Econ 226: Urban Economics and Policy

Singapore Management University

Instructor: Wen-Tai Hsu

Answer Key to More Di cult Questions (Part 1)

Question 3 of Problem Set 1. Derive the housing price gradient in the
monocentric city model in Chapter 2.
@p (x)
=
@x

t
:
q (x)

Hint: utilize the following three conditions. (1) budget line (2) tangency of
budget line and the indierence curve, and (3) u (c (x) ; q (x)) is equalized
across x.
Solution.
Recall the optimal solution must be such that the marginal rate of substitution equals the price ratio, i.e.
@u
@q
@u
@c

(1)

= p;

and since the budget line c + pq = y tx holds for every x (with the understanding that c; p; q are all functions of x). Dierentiate the budget line with
respect to (w.r.t.) x, we obtain
@c
@p
@q
+
q+p
=
@x @x
@x

t:

(2)

Also, for some value of u, u (c (x) ; q (x)) = u for all x. Total dierentiate
this w.r.t. x, we get
@u @c @u @q
+
= 0:
(3)
@c @x @q @x
Combine (3) with (1) and we get
@c
=
@x

@u
@q
@u
@c

@q
=
@x
1

@q
:
@x

Plug the above into (2) and we arrive at the result:

@p (x)
=
@x

t
:
q (x)

Question 2 of Problem Set 2. Consider the model in the slides "Cities

in Space and City Hierarchy." Given the optimal solution for ` (the distance
between two z-cities), show that it is welfare improving to have a z 0 -city
(0 < z 0 < z) in the middle between any two neighboring z-cities. In fact,
having a z 0 -city in between two z-cities but not exactly in the middle may
also be welfare-improving. Given that a z 0 -city is built in the middle between
two z-cities, determine the optimal value of z 0 . What is the tradeo behind
the choice of z 0 ?
Solution. With a z 0 -city in the middle, the savings in transportation
cost for each good in the set of goods [0; z 0 ] is
t`2
4

t`2
t`2
=
:
8
8

The rst term on the left-hand side is the transport cost if the good is not
produced in the middle and so there are only two locations of production (at
0 and `). The second term is the transport cost if the good is also produced in
the middle (so it is produced at 0; `=2 and `. So, the savings in transportation
2
cost for each good in the set of goods [0; z 0 ] is t`8 . If we have a z 0 -city with
z 0 > 0, then the net savings (i.e., net of xed costs) is
Z z0
t`2
S=
(y) dy.
8
0
Since (0) = 0 and function is continuous, for y su ciently close to 0,
2
(y) is arbitrarily close to 0. Given `, (y) < t`8 for y su ciently close to
2
0. Thus, we can choose z 0 su ciently close to 0 so that t`8
(y) > 0 and
S as the integral must be positive as well. Hence, there exists a 0 < z 0 < z
such that it is welfare improving to have a z 0 -city in the middle.
Think at the margin of z 0 . If we increase z 0 a little bit, say, by one
2
more good, then this good costs (z 0 ) and it also induces saving of t`8 . The
2
optimal condition for z 0 must be that (z 0 ) = t`8 . Given the function , this
condition determines z 0 . In the gure below, the optimal z 0 is denoted as
2

z 0o , and we see clearly that it is exactly the point where the net savings is
maximized. For any z 0 2 (0; z 0o ], the net savings S are positive and hence
such z 0 -city is worthwhile to have (though the best of them is the z 0o -city).
Question 3 of Problem Set 2.
Consider the model in the slides "Cities in Space and City Hierarchy."
Suppose that the optimal location of the "immediate sub-city" is in the
middle. Suppose that z1 = 1000 and (y) = 3y + k, where k > 0. Label the
immediate sub-city in between two z1 -cities as a z2 -city, and the next "layer"
of immediate sub-cities as z3 -cities, and so on. Let I denote the number
of layers in such a city hierarchy with I possibly innite. Can you derive a
formula for I? Suppose that t = d = 1 and the distance between two z1 -cities
is ` = 100. How many layers are there if k = 0? Now, suppose k = 10, how
many layers are there and what is the value for z2 ?
Solution. Recall the optimal condition for z 0 when the z 0 -city is in the
middle is
t`2
:
(z 0 ) =
8
Now, the z2 -city divides the area of ` into two areas of size `2 = `=2. So,
t`2
t`2
(z3 ) = 82 . Similarly, (z4 ) = 83 . Hence, the recursive structure implies
3

that

t`2i 1
(zi ) =
;
8

where
`i =

for i

for i

1:

`i 1
`
= i 1
2
2

Hence,
(zi ) =

t`2
:
22i 1

Plugging the functional form of ,

3zi + k =
zi =

t`2i
8

(zi ) =
t`2
3 22i

k
:
3

The number of layers I is therefore the largest i such that zi > 0. I

therefore satises the following two inequalities.
t`2
3 22I 1
t`2
=
3 22I+1

zI =
zI+1

k
>0
3
k
< 0:
3

Obviously, if k = 0, I is innite because no nite I satises the second

inequality. When k = 10, the above inequalities imply that
4I < 2000
4I+1 > 2000
This implies that I = 5.
The following gure shows that the at I, the savings in transport cost
t`2
per good 8I is still larger than (0), and hence there is a positive zI that
t`2

a zI -city should be built. But, when I+1

< (0), savings in transport cost
8
cannot even cover the the xed cost of the least costly good, (0) ; and hence
no more cities should be built.