# UCSD ECON 135, Summer 2013

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

in

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)?

f)

Would

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?

5.Suppose

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

1

the

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?

7.a)

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.

8.Taxi

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

curve.

9.Draw

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?

10.Explain

the tax subsidy to owner-occupied housing. Why do rich households receive a

higher housing subsidy than poor households?

11.If

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.

d.Since

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?

2

d. Show that with the toll,

the new equilibrium has a traffic level that is efficient. Explain why the

chosen toll achieves that.

3