Second Quiz Flashcards
What is the bid-rent model?
von Thunen but urban
What is the difference between von Thunen and the bid-rent model?
The relationship between land and inputs is not fixed.
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?
If we keep increasing one input, we’ll get diminishing marginal returns of output.
p = ?
price per unit of output
m = ?
total quantity of output
i = ?
input price
K = ?
composite capital inputs
r = ?
rent per land unit
S = ?
units of land input
t = ?
transportation cost /distance/unit of output
d = ?
haulage distance
MP = ?
Marginal Product
What is the marginal rate of substitution?
What part of the MRS is implied by cost minimization?
What are the assumptions for the bid-rent model?
- one market centre
- isolated city
- land is heterogeneous
- land and non-land production factors are mutually substitutable
When rents fall with distance, what is the shape of the line?
Curved
In what manner do rents fall with distance from the market?
At a decreasing rate
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.
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.
Who will land get allocated to if the red line is the fixed tech and the blue line is the flexible tech firm?
The land will get allocated to the flexible technology firm because they’re able to pay more.
Which area is the budget effect?
Pink
Which area is the substitution effect?
Yellow
Why is the bid-rent curve above the budget line?
Because technology is flexible, so we can move beyond the budget line.
The marginal productivity of the land increased with the flexible technology.
What is the bid-rent gradient?
What are three implications of the bid-rent gradient?
- Higher required S will be further from market
- Higher t will locate closer to market
- For similar products, p will be higher closer to CBD
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?
Because as an input becomes cheaper, we want to use more of it and less of other inputs (substitution), so S becomes smaller.
How do we prove that the bid-rent for residential is the same as for commercial?
Derive the two equations, and they’ll come out to the same thing.
What is the difference between the MRS curve and the bid-rent curve?
- MRS/ MRTS are isoquants of a given level of output whereas bid-rent is just rent, land size, and WTP.
- They cannot be derived one from the other
- MRS/MRTS are for a single individual or firm, bid-rent is for a group
What are the critiques of the bid-rent model?
- Monocentricity
- Opportunity cost of time has been ignored
- Trade/business activities with outside
- Location is only related to transportation cost, no room for amenities, etc.
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 some other factors that may affect population distribution in a city?
- Crime rate
- Pollution
- 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 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.
