PROP 6150 Summer 2018

PROP 6150 Economic Forces Shaping the City

Urban Spatial Structure – Land Rent Dynamics within a City

Fundamental Concepts – Bid Rent and Locational Equilibrium

To ensure that you spent time and understand the fundamental concepts about “firm” bid rents and “consumer
or household” housing price (aka also bid rent) functions please attempt the following two questions and
subject your answers to me via email by the end of the day tomorrow (Friday May 18th). If you want to do by
hand with a pen or pencil that is fine – please scan or even take a picture of your work (that was your work,
not some else’s) and send to me.

1. Consider firms from two industries competing for land in a city. Both firms face perfectly
competitive market environments, and all the assumptions of the classic mono or circular city as
covered in class on May 9th and developed in class notes #1 are assumed to hold. All firms occupy
the same amount of land.

a. Further assume that firms in the two industries have identical revenue and non-land cost
situations, but that firms in industry 2 face a higher cost of transportation per unit of output
and per unit distance (i.e. “t” is higher) than firms in industry 1. On a clearly labeled
diagram, draw/sketch the two firms’ bid rents and illustrate the observed equilibrium rent
that would be observed.
b. Explain why “bid rent” enforces a spatial equilibrium. Use the equation for the slope of the
bid rent to help with your answer.

2. Consider the “housing price function” developed in notes #2 – the equivalent for households that we
introduced for firms. Assume all household consume the same amount of housing, H, so the that
housing price function, or bid rent, is linear. However, let’s relax the assumption that only one
member of the household works and commutes to the CBD. Specifically, consider the housing price
bid function for Tom and Martha, both professionals with good jobs that have kept them focused on
their careers and fun but not kids; sometimes referred to as “Double Income No Kids”. Tom, a
lawyer, works downtown in the CBD and Martha, a specialist doctor, works in an emerging suburban
location 20 miles from the CBD. On a clearly labeled diagram, draw/sketch the housing price bid
function for Tom and Martha – assume that commuting costs per unit distance are the same in both
directions.