Question

New Cities Boom or Bust? Consider a region with a workforce of 12 million in a single city. The urban utility curve reaches its maximum with 6 million workers and includes the following combinations (W = workers; U = utility in $):

Suppose the government establishes a new city with 3 million workers, leaving 9 million workers in the old city. Assume that the number of cities remains at two.

a) Immediately following the establishment of the new city, the utility in the small new city is _____ and the utility in the large old city is _____
b) On the utility curve, mark the position of the new city with “N” and the position of the old city (immediately following the formation of the new city) with “D.”

Use arrows to indicate the direction of movement for each city.
c) In the long-run equilibrium, the workforce of the new city = _____ with utility = _____; the workforce of the old city = _____ with utility = _____

Answer 1

a). The utility in the small new city is “ Boom ” and utility in the large old city is “ Bust ”

Reason : Boom period means job are plentiful , economy is growing and market is earning subsequent return over investment .

Here are 2 cities at first ,

Where 12 million is total workforce

Assumption is there are 2 cities .

Division of 12 million workforce leads to

6 million in one and 6 million in other city .

Now Question is Govt. Distributed workforce as ;

3 million in new city and left 9 million in old city .

So where there is more workforce utility and demand will be less because workers are producing more .

And where there is less workforce utility and demand is more and production is less .

b). Full explained Diagram at top .

c) .In long run equilibrium ,the workforce of new city =“ Boom ” with utility = “ Bust ”;

the workforce of the old city = “ Bust ” with utility = “ Boom ”.