Urban Economics ECP 4613 First Set of Sample Test Questions Dr Ihlanfeldt I Indicate whether you believe the statement is true or false and carefully explain your answer 1 If all production processes were weight gaining a single giant urban center would contain all economic activity False If the cost of moving is high companies will locate near raw materials not in cities Additionally if businesses are production cost oriented they will locate near unskilled labor usually rural areas Finally firms will not always locate in cities because land prices are extremely high 2 In long run equilibrium migratory flows of capital and labor between cities of different sizes result in workers with identical skills receiving the same wage rate regardless of their work location False Nominal wages will not be equal because of the different costs of living from city to city and real wages will not be equal because of pecuniary returns such as crime the natural area lifestyles etc However the full real wage will be equal 3 The existence of agglomeration economies is the most important location factor in explaining the concentration of office activity within central business districts True Due to urbanization and localization economies conveniences such as face to face interactions are created within Central Business Districts This results in the heavy population of urban areas 4 Raising taxes to pay for higher levels of public services stimulates economic development True Only if the money raised from these taxes is used to improve things like education or infrastructure Improvements in these areas help to create jobs If the money is used to improve social programs such as welfare it will not help 5 The elasticity of business investment with respect to the level of business taxation is higher within metropolitan areas than between metropolitan areas True Locations within the same urban areas will act as substitutes for each other Locations in different areas will give you options on things such as where to live work etc A good example of this is the tax brackets of Chicago Obviously a business will be more likely to begin operations in an area with lower taxes than higher ones II Short Answer 1 Provide economic explanations for each of the following empirical findings a Real wages are higher for workers living in urban areas with large populations As the size of a city increases the negative returns begin to outweigh the positive returns so there must be compensation for living in urban areas Employers are more willing to pay their employees more because they are more productive the closer they live to firms and companies b The land rent gradient is negatively sloped Land rent gradients are negatively sloped because the demand for land is driven by the demand for housing People pay more to live closer to because of convenience This generates profits that are expropriated by the landowners c A basic firm creates more local employment than a non basic firm Basic firms create more local employment than a non basic firm because basic firms are critical to economic development because they bring in revenues from outside customers and they also support the non basic firms d The importance of transportation costs in the firm s location decision has declined over time Over time new inventions have lowered transportation costs This has allowed firms to choose where to locate so that they can pay more attention to production costs and maximize output Technology has also helped us to produce more while using less meaning we no longer have to transport as much to produce the same amounts Finally the ratio of bulk to volume has decreased which has also helped decrease transportation costs 2 Define the following terms and explain their significance to urban economics a transshipment point A transshipment point is any point where transportation carriers are forced to to change transportation forms as a result of terrain changes For example oil tankers can not travel on land so the oil must be filled into trucks Transshipment points are important because we need to understand where production occurs b Metropolitan Statistical Area A Metropolitan Statistical Area is a city with 50 000 people and those counties that are socially or economically integrated with the city For these counties to be included in the Metropolitan Statistical Area they must share a certain level of commuting with the city Metropolitan Statistical Areas are important because they provide the best statistical data for information on labor and housing markets living conditions etc c Agglomeration diseconomies Agglomeration economy is the term used to describe the benefits that firms receive when locating next to each other For example because of agglomeration economies firms can communicate between each other to increase their output efficiency etc Agglomeration economies are important because they explain why there is a break in urban economic growth and not large sprawling cities that never end 3 Give a brief explanation in terms of the principles of economic location that would tell us why a advertising agencies are concentrated in New York Advertising agencies are located here because there is a large number of firms clients and shows already in place here There are also location economies such as actors and writers Because of the high concentration of these location economies it is easier and cheaper for advertising firms to find these talents b automobile dealerships are attracted to one another Automobile dealerships are attracted to one another for the same reasons that many other firms are attracted to each other because of agglomeration economies Dealerships often open next to each other because they want to provide consumers with alternatives Agglomeration economies allow people to comparatively shop for large ticket items By opening next to another dealership auto dealers increase the chances of having customers buy from them if they can not find a better deal at alternative dealerships c computer software developers are concentrated in Silicon Valley California There are several reasons why these are located in Silicon Valley Firstly many of these companies are spinoffs from professors at universities around California Secondly this are being also very rich in amenities used to produce software products Finally because of the already high number of firms here more companies are willing to set up because of agglomeration