rule” holds true, what is the rank of this city in terms of the distribution of population?

b. (6) If the 4th ranked city in this nation has a population of 2,000,000, what does this mean in terms of the value of “b” (is it greater than, less than, or equal to 1)? Is the population more or less evenly distributed in this country than would be predicted by the rank-size rule?

7. Consider a consultant’s report on the expected economic impacts of the new Racino in Austintown. The consultant estimates that the Racino would increase total spending in the Youngstown-Warren MSA by $22 million per year and create 1,100 new jobs, computed as follows:

Increase in spending = Spending per customer x Attendance x Average spending multiplier

$22,000,000 = $200 x 50,000 x 2.2

Increase in employment = Number of new workers in Racino x Average employment multiplier

1,100 = 500 x 2.2

a. (6) The use of the average multipliers here is based on two troublesome assumptions. Explain what they are and why they are troublesome.

b. (6) Theoretically, the actual changes in total spending and employment in the Youngstown-MSA from the Racino could be zero. Explain what would have to be true for this to be the case?

8. Assume Youngstown has an equilibrium employment level of 200,000 workers, and an equilibrium wage of $100/day. The elasticity of demand for labor is 2.0 in absolute value and the elasticity of supply is 4.0. Suppose export oriented firms like Vallourec hire 500 more workers.

a. (3) If the employment multiplier is 3.0, what is the local marginal propensity to consume?

b. (9) Predict the new equilibrium values for the wage and total employment in Youngstown.

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