Reference no: EM133045689

Problem 1
Consider an office firm in a monocentric city. The labor-cost function is w = 60 - 6x, where x is the distance to the city center (from 0 km to 5 km). The interaction cost (for travel between the office firms is c = 12 + x^β, where β is a parameter (a variable beyond the control of the firm).

a. Based on the discussion of the travel costs of office firms, what is the plausible value for β? Greater, equal, or lower than 1?

b. Illustrate the cost-minimizing location for an office firm, including a value for C.

Problem 2
Melbourne and Sydney are the two main metropolitan areas in Australia. Each has 5 million inhabitants. Both cities have urban utility curve u(n) = 150 + 80n - 10n², where n is the number of inhabitants in millions. Melbourne has a plan to expand its urban transport system to the suburbs, but Sydney cannot expand it because the city is surrounded by National Parks. Melbourne estimates that its population will increase to 8 million people in ten years and Sydney won't be able to go beyond 5 million due to its geographical limitations. Melbourne also believes that the larger share of the population will boost productivity and urban utility will move to u(n) = 200 + 60n - 5n² after these 10 years, but utility in Sydney will remain the same. Discuss what would happen in both cities (housing market, urban housing prices, and others) if the predictions of Melbourne are right.