posted by eStone on .
Consider a monocentric city in which the cost of commuting is $10 per mile per month. A household located eight miles from the city center occupies a dwelling with 1,200 square feet at a monthly rent of $600. Nonland cost per dwelling is $200, and there are four houses per acre.
a. What is the price (per square foot) of housing at u = $8? What is the bid rent at u = $8?
b. Assume that the demand for housing is perfectly inelastic. What is the price of housing at u = 5?
c. Assume that housing firms do not engage in factor substitution. What is the bid rent at u = 5?
d. How do the answers to (b) and (c) change if the demand for housing is price-elastic and firms engage in factor substitution? Would the prices of housing and land be larger or smaller?