Key Components of Answers to the Midterm Exam

Urban Economics

Spring 2005

M. Finkler

Key Components of Answers to the Midterm Exam

1a.The 1850 – 1950 era featured the movement of labor from agriculture to manufacturing in urban areas. Both portions of the movement related to increased labor productivity and scale economies. Transportation economies furthered the concentration of populations around manufacturing operations in urban areas.

b.Urban economic growth in the current era depends on the ability to generate and sustain a competitive advantage or comparative advantage (relatively low unit labor cost.) Such an advantage typically results from either agglomeration or clustering economies or highly skilled laborers. Areas without one of these features will stagnate.

c.Distance still matters for those goods which are not market-oriented (such as resource intensive or weight-losing operations) as well as for clustering where proximity of workers reduces either production or purchasing costs.

2.a.A cluster is a group of interconnected companies and activities located in close proximity to one another. A trading cluster is made of industries that focus on export production while a local cluster provides goods and services almost exclusively to local residents and businesses.

b.The benefits of clustering in the cited example equal wages not paid in prosperous times plus the value of the additional workers above their wage. In the question, this amount equals 50*10 + .5*25*10 = $625. The costs equal the extra amount paid in stagnant times plus the foregone value above the wage rate paid in the isolated area. This equals 25*10 + .5*25+10 = $375. Since benefits > costs, and P > .5, clustering makes sense.

c.Benefits*p = Costs*(1-p) can be used to determine the critical value for p (p*) in terms of when to switch from isolated to clustered location. When p>p*, clustering makes sense. Given the information in b. p = .375.

3a.Total consumption Q = d*e* A = 25*100*80 = 200,000 cups per month. Since firms reach efficient scale at q= 25,000 cups, Q/q = 8 = N. Given the 80 sq. miles and 8 firms, each firm has a market area of 10 square miles.

b.If q = 40,000, the Q/q =5 firms and A/N = 16 sq miles.

c.The rank-size rule says that the population rank (with 1 = the largest city) times its population size equals a constant. As a result there will be few large cities and many small cities. CPT reaches the same result by assuming monopolistic competition with the market area small for industries with small scale economies, medium sized for industries with mid-sized scale economies, and large for industries with large scale economies. Given that large cities are assumed to have all these industries, there will be few large cities with the required scale economies. At the opposite extreme, there will be many small cities that feature goods and service production at small scale. These results are consistent with the rank-size rule.

d.Among other critical assumptions of CPT, economists question the existence of monopolistic competition as well as cite the existence of agglomeration economies (clustering.) Non-uniform demand, tastes, and income add to the critique.

4a.The principle of median location requires firm to locate such that there delivery costs are roughly equal in all direction.

b.ABCD

Miles from B10 0 1 2

Gallons10502545

Monetary weight 1 5 2.504.50@ $.10/mile

At B, the weights would be 1 to the west and 7 to the east. At C, the weights are 6 to the west and 4.50 to the east; thus the location must be between B and C. If one had to locate at either A,B, C, or D, one would locate at C since total delivery cost ($20.50) are lower than at B ($21.50)

c.If points to the west have a delivery price of $.05 per mile per gallon and points to the east have a delivery price of $.15 per mile per gallon, then one moves all the way to D which has a total delivery cost of $12.25 less than at C ($14.75.)

5a.Exports are important because cities need to serve a large market to take advantage of any local scale or cluster economies. Furthermore, income comes from other areas, and a portion will be spent on local goods; thus, a multiplier of export earnings will be obtained.

b.Economist cite three arguments: (1) spending on professional sports replaces other local entertainment spending, (2) the income received by the teams’ owners and players are typically saved or spent elsewhere, and (3) many local services (e.g., public protection and infrastructure) must be provided out of local revenues.

c.The LQ = (employees in industry i – local)/(employees in industry I - national)

Planners might use this information to determine, given the localization multiplier, how many local jobs will be created from the attraction of export jobs.

d.Just because an area’s LQ is presently high for some industries, thus export oriented, it need not mean that the area has a comparative advantage prospectively. A high level of unit labor cost would mean the area is too dependent on that industry.

6.aOccidental’s work force can produce either more ball bearings or more axles per hour than can Oriental’s; thus, he has an absolute advantage in both.

b.Comparative advantage is based on opportunity cost. Since Occidental must give up 2 ball bearings for each axle and Oriental must give up 8/3, Occidental has a lower opportunity cost for axle production than Oriental; thus, Occidental has a comparative advantage in axles and Oriental in ball bearings.

c.At an exchange rate of 2 ball bearings per axle, Occidental is indifferent to trade while Oriental would love to trade some ball bearings for axles.

d.With transportation costs, time must be devoted to moving goods and services and taken away from production. As a result, Occidental will have no interest in trade.

7a.For Michael Porter, clusters of trade-related activities – including suppliers of factors of production, research and training opportunities, and demanding consumers are important ingredients in generating a viable cluster. He cites the wine industry in California as an excellent example. Any cluster that can increase productivity or reduce purchasing costs would be attractive.

b.For Richard Florida, the attraction of creative people is central to economic growth and viability. Furthermore, he cites technological infrastructure, a pool of existent highly skilled people, and tolerance of diversity and change as essential to fostering an economic environment that attracts creative people.

c.The two arguments are complementary. Florida’s argument seems to be a special case of Porter’s broad story. For example, Las Vegas, NV and Orlando, FL are two rapidly growing areas that donot depend upon a creative work force but do require agglomeration or clustering economies.

8.a.The authors of the NEW Economic Opportunity Study sought to understand why Northeast Wisconsin (NEW) was falling behind in income per capita growth and job growth.

b.They discovered numerous factors including a lack of educated workers, many parochial local governments, and a culture that resists change.

c.Among other recommendations, they cited the importance of creating a regional decision-making body that could generate a vision of how NEW could be competitive as well as a focus on changing the image of NEW towards the new (skilled service) economy with added entrepreneurial energy.