Question

Consider a monocentric city in which the unit cost of commuting is $10 per mile per

month. A household located 8 miles from the city center occupies a dwelling with 1,200 square

feet at a monthly rent of $600. Nonland cost per dwelling is $200, and there are 4 houses per

acre.

(a) (5 pts) What is the bid rent at the distance of 8 miles per one acre of land?

(b) (5 pts) Assume that the demand for housing is perfectly inelastic (i.e., people always choose

to live in a 1,200-square-foot housing unit). What is the rent of housing at the distance of 5

miles?

(c) (5 pts) Assume that housing firms do not engage in factor substitution. What is the bid

rent at the distance of 5 miles?

(d) (5 pts) How would your answers to (b) and (c) change if the demand for housing is price-

elastic and firms engage in factor substitution? Will the prices of land be higher or lower?

Will households at 5 miles have smaller or bigger houses?

Answer 1

Part A

To calculate the bid rent of land for 8 miles is needed to determine the Total revenue and Non land cost. That is,

So the bid rent is,

per Hectre.

Part B

Here given the demand is perfectly inelastic. Then the price of housing at distance of 5 miles is,

Distance is,

the slope of housing price curve is,

Then,

per square foot. Then bid rent is,

Part C

Here firms do not engage in factor substitution. Then

Part D

The bid rent would be higher than the number computed in part C. Because of the price of house is higher and land per dwelling is lower.