Question

Consider a simple urban economic model of location choice where three types of land use—Urban, Suburban, and Rural—are distributed throughout the city. Land is a scare resource and it is allocated optimally (i.e. it is allocated to whichever type of user is willing to pay the most for it). Also, assume that distance (measured in miles from the central business district) is the only criteria considered in determining the optimal outcome. The marginal profit (MP) functions (profit per unit of land) for each land use type are as follows:

Urban: MP = 70 – 7*Distance

Suburban: MP = 55 – 2.75*Distance

Rural: MP = 30 – 0.75*Distance

Use these three equations to answer the following:

a. Plot the rent gradient as a function of distance for each type of land use. Trace out the overall bid-rent profile.

b. How much distance is devoted to the production of suburban land use?

c. Now, assume that policymakers decide that because of a recent rise in gas prices land users should get a transportation subsidy, via a tax credit, equal to a 10% reduction in travel costs per mile. Plot the new bid-rent curves. How is this subsidy likely to impact the spatial size and pattern of the city?

Answer 1