Problem 1: [20 Points] Answer the questions or evaluate the following: a) Imagine an introduction of a fully functional and affordable air taxi service into a major metropolitan area, such as Dubai. All other things being equal, what would be the long-term ramifications for the office rent, land value, building height, land use pattern, and the type of businesses in the CBDs? [5] b) Imagine a country with three major cities: A, B, and C. All cities have the same size of 2 million residents and the same (monetized) utility curve for their residents, which peaks at $100 for a 1 million population. City A decides to impose zoning laws limiting the city boundary to accommodate 80% of the current population, which means 1.6 million. Carefully graph and mark the spatial equilibrium outcome before the zoning law. Graph and show the outcome in the short and long-run after the zoning law comes into effect. Explain why and how the zoning law affects different cities and their residents. Who (if any) benefits from the zoning law? Why? Explain. [6] c) Use a graph to present the expected land rent and land use pattern in the monocentric city with a beltway? Explain why? Use a graph and carefully mark different areas based on the usage. [6] d) The tallest buildings are usually located close to the city center. Why do the building heights increase closer to the city center in the monocentric city? Explain. Use graphs and carefully mark different components of your answer. [4] Problem 2: [18 Points] 5 Recall the model that explains the height of the tallest building in a particular city/region using the regular cost-benefit analysis. Imagine that the marginal cost per square meter of building an additional floor in skyscrapers is a linear function of the number of floors and given by MC F +50, where F represents the number of floors. The marginal benefit per square meter of building an additional floor is fixed (flat line) and is given by MB 110. If being the tallest building brings additional benefits of $800 (per square meter), answer the following questions: a) Carefully graph the marginal cost and benefit (per square meter) of a floor as a function of the number of floors? [1] b) Carefully construct and graph the profit per square meter as a function of the number of floors? [2] c) What would be the optimal height for a building? What is the profit? [2] d) Is there a reason to build a much taller building than the optimal height? Why? Explain. [3] e) What would be the height of the tallest building? What is the profit for the tallest building? [2] f) Compare the profits for the optimal height and the tallets building and explain why your answer might be unintuitive? Discuss your answer from an efficiency standpoint. [3] g) Why is there a reason for the local government to intervene? How could the local government intervene? [2] h) Given other broader considerations, should the local government intervene? Why or why not? [3] Problem 3: [20 Points] Suppose the national government supplies affordable housing for low-income households. Assume that "affordable" housing is low-quality housing. As usual, assume houses lose 1 unit of quality every year. Each household tolerates 10 units of quality reduction. Renovating a house to higher quality is prohibitively expensive. The optimal quality for high- income households is 30 units, which is the quality of new houses itrahle economy. Use the quality-ladder model and answer the following questions. ormell a) Graph the quality-ladder diagram before government intervention. Carefully mark different parts. [3] b) Use the demand and supply graph to show the effects of affordable housing on the markets for low-quality housing. Why? Explain. [4] c) Use the demand and supply graph to show the effects of affordable housing on the markets for medium-quality housing. Why? Explain. [4] d) What would happen to the filtering process from the medium-quality to the low-quality market? Why? [2] e) Would the policy affect the high-quality market? Why or why not? To what extent? [4] f) Would the middle-income households be better off or worse off because of the policy? Why? Explain. [3]