Consider a monocentric city where the cost of commuting is $20 per mile per mont

Question

Consider a monocentric city where the cost of commuting is $20 per mile per month. A household located 5 miles from the city center lives in a 1,000 square foot house that costs it $500 per month. Nonland costs per house are $100 per month and there are 10 houses to the hectare.

1. What is the price per square foot of housing 5 miles from the center?

2. Suppose the demand for housing is perfectly inelastic. What is the price per square foot of housing 2 miles from the center?

3. Assume that housing developers do not engage in factor substitution. What is the residential bid rent for housing, per hectare, 2 miles from the center?

4. Now suppose housing demand was not perfectly inelastic (consumers do engage in consumer substitution), and housing developers did engage in factor substitution. Would the residential bid-rent 2 miles from the center be higher, lower, or the same than the amount you calculated in question 3? Why?

Explanation / Answer

1) At 5 miles from city center price per square foot = (house cost + nonland cost)/area = ($500+$100)/1000= $0.6 per square foot

2) Customer will be able to pay more if he is living near to the city center as he will be able to save on transportation cost. Here he is able to save $20*3=$60 so can pay $60 more. S At 5 miles from city center price per square foot = (house cost + nonland cost+$60)/area = ($500+$100+$60)/1000= $0.66 per square foot

3) R = P*H - K (Fixed factors)

R is Housing bid rent

P is price per square foor

H is no. of house per hectare

K is nonland cost

R = $0.66*10000 -10*$100 = $6600 - $1000 = $5600 per hectare

4. While factoring substitution, the residential bid rent will now be higher than answer 3. because the producers will now be substituting benefits of taking house near the city center like time-cost of commuting

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