Question

The conditions that prevent cities from forming are:

a. Constant returns to scale in exchange and production and equal productivity

b. Constant returns to scale in exchange and production and specialization of land and labor

c. Diminishing returns to scale in exchange, constant returns to scale in production, and equal productivity

d. Diminishing returns to scale in exchange and production, and equal productivity

Answer 1

Ans is a)  Constant returns to scale in exchange and production and equal productivity

Explanation;

In order to understand why cities exist we must first consider a world without cities. For there to be a place with no cities there must be equal productivity, constant returns to scale in production, and constant returns to scale in exchange. Equal productivity allows each person to be responsible for his or her self and there is no specialization in any one area thus there is no need for a city to develop.

The next thing necessary for there to be no cities is for there to be constant returns to scale in production. So if production is subject to economies of scale, then households will be more likely to involve a trading firm when trading their products. This is because trading firms will have the ability to effectively trade with lower transaction costs than if the household were to do it themselves.

The last necessary condition for cities to not exist is constant returns to scale in exchange. If there are scale economies in exchange then two households will link together and exchange the products in which they have a comparative advantage.