RED 362—Real Estate Fundamentals
Due Wednesday, February 20th
Submit typed answers (along with your hand drawings where appropriate) as
a hard copy at the beginning of class, be sure to include your name.
1. Classify the following as contributing to either localization economies or urbanization
economies (or both), and provide a brief explanation of your reasoning.
• Lots of good computer engineers in Silicon Valley
• Frequent flights between Newark Airport and Los Angeles
• A Kinko’s near University of Southern California
2. Consider two cities, Flexville and Rigid City, that have the same equilibrium wage and the
same equilibrium total employment. The export industries in the two cities produce the same
good. In Flexville, export firms produce with variable factor proportions—that is, they can
adjust the amount of labor per unit of output depending on the relative price of labor. In
Rigid City, export firms produce with fixed factor proportions, meaning the amount of labor
per unit of output is fixed. Suppose that both cities find a way to increase the quality of
residential public services (e.g. public schools, parks, libraries) without increasing taxes. Use
two supply-demand graphs, one for each city, to show the effects of the improvements in
public services on
• equilibrium employment
• the equilibrium wage
3. In a 1989 report, a consulting firm estimated the economic impacts of moving the Los Angeles
Raiders (a professional football team) to Sacramento. The authors predicted that people
would spend $28 million per year on the team (tickets, food, merchandise, and parking). (You
can assume this is a reasonable estimate.) The consulting firm then used an economic
multiplier of 2.2 to arrive at their estimate of the total economic impact of the Raiders on the
city of Sacramento—$61.6 million per year. What implicit assumptions have they made in
their analysis? Provide a brief assessment of their conclusion.
4. Suppose you operate a small manufacturing firm in Long Island City and you recently
developed a unique, new production process that will allow your shop to earn $500 more
per month in profit. Your landlord hears about this and smiles since she remembers from her
real estate class that all economic development benefits accrue to landowners. She says,
“since the supply of land is inelastic (e.g. very steep), you will now have to pay me $500 more
per month in rent.” Is your landlord correct? Explain.
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