Part 1 True, False, or Uncertain; Explain (5 points each) For each question, answer whether the statement is true, false, or uncertain and **concisely** explain why. It is possible that parts of statements are true and parts false, so please be precise. Credit is given for the reasoning, not just the correct answer. o In our simple 2-city model of natural advantages, an increase in the total population that chooses between the two cities will lower rents due to the simple logic that with more workers the markets will be more competitive and more competitive markets lead to lower prices. The Rosen-Roback model tells us that if two locations inside a single city are such that consumer amenities are better in location A than location B, then the wages of people who live in A will be lower than wages for those who live in B. Homeless shelters are something necessary for the city, but also typically considered by local residents a dis- amenity. In the new long run equilibrium, market rate tenants are most negatively affected, indeed may flee the neighborhood, while NYCHA and rent-stabilized tenants are shielded from equilibrium negative effects by their rent protections and typically will remain in their apartments. In our model of spatial equilibrium with homogeneous labor, the long run effect of a rise in productivity in a smaller city like Binghamton would help labor located there but hurt labor located in a large city like New York. Landlords in the two cities would in the long run be indifferent because the population will rebalance to hold rents unchanged. The fact that measured wage inequality (e.g. Gini coefficients) is higher in large cities than small shows that the poor would be better off if they moved to smaller cities. Cities that have grown fast in the last twenty years have also had a large number of immigrants settle there, proving that immigrants are an economic engine for city growth. In Krugman's \"cheat model\" of the New Economic Geography, a greater share of spending on the traded manufacturing good produced by mobile workers reduces the likelihood of strong spatial concentration because the workers are free to move away from the large, high price index location. 10. 11. 12. 14. 16. 17: 18. 19. 20. In the New Economic Geography, spatial inequality is lowest when transport costs are high and inequality may well rise when transport costs get sufficiently low (but positive). Rent stabilization that succeeds in keeping rents below market levels may also make it more profitable to be a slumlord, who lets properties deteriorate, than a diligent landlord, who fixes problems whenever this is needed. Hence on the open market, slumlords may outbid diligent landlords for buildings. The Arzhagi and Henderson model showed how to value knowledge spillovers using data on the number of patents developed by researchers near Madison Avenue. The fact that it is the presence of positive externalities, such as knowledge exchange, that explains why cities exist at all, also suggests that cities will be too small from a welfare perspective in our standard models. The decline of manufacturing in New York City is evidence that knowledge exchange is less important to city formation than it was 50 years ago. . The fact that in Manhattan the median price of rent stabilized studios is $1,300 and that of rent stabilized apartments with three or more bedrooms is $1,250 suggests that the demand for studios there is very intense. At the peak, taxi medallion prices reached roughly $1.2 million. Recently the prices have fallen as low as $150,000 and foreclosures on loans for the licenses have become common. This has been a disaster for those who owned individual licenses and provides clear evidence that they were exploited by those making the loans. . The distribution of people of different incomes within a city is log-supermodular, so that if we pick any two incomes and any two points inside the city, the relatively higher income person will live relatively further from the center. Rent stabilization does not create rationing because that would be associated with quantity controls, not price controls. If something like the Google self-driving car comes into common use, it will drive down suburban home prices relative to apartment prices in Manhattan because it will dramatically reduce the cost (including the disutility from driving) of the commute. Manhattan has more than 50% of the city's studio apartments but only about 20% of the city's 2-3 bedroom apartments. This underscores that, in spite of its reputation, Manhattan is actually a cheap place to live. In Manhattan, the median rent for apartments whose rent is not regulated shows a 40 percent premium for 2 bedroom apartments over studios. For rent-stabilized apartments, the same comparison shows effectively no premium that needs to be paid. The most plausible explanation for this is that leaving housing to the market allows landlords to exploit families, who have inelastic demand to rent larger apartments. Davis, Dingel, and Monras's paper on Citi Bike shows that Krugman was right that a reduction in transport costs leads to even more centralization of economic activity