ECON393 Exam 2

-Agglomeration economies refer to the type of economies of scale or scope that operate across groups of firms or industries. -Agglomeration Economics is the idea that the productivity of firms can be impacted by where the firm is located. For example, a firm in an urban area is expected to be more productive than one in a rural region -There are five major sources of agglomeration economies: Location centrality, labor pooling, skills matching, input sharing, and knowledge spillovers.

A business can save money by moving closer to other businesses that it interacts with everyday

Labor pooling states that it is more advantageous for a company to move to a spot where other companies are hiring the same type of workers, because when the company is busy it can hire the workers easily and for cheap if there are a lot of workers. If you are the only company hiring these type of workers in an isolated are though, it will cost more and be harder to get new ones

This refers to a firm's ability to match the skills of their workers to the skills needed to complete a task. In the figure below, the distance between the letters outside the circle represent the cost incurred by the firm trying to retain its employees. On the left, it costs 1/4 of the circumference of the circle to train these employees. But on the right it costs 1/6. Lower costs=More gravy

Input sharing refers to situations in which the optimal scale of production of an intermediate good exceeds the input requirements of a down-stream producer, i.e., the purchaser of an intermediate input. So basically it makes more sense for a car manufacturer to be close to a steel producer because it would not be efficient for the car company to try and produce its own steel. The steel company produces in bulk and sells right to the car manufacturer.

Human capital spillovers refer to the transfer of knowledge between firms and industries in close proximity to one another. In denser urban are, the flow of information and number of contacts between firms increases due to labor mobility between firms, improved educational opportunities, and informal encounters and discussions between employees of different firms. -It has been observed that agglomeration economies are in cities with highly skilled labor forces -Agglomeration economies are important determinants of the distribution of firms across different sizes of urban areas. A basic tenant of urban economics is that people and firms adjust their locations to establish locational equilibria in which similar individuals obtain similar utility. Since lower skilled firms obtain fewer benefits from agglomeration economies, they cannot pay the wage premiums necessary to attract employees to highly urbanized areas. Consequently, they locate in smaller towns with lower costs of land, housing, transportation, recreation, etc. They pay lower wages, but their employees have lower costs of living. Cities of different sizes have different levels of infrastructure, such as highways, roads, schools, parks,and sanitation.Bigger cities with more public infrastructure can support more people at any given utility level.

Comparative advantage would say that Delaware shouldn't manufacture computers if the state doesn't have the resources & capabilities to do so. Delaware has a competitive advantage over other states in areas such as corporate finance. Delaware's judicial system is shareholder centered and is a very hospitable business climate for big financial firms like J.P. Morgan Chase to conduct business. Through agglomeration market forces such as labor pooling, skills matching, and knowledge spillover Delaware is able to provide financial services at a more efficient rate when comparing the possibility of manufacturing computers. (Maybe add something about urbanization of economies) Delaware would have low localization economies, or intra-industry agglomeration, in the computer manufacturing industry since there is a low number of other computer manufacturing firms in the area, low number of skilled labors that would meet the skill requirements of the computer manufacturing firms, labor pooling would low (so higher wages during high demand → spend more on wages than clustered firms) because the firm in DE would be an isolated firm, the input sharing would be low because inputs for computer manufacturing are not nearby and will be hard to get differentiated capital inputs which increases the benefit to the firm while also delivering a lower average cost of the good due to proximity, and knowledge spillover would be impossible because there are not many computer manufacturing firms in DE. This would mean less locational potential, the value of an area due to externalities that would increase property value in urban areas with high population of human capital. Also, less human capital pooling and process innovation because DE is does not have a diversified city where a firm can make a process efficient enough to move to a specialized city to enjoy lower costs and wages. Lastly, since the older generation with the skills for computer manufacturing are not located in DE, the younger generation will not be trained in DE for computer manufacturing, but somewhere else where the younger and older generations are near education (internships/apprenticeships).

-The reason why you see numerous ATM's and bank branches on every street corner is because by reducing the transportation cost that is associated with going to an ATM and pulling out money, consumers will be more likely to visit the ATm's more, and in turn use the bank more. This is shown on a linear graph below: *Look at graphs and explanation of graphs on google doc* However, it makes more sense for the headquarters of banks to locate around each other because of Agglomeration economics. There are 5 reasons why it is advantageous: Location Centrality, Labor Pooling, Skills Matching, Input Sharing, and Knowledge Spillovers. (See question 1) The reason why there are central business districts, like a banking district where these firms would be located in, is due to agglomeration in consumption. Essentially, consumers are attracted to areas that provide more variety of differentiated goods and that that this effect, which can be represented by Rho (p), is stronger (closer to zero) for differentiated goods that are less perfect substitutes.

-Agglomeration economies are important determinants of the distribution of firms across different sizes of urban areas. A basic tenant of urban economics is that people and firms adjust their locations to establish locational equilibria in which similar individuals obtain similar utility. Since lower skilled firms obtain fewer benefits from agglomeration economies, they cannot pay the wage premiums necessary to attract employees to highly urbanized areas. Consequently, they locate in smaller towns with lower costs of land, housing, transportation, recreation, etc. They pay lower wages, but their employees have lower costs of living. Cities of different sizes have different levels of infrastructure, such as highways, roads, schools, parks, and sanitation. Bigger cities with more public infrastructure can support more people at any given utility level. *Graph* First note that there cannot be multiple cities at points like "a" on a utility-population profile in a stable equilibrium. If there were two small towns at point "a", any small difference in their sizes would cause the smaller town to lose population to the bigger town, which would offer higher utility. Every movement of population from the smaller to larger town would reinforce the higher utility of the larger town, drawing even more migration. The only stable points on the utility-population profiles are those like "b" on the downward sloping portion of the curve. At "b", any small difference in population would cause migration from the bigger to the smaller town, which is self-correcting. The towns would converge back to point "b". This implies that towns cannot be too small in equilibrium, because they will lose population and die. Towns can be too big, as migrants do not consider the external effect of congestion on the existing residents when they move. They will relocate as long as they can improve their individual utility, even though they decrease the utility of the town as a whole. As long as people can migrate between the three types of cities, the long run equilibrium point will occur at points "b" "c" and "d". The utility offered by each town must be the same or else there would be no further migration.

This distribution is not unusual, the migration of workers and firms across cities with different degrees of agglomeration economies creates a distribution of cities with relatively few large cities and many smaller cities. Suppose there are nine industries each of which employ 12,000 workers. These industries fall under three categories: -Type A- industries have weak/no localization economies and no urbanization economies. -the firms in type A have little to gain by clustering in the same cities so they spread out over the cities to avoid higher costs of living associated with large cities. We will assume that they initially spread out evenly over the nine cities so that 4000 workers in type A are in each city. -Type B- industries have strong localization economies, but weak/no urbanization economies. -The firms in type B industries benefit by locating in cities with other firms in the same industry. They have little to gain by clustering with firms from other industries. We will assume that they spread out over three cities each of which specializes in one of the type B industries. These cities will each have 12,000 additional workers from B industries. -Type C- industries have strong localization and urbanization -The firms in Type C industries benefit from locating in cities with other firms in the same industry and in other industries. These firms cluster in one city with both A and B industries. Thus, this city will have 36,000 additional workers from the type C industries. We need to keep in mind that it is possible that some of the firms of type A and B may migrate from larger to smaller cities to avoid the higher wage levels needed to compensate their workers for the higher cost of living. It is possible that some of the type A and B firms will have relatively stronger agglomeration economies than others of their type and will benefit from locating in a larger city. However, let us assume that these effects counteract each other so there is no net migration.

Type A- industries have weak/no localization economies and no urbanization economies. -the firms in type A have little to gain by clustering in the same cities so they spread out over the cities to avoid higher costs of living associated with large cities. We will assume that they initially spread out evenly over the nine cities so that 4000 workers in type A are in each city.

Type B- industries have strong localization economies, but weak/no urbanization economies. -The firms in type B industries benefit by locating in cities with other firms in the same industry. They have little to gain by clustering with firms from other industries. We will assume that they spread out over three cities each of which specializes in one of the type B industries. These cities will each have 12,000 additional workers from B industries.

Type C- industries have strong localization and urbanization -The firms in Type C industries benefit from locating in cities with other firms in the same industry and in other industries. These firms cluster in one city with both A and B industries. Thus, this city will have 36,000 additional workers from the type C industries.

Broken up in terms below

The service sector yields the highest surplus when it is close to the Centralized Business District. The manufacturing sector is the second most productive sector at the CBD and residential tenants are the least likely to benefit from being at the CBD and would prefer larger homes in more suburban communities further away from the CBD, cheaper land which means bigger homes and more property for certain income levels. -Now we are prepared to explain how land values vary systematically in a stylized city, and how this determines the pattern of land use, population density, building heights, and commuting patterns throughout the whole city. For simplicity, we initially assume that the city has a single export node at its center. Historically, this would be a railway station or port. Service, manufacturing, and residential sectors compete for land. We also assume constant returns to scale in local transport that largely consists of a hub-and- spoke network of streetcars. Agglomeration economies provide the glue that holds the city together. These assumptions generate a monocentric city that represents a stylized version of early 20th century US cities. To simplify it further, we assume that all production involves fixed proportion technologies, constant freight cots, fixed output prices, free entry and perfect competition.

According to David Ricardo, competing farmers would be willing to pay the owner of the land up to the amount of this surplus in rent for the right to the farm. The higher bid price is because of the economic profit realized from the more productive farm -Agglomeration economies and a central export node are enough to ensure that the central location has the highest productivity. Since the service sector (office work) usually exhibits the greatest agglomeration economies, it earns the highest surplus at the most central location, but the surplus decreases rapidly with more distant locations. The manufacturing sector earns the second highest surplus in the central location and its surplus decreases more gradually with distance. Finally, the residential sector earns the least surplus at the central location, but this surplus decreases most gradually with distance. The following graph illustrates how these surpluses vary with distance from the center of the city. -The commercial office space realizes the highest surplus when located at the CBD, manufacturing realizes the second most, and residential realizes the least amount of economic surplus from its location to CBD. These individuals and firms would be willing to pay a premium equal to the amount of surplus it could expect to obtain in that location.

-Without restrictive lot sizes the municipality will attract consumers who favor below average lot sizes as opposed to above average lot sizes because the property taxes will be cheaper on the property but the family can expect the same amount of municipal services.

Assumptions of fixed proportion production and constant freight costs cause the bid/rent functions to be straight lines. For the service sector, empirical studies of actual bid rent functions indicate they are steepest in the center of the and get less steep with distance. The curvature of the bid rent function is largely due to the substitution of capital for land as the price of land increases. The interest rate is the price of capital, which is the same through the city. The price of land however varies systematically with distance from the city center. Substituting capital for land means taller buildings to get more usable space for a given amount of land. Taller buildings increase density, generating higher agglomerations economies, further increasing productivity of centrally located land, thereby increasing the surplus it generates, and its rent its users are willing to pay.

Profit seeking agents within the housing sector will continue to produce taller buildings knowing that they will generate a higher rental income due to the agglomeration effect. These changes take place over the long run. A contractor would only be willing to invest in rebuilding/renovating a property if the increased agglomeration effect has already taken place around his property. If this is true, and the benefit (additional NPV of rental income) exceeds the costs associated with renovating the property.

The internal combustion engine that came about at the end of WWII made cities turn cities from monocentric to polycentric cities. Truck freight made it possible for the manufacturing sector to spread outward on inexpensive land along the city's edge. People could build smaller and cheaper warehouses because it did not cost as much to do so on the abundant land. Cars allowed for people to be able to live outside the city where they worked. Agglomeration economies kept central office work in the center city while satellite branches of service sector firms developed in the suburbs to provide proximity to the manufacturing and residential sectors. In some cases, the office clusters developed into new cities that were absorbed my existing metropolitan areas. In other cases, office clusters developed new edge cities and the intersections of ring roads and radial highways. The internal combustion engine helped to decrease the overall density of cities, shifted a large fraction of employment to suburban areas and beyond, and greatly increased suburb to suburb work commutes. Agglomeration economies also had an effect in the sense that the firms and manufacturing companies that spread out still worked as a whole unit, and as per the definition of agglomeration economies. *Graph is the circular carnival tent looking thing*

Look at cards below

Location Centrality, Skill Matching, Labor Pooling, etc. The 3 key exogenous parameters are: 1) The proportion of expenditures of manufactured goods 2) The degree of sustainability of the manufactured goods 3) The transportation survival rate

The number of firms and product varieties are determined in the model based on how the 3 exogenous parameters alter the 3 effects. If there is a decrease in sustainability, then there will be an increase in variety and differentiated products. If there is an increase in sustainability, then there will be a decrease in variety and differentiated products. Label 1: The "Home Market Effect" -- wages are higher in large manufacturing regions. Demand for region's products increases, so marginal revenue increases (concentrates). Label 2: The "Price Index Effect" -- large manufacturing region has a lower price index (cheaper goods). A decrease in price levels puts downward pressure on wages, so marginal and average cost will decrease (concentrates). Label 3: The "Competition Effect" -- Transportation costs decrease demand by foreign farmers and puts downward pressure on profits of manufacturers in large manufacturing region. This favors firms in the small manufacturing sector (dispersion).

2 Effects that promote concentration of production in a manufacturing region: -The "home market effect" (encountered in the new trade model) says that wages are higher in the larger manufacturing region. This induces workers to migrate to the larger region. Demand for the region's products increase, raising marginal revenue. More firms want to move to the region. This effect operates in favor of concentrated manufacturing. In the graph below, the arrow labeled 1 represents this effect. -The "price index effect" says that the larger manufacturing region has a lower price index (goods are cheaper). This provides a further inducement for workers to move to the region. Lower price levels put downward pressure on wages which lowers the firm's marginal and average costs curves. More firms want to move to the region. This effect operates in favor of concentrated manufacturing. In the graph below, the arrow labeled 2 represents this effect. The effect that promotes dispersion of production: -The "competition effect" says that transportation cost decreases demand by foreign farmers and puts downward pressure on profits of manufactures located in the larger manufacturing region. This favors the firms in the small manufacturing sector, which has a c.i.f. price advantage. This effect operates in favor of dispersion of manufacturing. In the graph below, the arrow labeled 3 represents this effect.

As the transportation survival rate increases (transportation costs decrease), the industry crosses the border from the dispersed to the concentrated region. Low survival rates (high costs) make it desirable to be close to the farm population to minimize transportation costs that increase the relative prices, decrease demand, and decrease profitability of transported goods. High transportation survival rates (low transportation costs) make location less significant. As the sustainability of goods decreases, the border between dispersion and concentration regions contracts, so industries cross from the dispersed to the concentrated region. High sustainability means the products are not very differentiated. Low sustainability means highly differentiated products. The value of additional variety and the ability to mark-up price over marginal cost increases. This means firms are more monopolistic and have increased output. This magnifies agglomeration economies.

Farm population has decreased from over 90% at the time of the American Revolution to less than 3% today. Transportation costs have decreased dramatically since the historical development of cities (transportation survival rate has increased). Historical development of cities had significantly less variety in products than we have today.