UCSD ECON 135, Summer 2013

| August 14, 2017

University of
California, San Diego

Economics 135
Summer Session I 2013

Problem Set 3

1. The¼valueacrelotf ina
LA½acreis$331,000lot. One might guess that value of

LA should be $ 2*331,000 = $662,000. How would you explain that the actual
value of½acre lot in LA is only $359,000?

2. Suppose
jobs at the CBD have a daily wage of W. A firm moves 5 miles south of the CBD.
What wage would the suburban firm need to offer such that a worker who lives 3
miles south of the CBD would be indifferent between working at the CBD versus
at the suburban firm? At this wage, draw a graph showing the commuting area for
the suburban firm, i.e., the locations where workers would prefer to work at
the suburban firm rather than the CBD firm. Also draw a graph of the bid rent
function along the radius from the center that goes South from the CBD.

3. Suppose
city X is considering adopting a new regulation that would prohibit people from
keeping chickens in their backyards (since chickens are smelly and sometimes
carry bird flu). The city has 50 houses and 20 homes have chickens. The
regulation would cause the value of the homes with chickens to fall by 10% and
the value of the homes without chickens to rise by 10%. Suppose that without
chickens, all the lots would have the same value.

a)What would happen to
average land values in the city after the regulation?

b) Will the city adopt
the new regulation if it were put to a vote?
c) Now
suppose the city must compensate landowners for “regulatory takings,” meaning
that the city must pay the landowners who keep chickens for the reduction in
the value of their lots. Would the city still adopt the regulation?

d) Now suppose the
figures are reversed, so that 30 homeowners keep chickens and 20 do not. How
would your answers to (a) – (c) change?
e)Is it true (in
general) that cities tend to adopt too many regulations (meaning that they
sometimes adopt inefficient regulations)?
governmental efficiency be increased by requiring that cities pay landowners
for reductions in land value that are due to regulations?

4. Assume
that we regress average commuting time of commuters in the 50 largest U.S.
metro areas on the same explanatory variables, but we use data for 1990.
Suppose that the results now show that the coefficient of %public transport is
now 18 and coefficient of %moved in last 5 years is now -3. How would we
interpret these results?

one lane of a freeway is designated as a diamond lane. How will this change
affect congestion on the other lanes?

6. During the 1970’s, there was a
national speed limit of 55 mph, but it was repealed in


late 1970’s and, currently, only the states regulate speed limits. Suppose the
Federal government is considering adopting a new national speed limit of 55,
65, or 75 mph. You are asked to plan a study of what speed limit would be the
most economically efficient. How would you propose to do the study?

Suppose when an additional driver enters a freeway, 10 cars are forced to slow
down from 70 to 60 mph and the reduction in speed lasts for one mile. What is
the efficient congestion toll? Assume that all drivers’ value of time is
$12.00/hour. Which driver(s) should pay the toll?

b) Show the efficient congestion toll and how
it affects the number of drivers who use the freeway on a graph.

medallions (permits to operate taxis) are fixed in supply in New York City. So
in order to become a NY taxi owner, a driver must purchase a medallion from
someone who owns one.

a) Draw the supply and demand curves for taxi
medallions on a graph. b) Explain the shape of the supply curve.
c) What determines the height of the demand

a supply curve for housing that is vertical and one that is horizontal. Also
draw a demand curve and show how price is determined in each situation. What
determines whether the supply curve for housing is vertical or horizontal?

the tax subsidy to owner-occupied housing. Why do rich households receive a
higher housing subsidy than poor households?

all rich households were given the house of their dreams would it improve the
quality of housing occupied by poor households? Describe alternative ways to
improve housing for the poor.

12. Assume that the demand (MB) for
driving in a highway during peak hours is given by MB = 5 – 0.02 N, where N is
the number of cars per mile currently in the highway. The private marginal cost
is equal to $0.25 when there are 40 cars or fewer, but after 40 cars the
highway reaches capacity, and the marginal cost increases by $0.02 (2 cents)
for each additionalcar in the highway. Due to the congestion, there is
also an external cost whenthere are more than 40 cars per mile in the
highway. The MEC is equal to zero for N less or equal than 40, and it is given
by the equation MEC = 0.1 (N-40) when N>40.

a. Write the equations for the PMC and
SMC. Hint: if you can’t figure out how to do it, look at the lecture notes.
Graph the PMC, SMC and demand in the same diagram.

b.Find the (private)
equilibrium number of cars in the highway. Illustrate your answer in the graph
from part a.
c.What is the efficient
traffic level? Find it and illustrate it in the graph from part a.
the equilibrium found in part b is different from the efficient outcome found
in part c, a toll system is proposed to solve the inefficiency. What is the
toll per mile that will achieve that?


d. Show that with the toll,
the new equilibrium has a traffic level that is efficient. Explain why the
chosen toll achieves that.


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