Regional Economics – Consider an office firm in a monocentric city

Problem 1

Consider an office firm in a monocentric city. The labor-cost function is ????=60−6????, where x is the distance to the city center (from 0 km to 5 km). The interaction cost (for travel between the office firms is ????=12+????????, where ???? is a parameter (a variable beyond the control of the firm).

a. Based on the discussion of the travel costs of office firms, what is the plausible value for ????? Greater, equal, or lower than 1?

b. Illustrate the cost-minimizing location for an office firm, including a value for ????∗.

Problem 2

Melbourne and Sydney are the two main metropolitan areas in Australia. Each has 5 million inhabitants. Both cities have urban utility curves u(n) = 150 + 80n – 10n2, where n is the number of inhabitants in millions. Melbourne plans to expand its urban transport system to the suburbs, but Sydney cannot expand it because National Parks surround the city. Melbourne estimates that its population will increase to 8 million people in ten years and Sydney won’t be able to surpass 5 million due to its geographical limitations. Melbourne also believes that the larger population share will boost productivity, and urban utility will move to u(n) = 200 + 60n – 5n2 after these ten years, but utility in Sydney will remain the same. Discuss what would happen if migration between these two cities is possible. Will it have new equilibriums? Will they be stable?

Part B: Answer all of the given questions. The point values are given in parentheses.

Problem 3 (30 Points)

Considering what you have learned about spatial econometrics, how would you construct a research model that examines the effects of environmental pollution in region A but you suspect there are also spillover effects in regions B and C? What variables would you consider? What do you think the y variable should be? Carefully outline all the steps to develop this model. {Hint: I am not looking for the exact approach, but in general terms, how you would develop this analysis.}

Problem 4: (30 points)

Suppose Muriel Bowser, the mayor of Washington DC, came to you. Well actually maybe her policy advisor would approach. The City Council also wants to ban plastic bottles in Washington DC because of its environmental hazards. The ban on plastic bottles would also include bottled water and soft drinks, Gatorade, ice tea, etc. The Mayor is not sure about the economic impact of such a ban would have on Washington DC. City of Washington DC banned plastic bags a few years ago without assessing the economic impacts. The following are some inputs to the analysis to consider:

Washington DC does not produce any bottled drinks. They are imported from other areas.

Assume that the original price of bottle of water is $1.00 and $2.00 before the imposition of the ban.

The revenue for the consumption water bottle industry and soda industry for Washington DC is $23,457,389 by consumers.

There is no data on the number of actual bottled water consumed in Washington DC.

a. What is the research question that would be of interest to the City Council and the Mayor? State in one sentence.

b. The approach would be a policy change, e.g., what happens if there is a change in supply and what is the impact on demand. More specifically, the latter could be described as ?????upply ? Demand. How would you measure the ?????upply? {Hint: use $23,457,389 for this part}. Carefully show your calculations.

c. Once you identify part b, how would you use this to measure economic impacts on Washington DC? You can generalize this, so do not become to bogged down in the exact estimates.

a. After you complete the analysis, you will obtain estimates direct, indirect and induced effects. What do you think these estimates may look like?

d. Other than economic impacts, what other impacts do you think would be important to the City Council and the Mayor?

Problem 5 (30 points)

In week 2, we delved into the theories of neoclassical location theory, which describes regional growth. Based on the readings and the lecture,

a. How does innovation or national economic growth affect regional economic growth?

b. What role do you think networks play in the innovation of business firms?

Problem 6 (30 points)

In this course, we covered a variety of empirical methods, e.g., shift-share analysis, economic impact analysis, input-output models, spatial econometrics, etc.

a. Of these methods, which of the empirical methods piqued your interest? In other words, what is your favorite method. Just select one. Why is it your favorite method?

b. Given your favorite method, provide an example for its use. Carefully identify your hypothesis, data sources and how you would apply the method.

c. From part b, what type of results would you expect?

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