ECO333 Urban Economics Final - Page 1 of 10

This exam contains 10 pages (including this cover page) and 7 questions.
Total of points is 80.
ECO333 Urban Economics Final - Page 2 of 10

1. In Chetty and Hendren (2018), the authors are investigating the impact that a neigh-
bourhood has on intergenerational mobility.

(a) (4 points) Explain why the authors can’t simply compare the outcomes of children
whose families move to different areas (e.g. compare the outcomes of children who
move to San Francisco with the outcomes of children who move to Los Angeles)

(b) (4 points) Suppose a policy maker read this study and proposed that the govern-
ment subsidize moving costs for families with children who are close to the age of 18
(and thus soon to enter the labour market). Would this policy be effective? Explain
why or why not.

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2. For this question, consider a Rosen-Roback framework where a household’s utility func-
1 2 1
tion is provided by q 3 c 3 a 2 . Here q represents the amount of real estate (or housing), c is
a catch-all consumption commodity which also serves as a numeraire, and a represents
the amenities offered by a given location. Firms in this economy produce c, and the unit
1 1
cost of production is given by C(y, p, a) = p 2 y 2 aθ , where p is the cost of housing, and y
is the wage.

(a) (4 points) Using the above information, we can show that the household’s demand
y 2y
functions for housing and consumption are q = 3p
and c = 3
. Use these demand
functions to derive the household’s indirect utility function V (y, p, a), explain how
V changes as a increases.
ECO333 Urban Economics Final - Page 3 of 10

(b) (4 points) Given free mobility of households, our equilibrium condition for house-
holds is that V (y, p, a) = ū for all locations, where ū is a constant. If real estate
prices are fixed (p is constant) what must happen to wage levels as amenities in-
crease?

(c) (8 points) Plot V (y, p, a) = ū and C(y, p, a) = 1 on the yp-plane (i.e. y on the
x-axis, p on the y-axis) for a given level of a. Suppose there is an increase in a and
that θ is positive, show how each curve shifts on your original diagram. Can you
determine what the impact on the equilibrium level of wages and real estate prices
is? interpret your result.

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ECO333 Urban Economics Final - Page 4 of 10

3. Suppose we estimate the following two regression equations:

P = cp + βe E + βc C + bZ (1)

W = cw + γe E + γc C + dX (2)

Where for a given city, P is the price of housing, E is a metric for the quality of K-12
education, C is the property crime rate, and W is the wage level. X and Z are other
controls.

(a) (4 points) What is a household’s willingness to pay for a marginal increase in the
education level, E? (shortly explain your answer)

(b) (8 points) Suppose we wanted to compare quality-of-life levels across cities. Suggest
an index we could use, and broadly outline how we’d calculate the index values for
different cities. (shortly explain your answer)

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ECO333 Urban Economics Final - Page 5 of 10

4. Recall the AMM model where we have households who consume two goods (housing and
a generic consumption good c) and choose how far away to locate from a city’s central
business district (CBD). Let x represent the distance from the CBD, q be the size of
housing a household consumes, p(x) be the cost of housing x units away from the CBD,
y represent the household’s income, and t represent a constant cost of commuting to the
CBD. Thus, each household chooses (x, c) so as to maximize their utility, u(x, c) while
working within their budget constraint c + p(x)q = y − tx.

(a) (6 points) Consider the following modification to this model, suppose we have two
types of households, rich households who earn wage yr and poor households who
earn wage yp with yr > yp . These households face the same cost of commuting,
t, and there is no consideration of the time spent commuting by either type of
household. What would the AMM model predict the distribution of poor and rich
households to look like in the city? You do not need to derive any equations for your
answer, but you should motivate your reasoning using the model fundamentals.

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(b) (6 points) Glaesar, Kahn, and Rappaport (2008) find that the empirical investiga-
tions of the base AMM model fail to explain why poor households locate near the
city center while rich households locate in suburbs. What alternative explanation
do they offer to support this distribution? (there is no need for the mathematics in
this part, explanation is enough)
ECO333 Urban Economics Final - Page 6 of 10

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5. Consider an economy composed of households of type A and type B, both of whom

consume a common consumption good c and a house which is defined by a variable, q,
represents the general quality of the house. Both households have a common income y,
and the price of a house of quality q is p(q) which is a function increasing in q. Suppose
the preferences of households of type A can be represented by uA = uA (c, q) while the
preferences of type B households are represented by uB = uB (c, q).

(a) (2 points) Depict the bid curve of household A on a graph with the price (p) on
the y-axis and the quality (q) on the x-axis. Show the bid curve with a high and a
low utility for the same household.

(b) (2 points) Suppose there is one developer in the market. Depict the offer curve
for the developer with a high and low profit. use part (a) and (b) to show the
equilibrium price and quality on the graph.

(c) (2 points) Now, suppose household B have higher preferences for a high quality
house that household A. Depict the bid curve of both households on a graph with
the price (p) on the y-axis and the quality (q) on the x-axis.

(d) (2 points) Suppose we also have two home developers, a high-cost developer H,
and a low-cost developer L. Which developer will each household type purchase
from and why? Depict the equilibrium outcomes by adding the offer curves from
each firm.

(e) (2 points) using your graph in part (d) depict the hedonic curve of house prices.
ECO333 Urban Economics Final - Page 7 of 10

(f) (4 points) what does the slope of hedonic curve tell about the households and de-
velopers?
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ECO333 Urban Economics Final - Page 8 of 10

6. (8 points) Bayer, Ferreira, and McMillan (2007) estimate households’ willingness to pay
for school quality. Explain why it is important for them to include both boundary fixed
effects and sociodemographic controls in hedonic price regressions for school quality.

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7. Suppose you’re asked to answer a question from an ’A’ student from your ECO20X
(where X ∈ {0, 4, 6}) course who did not take ECO333. They, being old fashioned, have
written you a letter, on paper, saying ”I heard you took ECO333, and I have always
wondered...”

(a) (4 points) Why is it that all the awesome places to live are so expensive?

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(b) (6 points) I always hear people talking about urban sprawl. What is it people are
worried about and what should we do?
ECO333 Urban Economics Final - Page 9 of 10

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ECO333 Urban Economics Final - Page 10 of 10

End of the exam. Extra page (use this page if you really have to):
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