Question

In one or two sentences explain how the relationship between office bid rent and proximity to a central business district is related to the concept of firms clustering to take advantage of knowledge spillovers. What do they both value?

Answer 1

Answer :-

• The relationship between office bid rent and proximity to a central business district is negative as with the increase in distance between firm or office and central business district the office bid rent decreases.

Office bid rent means the rent which a firm is willing to pay for the use of building or land.

• Firms clustering to take advantage of knowledge spillovers means similar industry firms comes togather to make a group to exchange their knowlegde, ideas of business etc.

These two are related in following ways:

• Every firm wants to setup as near as possible to the central business districts for increasing their business
• Most of the firms locate near central business districts and their rent is high so with the help of firms clustering they share new ideas, innovations, tachnologies etc. from other firms to increase their production through which they can earn profit and can compansate for higher rent.

They both are valuable as:

• Firm clustring reduces firms' cost of production through knowledge spillovers
• Increases profits
• Locating near central business districts reduces the transportation cost of firms