3_Monocentric Model: Slope Flashcards
What is locational equilibrium in the monocentric model?
It is the state where people receive the same utility at all locations, meaning they are indifferent between all possible locations.
Why must housing prices be higher near the CBD in equilibrium?
Higher prices near the CBD balance commuting costs, keeping all individuals on the same indifference curve.
What is the equation for locational indifference in the monocentric model?
𝑑P(x)/𝑑x = −𝑡/h(x)
This means that the slope of the price function equals the commuting cost per unit of housing.
What does the locational indifference equation imply?
The marginal benefit of a shorter commute must equal the marginal cost of higher rents.
Why do prices decrease as we move away from the CBD?
Prices fall to compensate for the longer commute, ensuring individuals remain indifferent between locations.
What are some real-world examples of compensating differentials?
Lower wages in places with a lower cost of living
Higher wages for jobs with higher risks or worse working conditions
Rent discounts for locations with fewer amenities or higher crime rates
What is the slope of the residential bid rent function when there is no consumption substitution?
Slope = −𝑡
Since housing consumption is fixed, the bid rent function is linear.
How does consumption substitution affect the bid rent function?
The slope is 𝑑P(x)/𝑑x = −𝑡/h(x)
Near the CBD: Steeper, because a smaller housing unit requires a larger rent reduction to compensate for commuting. Further away: Flatter, as larger housing units require a smaller rent reduction.
Why is bid rent higher when households can substitute housing consumption?
If households are forced to rent the same housing size at all locations, they have less flexibility, lowering their willingness to pay per square foot.
How does housing consumption change as distance from the CBD increases?
Near the CBD: Smaller housing units due to higher prices
Far from the CBD: Larger housing units due to lower prices
How does consumption of non-housing goods change with distance from the CBD?
Near the CBD: More spending on housing, less on other goods
Far from the CBD: More spending on non-housing goods, as housing is cheaper
What are three key predictions from the monocentric model?
Prices per square foot decline with distance from the CBD.
Housing consumption increases with distance from the CBD.
Non-housing consumption decreases with distance from the CBD.
What is the equation for the slope of the bid rent function? What does this suggest?
𝑑P(x)/𝑑x = −𝑡/h(x)
This suggests that rents change with distance according to:
* Commuting costs (𝑡)
* Choice of how much land to consume as housing at location x (i.e. h 𝑥 )
This suggests that rent changes depend on commuting costs (t) and the amount of land consumed (h(x)) at a given location.
Why is the per-mile cost of commuting not enough to explain bid rent slopes?
The pecuniary cost of travel (bus fare, gas, car depreciation) is relatively small and does not fully explain large rent changes near city centers.
What additional factor influences commuting costs beyond just transportation expenses?
The time cost of commuting, which reflects the opportunity cost of time spent traveling instead of working or enjoying leisure.
How do economists measure the cost of time spent commuting?
They equate it with the opportunity cost of that time, which is often approximated by the hourly wage.
Why is slope of the bid rent with substitution steeper near the CBD, and flatter far away?
