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Question 4 (Optimal city size) Consider a reduced form version of the model above. There are L people in each city. Output per person is qLSand there is a coordination cost per person of bL2 Thus the total amount each person gets to eat after paying for the coordination cost is y qLS -bl2. Assume that q > 0 and b > 0. This question is about optimal city size. 4.1) What sort of things does the coordination cost term -bl represent? Why does it make sense that the exponent on L is greater than 1? 4.2) Draw a graph of per capita consumption as a function of L. How does it depend on the parameters q and b? Give some intuition for this.

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LRME ecomomuu Scalu Disecene c Scor nal co- , Cost

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