In the monocentric city model, suppose there are two income groups (high vs. low). Both groups...

In the monocentric city model, suppose there are two income groups (high vs. low). Both groups pay the same transport costs for commuting to the central business district, and transport costs are entirely monetary. One group has a lower income than the other group. Use a diagram to explain the locations of different groups in the city in equilibrium.

1.1 Draw two different bid rent (housing price) curves for land for the different income groups. Why do they differ?

1.2 Intuitively, what explains the slope of these bid rent curves? Reference the concept of “compensating differential” in your discussion.

1.3 Use the same diagram to explain the locations of different groups in the city in equilibrium. Will the city be segregated or integrated?

1.4 Does the data across cities in the world conform to the theoretical predictions of (1.1) and (1.2)? Why or why not

Solutions

Expert Solution

Let's assume two income groups, one high (y_R) and one low (y_L).

So that: y_R > y_L

And with two income groups there are going to be two housing prices, P_R for the high and P_L for the low

In the monocentric city model prices of houses at the center are the highest and decreases spatially as we move towards the suburbs.

Consider the housing as a normal good, we find that people with higher income tend to consume more. So, they locate where the rental price of housing is low, which is away from the center towards the suburb.

For the members of an income group to live in a particular location, they must be the highest bidder at that location.
From the figure it is determined that poor households are the highest-bidder inside the intersection.

The graph shows equlibrium at point X', where x is the distnce from the centre of the city shown in the x-axis, while the y axis shows, the price.

1.3

From the diagram, it can be seen that people with higher income live to the suburbs, while lower-income people live near the center. The city will be segregated.

1.4

Yes, the data from 1.1 and 1.2 confirm theoretical predictions. In the US rich people live towards the suburbs as they prefer newer buildings and newer housing are towards the suburb. While poor people try to reduce transportation cost and save more time from being stuck in traffic try to live near the center. This cannot be said for all the cases.

Rahul Sunny answered 1 year ago

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