FIN266 BID RENT CURVE EXAMPLE Student

$ Bid-Rent

$120
$80

$40

CBD 1 mi 2 mi 3 mi

By living closer to the downtown, households reduce their time cost of commuting.
--Ling and Archer*

In the graph above, commuters living 3 miles away from the CBD dictate the cost of renting at the
CBD. Why? Because they should be willing to pay such a rent so as NOT to have to commute. It
makes no difference that they pay no rent living three miles out. Answer the following questions.

1. The price for rental housing is a function of:

A. Commuting cost
B. Quality of the school district
C. Size of apartment
D. Proximity to shopping

2. Rents at the CBD are influenced mostly by:

A. The household income of persons living at the CBD
B. The commuting costs for renters living 3 miles from the CBD
C. The quality of housing at the CBD

3. If commuting costs are $1 per mile, and the commuter travels to work 20 days per month, how
much should a person living three miles away from the CBD be willing to pay to rent at the CBD?

A. $120 B. $80 C. $40 D. zero

4. Now apply the model in the text by assuming that MSU is the CBD. A student commutes nine
miles to MSU 20 days per month and her commuting cost is $3 per mile. How much should she be
willing to pay to live in an apartment next to campus?

A. $1,080 B. $540 C. $360 D. $180 E. $90

5. Does the person living just two miles away pay just $80 to rent a place at the CBD?
A. Yes, because $80 is what he would have to pay to commute.
B. No, he would pay $80 to live 2 miles out.
C. No, he would have to pay whatever the person living 3 miles out would pay.

* Real Estate Principles: A Value Approach, by David Ling & Wayne Archer. 2nd ed. 2008.
McGraw-Hill: New York. From Exhibit 6-2, Chapter 6, p. 130.