Question

1.Consider a nation with two islands separated by water infested with fire-breathing dragons. Initially both islands are self-sufficient and there are no cities. Suppose a dragon-whisperer tames the dragons and harnesses them to serve as air cargo carriers/

a. The dragon re-purposing will cause trade if...

b. If the dragon re-purposing causes trade, a trading city will develop if...

2.Explain the causes and the different kinds of agglomeration economies. How does size of the city generate lower wages and production cost?

Answer 1

1.
a. First of all to trade one island has to have a good which is a specialty to that island or has an advantage in making better quality products at the same price on one island over the other.
The dragon re-purposing will cause trade if one island has a specialty product that will be loved by the other or one island can make a product in better quality than compared to the other at the same cost and is still able to make the profit after the air cargo fee.

b.If the dragon repurposing causes trade, a trading city will develop if the comparative advantage in trade is combined with scale economies in transport and trade.

2.
Agglomeration economies are a fundamental explanation for the existence of cities. Spatial clustering allows for a variety of external benefits such as labor pooling, sharing of suppliers, and specialization; these in turn contribute to increased productivity and economic growth.

Types of agglomerate economies are:
Localization and Urbanization economies.
In localization - Firms need a large number of skilled labor, labor pooling happens, which increases employment opportunities for laborers. This helps in developing industries and the ease of exchange and supplies.

With increasing city size people become more concentrated and skilled labor is easily available. Due to a large amount of skilled labor and high competition, firms lower wages. In an agglomerate economy with a concentration of firms and laborers, ease of exchange and trade occurs, this results in lowering the cost. With Good supply networks; Supply of trained laborers; Infrastructure built specifically for the industry; and Good transport links the larger the size of the city lower the wages and production cost.