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##### UCSD ECON 135, Summer 2013

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Question;University of;California, San Diego;Economics 135;Summer Session I 2013;Problem Set 3;1. The?valueacrelotf ina;LA?acreis$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 of?acre 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

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