Posted by **eStone** on Tuesday, May 5, 2009 at 10:04pm.

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?

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