Problem 4: US Cities' Evolution and Congestion Pricing Choosge the BEST answer AND explain why it is the best answer (credit is for the explanation). 1. In the model of Glaeser and Gyourko, explain the time path of housing prices in the face of a negative productivity shock to a city. (a) Housing prices will in the short run remain at the initial high level because landlords are profit maximizers, but then will decline because the landlords stop making new investments and the quality of housing units declines. (b) Housing prices initially fall further than their long run decline because housing is a durable good, but then will rise back to a long run intermediate level when enough units are eventually removed from the stock due to deterioration. () Housing prices will initially rise as people anticipate that the negative productivity shock is only temporary, but then will decline back to their initial long run level. (d) Housing prices will slowly and steadily decline to a new long run equilibrium as landlords react cautiously to the news of the negative productivity shock. 2. Of the 10 largest US cities in 1950, only New York and Los Angeles have increased in size. This may reflect: (a) A rising valuation of amenities as incomes rose over this period and Los Angeles has a pleasant climate year round. (b) A declining valuation of amenities as Los Angeles and New York both started out with very high levels of pollution. () The long run attractiveness of New York as it successfully shifted from a manufacturing economy to one dominated by finance, business services, and tech. (d) The role of endogenous amenities Broadway shows, novel restaurants, etc. that couldn't be matched elsewhere. ) All except (a) (f) All except (b)