Quiz 2 Flashcards
What is the bid-rent model?
Urban von Thunen with land substitution.
What is the difference between von Thunen and the bid-rent model?
Land/capital substitution
Urban/rural
What is an isoquant?
A curve representing the relationship between inputs to produce a fixed amount of output.
What is the marginal rate of technical substitution?
MRTS is an ouptut isoquant for an individual firm.
p = ?
price per unit of output
m = ?
Marketable units of output
i = ?
Input cost per-unit
K = ?
The number of units of composite capital inputs
r = ?
rent in $/land unit/time unit
S = ?
Size of the land in units.
t = ?
transportation cost /km/unit of output
d = ?
haulage distance in units
MP = ?
Marginal Product
What is the marginal rate of substitution?
Domestic utility isoquant.
What part of the MRS is implied by cost minimization?
What are the 5 assumptions for the bid-rent model?
- constant t
- homogeneity
- isolation
- monocentricity
- substitution
When rents fall with distance, what is the shape and orientation of the line?
Negative slope
Curved for bid-rent
Straight for vT
In what manner do rents change with increased distance from the market in bid-rent theory?
Rents fall at a decreasing rate, i.e. curved and downwards sloping line the further away from CBD we get.
What does a higher position of the full bid-rent curve mean?
Higher positions of the entire bid-rent curve mean lower profits for the firm paying rent, because they’re paying more rent for any given S.
Who does the money go to if a firm paying rent adopts more flexible technology?
The residual will actually just end up going to pay a higher rent.
Which type of firm is which line?
Flexible technology firm is the curved blue line, fixed tech firm is the straight red line.
Which area is the budget effect?
The budget effect is in pink
Which area is the substitution effect?
Yellow = substitution effect
Why is the bid-rent curve above the budget line?
Flexible technology increased the marginal productivity of the land, allowing us to move beyond the budget line.
What is the formula for the commercial bid-rent gradient?
What are three implications of the bid-rent gradient?
- Higher p = closer (rent increases faster than distance decreases)
- Higher S = further
- Higher t = closer
Why will p be higher closer to CBD for the same product?
Because rent increases faster than distance decreases.
Why does the bid-rent curve become shallower with distance?
Substitution:
As land becomes cheaper, we want to use more of it and less of other inputs (substitution), so S becomes larger, and since it’s rise/run, that’s also shallower.
slope = delta r/ delta d =-t/(S/m)
How do we prove that the bid-rent for residential is the same as for commercial?
Derive the two rent equations with respect to d.
What is the difference between the MRS curve and the bid-rent curve?
MRS:
- Individual consumer
- Isoquant of utility
Bid-rent:
- aggregate
- not an isoquant
- WTP
What are 5 critiques of the bid-rent model?
- Amenities
- Constant t
- Isolated
- Monocentric
- Opportunity cost of time
What happens when we factor in opportunity cost for wealthy residents?
We get a steeper slope with them being more attracted to CBD
What are 3 public goods?
Public goods
- Healthy environment
- Safety
- Schools
What does the residential bid-rent look like when there’s an amenity a ways out from the CBD?
There will be a little spike in it.
What does the residential bid-rent look like when there’s derelict land?
There’s a hole in it, and it’s a bit less steep closer to the land, then it takes a little to get back to almost the original slope.
What does the residential bid-rent look like with a heavily polluted downtown core?
The curve will be less steep to the point where the pollution stops, then rejoin what it would have been without the pollution.
Why is the bid-rent line a curve?
Because S rises with distance due to substitution, the angle of the line also gets shallower. This is partly because landlords have substituted capital instead of land closer to CBD in order to economize on rare land and build upwards (*not exponential - the shape of the curve is due to slope=-t/S)
Why are rents higher closer to the CBD from the landlord’s point of view?
- Land becomes more scarce & therefore expensive
- Landlords substitute capital instead of land by building upwards
