# Urban Economics

Topics: Supply and demand, Firm, Automobile Pages: 2 (459 words) Published: March 26, 2012
Assignment #4: CHAPTER 3 - Why Do Firms Cluster?

2. Labor Pooling: What's Fixed and Variable?
Consider the model of labor pooling, with each firm locating either in an isolated site or in a cluster with other firms. Fill the blanks with "fixed" or "variable". A. In an isolated site, the wage is variable and the firm's workforce is fixed because the supply of labor is perfectly inelastic. B. In a cluster, the wage is fixed and the firm's workforce is variable because the supply of labor is perfectly elastic. C. Illustrate with two graphs, one for the isolated site and one from the cluster. C. (Picture attached for the graph)

3. Trade-offs with Clustering for Labor Pooling (picture attached for the graph) A. Use Figure 3-2 to illustrate the situation.
B. During good times, the benefit of being in the cluster as opposed to being isolated is \$550, computed as (\$40 - \$30) x 50 workers + (1/2) x (\$40 - \$30) x 10 workers. C. During bad times, the cost of being in the cluster as opposed to being isolated is \$450, computed as (\$30 - \$20) x 40 workers + (1/2) x (\$30 - \$20) x 10 workers. D. The benefit exceeds the cost because a firm in a cluster changes its workforce when demand changes.

5. Number of Workers and Net Wages
Using Table 3-2 as a starting point, suppose the gross wage is \$36 and the unit training cost is \$48. Complete the following table. Number of Workers Skills Gap Training Cost Net Wage
41/8 \$6 \$30
81/16 \$3 \$33
241/48 \$1 \$35

8. Agglomeration Economies and Auto Row
Chapter 1 uses Auto Row as an example of self-reinforcing changes that lead to extreme outcomes. Consider a city with three isolated automobile dealers, each of which has three buyers per day. The profit per car sold is \$ 1,000. A two-dealer cluster would get six times as many buyers (18), and three-dealer cluster would get 12 time as many buyers (36) A. Use a graph like figure 3-2 to show the profit gap (the profit for a firm in a...