3. (10) Consider a city with two auto sellers, a Toyota dealer and a Honda dealer. Initially, the distance between the two dealers is three miles. The Toyota dealer wants to relocate to a site adjacent to the Honda dealer and submits a rezoning request to the city council. The Honda dealer responds to the rezoning request with the following statement: "One of the lessons from Econ 102 is that an increase in supply will decrease price. If the Toyota dealer moves to the site adjacent to my dealership, the local supply of cars will increase, and I'll have to cut my prices to sell the same quantity of cars." Critically appraise the Honda dealer's statement. If the statement is incorrect, what's wrong with the reasoning?
4. (10) The following shows the spatial distribution of the number of consumers at different locations. A new store is proposed. Due to directional discrimination, the travel cost per mile eastward (to the store) doubles the travel cost per mile westward (to the store). Find the optional location of the new store. Show your work.
W(est)_________A_________B____________C_____D________________E(ast)
32 18 20 22 15 30
5. (30) Why do economists like cities? Credits depend on the completeness, evidence (cited), and the quality of writing.
6. (30) What causes industry agglomeration? Why Is New York America’s Largest City? Credits depend on the completeness, evidence (cited), and the quality of writing.
3.
The Decision taken by Honda Dealer is Correct. As the Supply of products of increases, the price has to decrease. If Toyota dealer relocates adjacent to Honda dealer. The Supply of the Automobiles increase in that area. Due to supply of the products, Demand will increase iniitially & gradually decreases. on the decrease of demand, to sustain in the market, Honda Dealer has to reduce its price to maintain its markets share.
5.
Economists have amassed a wealth of data that allow us to answer: emphatically no. Cities are essential to the Information Age economy, and those with a diverse mix of industries and a highly skilled workforce—preeminently New York—have a bright future. Indeed, the communications revolution gives cities a whole new vitality. In study after study, the evidence of cities’ continuing vibrancy is unambiguous. Here's what the data show:
A Hoover Institution study I conducted with economist David Maré found that, on average, workers in big cities earn considerably more than workers in small cities, who in turn earn far more than their rural counterparts. According to 1990 census data, workers who live in metropolitan areas surrounding cities of more than 500,000 people earn 34.4 percent more than workers who live outside metropolitan areas, and 10.8 percent more than those who live in metropolitan areas with smaller central cities. And earnings are higher in cities than in suburbs: within metropolitan areas, on average, individuals who work within the central city earn 17.3 percent more than those who work beyond the city limits. These results stand even if we make them go through a large number of statistical hoops and further tests. For example, workers with the same level of education and those in the same demographic group get substantially higher wages in cities.
Standard labor economics tells us that high wages reflect higher productivity: a company won’t pay a premium for workers unless it gets value for its money. And indeed, economists Antonio Ciccone and Robert Hall have established a direct connection between urban density and productivity. Looking across the U.S., they found that industries in denser areas are much more productive than elsewhere.
Why? A look at earning patterns over time suggests that it is because the dynamic, economically diverse urban environment allows workers to develop skills superior to those they would be able to develop outside a city. For it is longevity in the urban workforce that enhances an employee's value. New migrants to cities experience less than a 1 percent wage gain from their move. But after five years, those workers are earning over 10 percent more than similar workers who stayed in rural areas. These wage gains represent permanent skill accumulation: when urban workers leave cities, they experience no significant wage declines. And there’s no evidence that technological or social developments are diminishing cities' role as the training ground for America’s workers: I found little change over the past 15 years in the urban wage premium.
Although workers of all educational levels earn more in cities, the urban wage premium is greatest for the most educated. Little wonder, then, that cities continue to attract the brightest and best-educated young workers. The National Longitudinal Survey of Youth tells us that young urban dwellers have significantly higher IQ scores on average than young people living in rural areas. And the average resident of a big-city metropolitan area has about one more year of education than his rural counterpart.
Today, of course, the ingredients for urban success are widely different than they were during the first great age of American urbanization a century ago. During the Industrial Age, urbanization and the rise of manufacturing were so closely linked as to be almost one and the same thing. In 1870, economist Alberto Ades and I have found, the statistical correlation between a state's concentration of manufacturing and its level of urbanization was 86.6 percent—demonstrating what to statisticians is an extraordinarily powerful connection between the two variables. Heavy industry and urban prosperity went together for the simple reason that cities made mass production possible. A big city meant a ready-made market for manufactured goods, a market comparatively inexpensive to serve because no long-distance transportation costs were involved. So factories located in large cities could achieve real economies of scale: they could spread out fixed costs of production over massive quantities of products.
As the twentieth century progressed, it became far less advantageous for factories to be located in large cities. Transportation costs declined dramatically, making a factory’s proximity to a large urban market much less crucial. The advantages of large-scale production diminished as technological advances made it economical to produce higher-quality, semi-customized goods in smaller batches and as consumers demanded those specialized products. As a result, manufacturers were able to locate plants in suburban and rural areas that offered less expensive real estate, a more favorable tax and regulatory climate, and a better quality of life for executives and workers.
If the U.S. economy had continued to center on heavy manufacturing, these developments may well have spelled doom for the cities. But traditional manufacturing has declined greatly relative to high-wage, high-skill industries, from telecommunications to finance to advertising. In 1950, 33.7 percent of American workers had manufacturing jobs; by 1990 this proportion had declined by almost half, to 17.4 percent.
The shift away from heavy industry has been the salvation of urban America. For while the decline in urban manufacturing has been unavoidable, the growth of high-skill industries has enabled many cities to prosper.
Unsurprisingly, cities that depend on manufacturing have tended to decline. Economists José Scheinkman, Andrei Shleifer, and I, in a study for the Journal of Monteary Economics, examined how cities’ dependence on manufacturing in 1960 affected their growth during the subsequent three decades. We found that every 20 percent increment in a city’s 1960 concentration of employment in manufacturing corresponded with a 16 percent decrease in population between 1960 and 1990. That same 20 percent increase in dependence on manufacturing in 1960 led to a 50 percent decline in manufacturing employment and a 13.4 percent decline in non-manufacturing employment between 1960 and 1990.
Declining manufacturing centers, especially smaller cities, dot the American landscape. East Chicago had 58.9 percent of its labor force in the manufacturing sector in 1960. Its population declined from 57,669 to 33,892, or 41 percent, between 1960 and 1990. During the same period Flint, Michigan, and Youngstown, Ohio, lost 28.5 percent and 44.2 percent of their populations, respectively. By contrast, cities in the Midwest and Northeast that don’t depend on smokestack industries showed substantial growth. These include Springfield, Illinois, the state capital, which grew by 20 percent; Stamford, Connecticut, which has attracted financial firms and corporate headquarters and which grew 17 percent; and Champaign, Illinois, a college town, which grew 28 percent. In the West and the South, the nonmanufacturing winners are even more striking. Phoenix, a young metropolis with a diverse economy and a population that recently surpassed 1 million, more than doubled in population between 1960 and 1990; Durham, North Carolina, with strong research, health care, and service sectors, grew by more than 50 percent in the same period.
The key to urban success or failure in today’s economy is simple: high-skill cities prosper; low-skill ones stagnate or decline. The National Bureau of Economic Research study found that cities that had a high proportion of college-educated workers in 1960 grew in population over the subsequent three decades, while those that didn’t, shrank. Compare the striking success of the university town of Madison, Wisconsin, where 20.9 percent of residents were college-educated in 1960, with the relative failure of nearby blue-collar Milwaukee, with only 5.9 percent college-educated in the same year. In the next three decades, Madison’s population grew by half, while Milwaukee’s declined 33 percent during the same period. Or compare two southern Virginia cities: Portsmouth, once a shipbuilding center (4.1 percent college-educated in 1960), shrank by 28 percent between 1960 and 1990, while Hampton, home of NASA’s Langley Research Center (10.4 percent college-educated in 1960), grew by 53 percent.
Education's importance for urban success is growing rapidly. Scheinkman, Shleifer, and I found that the connection between initial levels of education and population growth was much greater from 1970 to 1990 than it had been in the previous 20 years. Between 1950 and 1970, one additional year of schooling on average in a city increased its growth rate by 3.8 percent. For the 1970 to 1990 period, that figure soared to 8.1 percent.
Even the less well schooled residents of well educated cities prosper. James Rauch and David Maré have both marshaled overwhelming evidence that higher average education levels in a city translate into higher wages for everyone—not just the well-educated themselves. That is, if two workers have identical levels of schooling, the one who lives in the better-educated city is likely to make more money—perhaps because the sharing of knowledge in a highly educated workforce makes each individual worker more productive.
It’s not just the promise of financial success that makes cities magnets for talented workers. Young workers flock to cities in part because they will be exposed to a far wider range of accomplished elders and to a wider range of experiences than their rural peers. Economist Alfred Marshall's century-old observation is as true today as ever: “Great are the advantages which people following the same skilled trade get from near neighborhood to one another. The mysteries of the trade become no mystery but are, as it were, in the air.”
Young medical residents in New York, for example, encounter a much broader range of medical problems than their rural counterparts. Artists and actors benefit from the city’s rich cultural environment. Young lawyers, developing skills at breakneck pace over grueling hours, learn in New York not only from the partners at their own firms but also from their opponents and from lawyers they meet socially.
Large urban labor markets also encourage what economists call the coordination of labor: a big city makes it much easier for a worker or entrepreneur to find a niche. As Adam Smith noted, the bigger the market, the finer a division of labor is possible. By contrast, Smith wrote, in small villages “every farmer must be butcher, baker, and brewer for his own family.” Hard data confirm Smith’s observations: in a study for the National Bureau of Economic Research, Alberto Ades and I found a correlation of over 87 percent between the division of labor and the degree of urbanization across states in the nineteenth century. We lack comparable data for modern periods, but a casual look at the yellow pages shows just how specialized big-city businesses can be. The Manhattan yellow pages list such esoteric specialties as necktie renovating (one entry), nautical instruments (three entries), and papaya products (one entry). Not one of these entries appears in the San Francisco yellow pages, let alone in those of the typical small town.
6.
From the pre‐industrial time to the postmodern era, human society has seen spatially concentrated economic activities. Even though some industry development is driven by natural features, mechanisms related to the forces of agglomeration are more fundamental; these have also played an important role in the formation of urban areas and industrial structures. Businesses can benefit from locating close to each other, or take advantage of operating in urban areas. Whether it is the reduction in transportation cost or the gains of positive externality from technology spillover, industrial agglomeration has been a central theme in the field of economic geography.
Economies of agglomeration or agglomeration effects are cost savings arising from urban agglomeration, a major topic of urban economics. One aspect of agglomeration is that firms are often located near to each other. This concept relates to the idea of economies of scale and network effects.
As more firms in related fields of business cluster together, their costs of production may decline significantly (firms have competing multiple suppliers; greater specialization and division of labor result). Even when competing firms in the same sector cluster, there may be advantages because the cluster attracts more suppliers and customers than a single firm could achieve alone. Cities form and grow to exploit economies of agglomeration.
Diseconomies of agglomeration are the opposite. For example, spatially concentrated growth in automobile-oriented fields may create problems of crowding and traffic congestion. It is the tension between economies and diseconomies that allows cities to grow but keeps them from becoming too large.
The basic concept of agglomeration economies is that production is facilitated when there is a clustering of economic activity. The existence of agglomeration economies is central to the explanation of how cities increase in size and population, which places the phenomenon on a larger scale. The concentration of economic activity in cities is one reason for their development and growth.
3. (10) Consider a city with two auto sellers, a Toyota dealer and a Honda dealer....