2_Monocentric Model: Consumption Foundations Flashcards
What are the key assumptions in the simplified monocentric model regarding residents’ housing choices?
Everyone consumes the same amount of housing h. Rental prices are determined by commuting costs. Rent declines exactly by the amount of additional travel expenses incurred when moving outward from the CBD.
What is a major flaw in the simplified monocentric model?
The model assumes residents consume a fixed amount of housing, but in reality, when a good becomes cheaper, consumers tend to buy more of it. This means residents should consume more housing where prices are lower and less housing where prices are higher.
What is consumption substitution in the monocentric model?
It allows households to adjust their consumption by choosing more housing (and less of other goods) or less housing (and more of other goods), making the model more realistic.
What are the two main components of household utility in the model with consumption substitution?
Housing space (h) and Numeraire good consumption (c) (representing all other goods). Each is also a function of distance, meaning c(x) and h(x) change based on location.
What is the budget constraint equation in the model with consumption substitution?
y − tx = pc c(x) + P h(x) h(x)
Since pc is normalized to 1, this simplifies to y − tx = c(x) + P h(x) h(x).
What does the standard consumption model illustrate?
It shows the trade-off between housing consumption (h) and other goods consumption (c) along an indifference curve, subject to the budget constraint.
How do housing prices change as distance from the CBD increases?
Housing prices P h(x) decrease as distance increases (P h(x1) < P h(x0)).
How do households adjust their consumption when moving further from the CBD?
They buy more housing/land because it is cheaper. They spend less on other goods to balance the budget.
How does the bid rent function behave as distance from the CBD increases?
The function is not linear; it is steeper closer to the CBD and flatter further away, reflecting the changing demand for housing.
Why must lower housing prices be maintained at farther distances?
To keep the household locationally indifferent, ensuring they achieve the same utility regardless of location.
