Economics of Cities Test 2
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What are some of the reasons for increased urban and suburban sprawl after 1900?
- Declining Travel Costs
- Amenity/Disamenity Differences beween city and suburbs
- Rising Incomes and Decaying Housing Stock
- Large Subsidy for Home Purchasing
What was the question that Nate Baum-Snow wanted to proof?
do highways cause suburbanization or does suburbanization cause highways?
What dis Baum-Snow find in his research?
- 18% of the central city population declined for every highway "ray" going into the CBD
- (30% shift to the suburbs)
On a graph, what do declined travel costs cause the bid rent curve to do?
rotate out, showing an expansion to the economic city
What did Leah Boustan find in her research?
- From 1940-1970, the African-American population quadrupled in Northern cities.
- During that same time, the North lost 10% of the white population
How did Boustan do her research?
She combined historical migration patterns from South to North, based on things like railroad paths or community networks, plus shocks to agiculture in Southern states.
What was the overwhelming finding from Boustan's research?
there was a net decline of 17% of the central city population OR about a 30% shift to the suburbs
What does the Isoquant show?
A graph of all possible combinations of inputs that result in the production of a given level of output
What does the isocost line represent?
the slope, which is equal to the price of the land over the price of the capital
What is the number one determinant of Relative Price of Land and Capital?
Cost of Inputs
WHat are the two things that are considered in the Process of Choosing a neighborhood?
- Local Public Goods
- Neighborhood Externalities
What does non rival mean?
anyone can consume without it affecting others
What does non excludable mean?
you cannot prevent consumption in a cost effective way
What is the primary difference between pure public goods and local public goods?
Local public goods are partially excludable based on location of residence
How is partial excludibility different from non excludibility?
Partial excludibility CAN be provided by a market and can enforce payment
What were the caveats of Tiebout's model?
- No equity concerns
- Further sorting from tax payments and Income differences
What does Tiebout's model say overall?
People tend to move from areas of inefficency
What are Tiebout's two assumptions about his model?
- No inter-neighborhood externalities
- Households must be able to move costlessly and freely between neighborhoods
What does the ability to move costlessly mean?
The cost of switching from Inman Park to Adair Park must be less than the benefits of moving
What does the ability to move freely between neighborhoods mean?
- There are no restrictions or burdens on moving
- you can choose the neighborhood that matches your preferences on a non-monentary basis
What are the two reasons that people would discriminate against selling homes?
- tastes (some people just don't like others)
- statictics (it is more profitable)
What does Gary Becker say about economic agents in house-selling?
You should never see discrimination if markets are competitive
What does John Yinger say against Becker's idea?
If customers what discrimination of neighborhoods, then discriminators will not be "compoted" away
What is the criticism of Becker's analyis?
Are the markets really competitive or not?
WHat was the issue with the discrimination experiment with Becker?
too many other factors couldn't be controlled such as: location of the house, discrimination in other markets (selection problem), and renters in a neighborhood (selection problem)
Describe Yinger's Audit Study.
- He set up two "ACTORS" to portay house inquirers in Boston, 1981: one white and one black.
- They would both have the same characteristics: marital status, appearance, questions, occupation, credit score, etc.)
- The actors would report back to Yinger to see how they were treated
What were the criticims of Yinger's experiment?
- External Validity-is it the same EVERYWHERE, ANYTIME?
- Only real estate agents
- relies on in-person ACTORS, who may skew results (Hawthorne Effect) or misreport
What were the results of Yinger's experiment?
- 30% fewer homes were sold to Blacks
- 10% were more likely to not show blacks a home at all
What are some critisisms onf the Hanson and Hawley Online Audit study?
- unknown race of the landlord
- renters only
- name to identify race
- external validity
Define Housing Market.
an inherently space-based, or place-based market
What are the seven reasons that housing markets are different?
- Land and structure are purchased together
- Houses are Long-Term Purchases
- Houses are heterogeneous products
- Quality Changes with Time
- Houses are Purchased with mostly Debt Financing
- Houses are seen as an Investment
- House Purchase is subject to Psychology
Define "errors" in the Regression Analysis of Housing Markets.
the differnece between the plotted data and the line that fits all of the data the best
What are two considerations to look for when using the Hedonic Model?
- Error term-if two errors are correlated, your slope will be incorrect
- Data source-assessed and self-reported data are to be avoided
What does B represent in the Hedonic Model?
the slope-what happens to price when we increase variation of interest by one unit
How would you predict the purchase price (PH) of any home?
You would compare the requests to the data average by adding the differences from the average rates from the rates requested.
What are the three factors that determine how well the Hedonic Model works?
- Data Source
- Missing Varialbes
- the R2 statistic
- the Confidence Variable
What is the R2 statistic do?
It tells us how much percentage of the price variable (PH)we are able to explain from the model
What is the optimal range of R2 to explain the price variable? (not bad and not too high)
How does the Confidence Interval work?
it gives a prediction range of a particulat amenity of the slope (B). For example, when B2 =10,000(+)100 , (100) tells us that we are 95% sure that the 10,000 is between the lower bound, (99,000), and the upper bound (10,000)
What two reasons to prove that quality of a home changes over time?
- Depreciation (which varies from area to area)
What does Ed Glaeser say about Price Inflation?
"Price Inflation is going to be roughly zero or smaller in the near future"
Why does Ed Glaeser believe that Price Inflation will be low in the future?
- Consumption is the dividend
- Construction costs are falling
- There is an endless supply of buildable land
Explain the Independence of Irrelevant Alternatives.
If you like an Italian Club better than a Beach Club, you will always buy an Italian Club. Even when given the choice of a Vito (Italian Club - ham), you will STILL pick an Italian Club
What did Dan Arieley find in his experiment dealing with Irrelevant Alternatives?
Experimenters got a Snicker when given the alternative of a smaller Snicker.
Define Projection Bias.
It is when you overestimate your future utility from a purchase due to current conditions. (Ex. HGTV's Sell This House!)
What did Mike Conlin find in his research pertaining to Projetion Bias?
More people returned raincoats if they were bought on a rainy day from catalogs then if bought on a sunny day (he observed rate of returns from rainy days vs. sunny days)
What two things does the User Cost Model of Housing do?
- explains prices
- explain user cost and annual cost of owning a home
What is the User Cost Model of Housing formula?
PH=H(rental value) / (i1(1-@)+i2@+m+d+tp-#)
How is the Mortgagae Interest Deduction formula different from the User Cost Model of Housing formula?
the marginal tax rate is inserted twice
How much of home purchases are paid through by the bank usually?
- 80% financed through bank
- The rest is paid by equity
What is the opportunity cost of buying a house straight from equity called? (Equity means "making it rain")
risk free rate
In the User Cost Model, what does H stand for?
In the User Cost Model, what does i1 stand for?
opportunity cost (risk free rate)
In the User Cost Model, what does i2 mean?
In the User Cost Model, what does theta (@) stand for?
the share of the house purchased with debt (usually 0.8-0.9)
In the User Cost Model, what does m stand for?
maintenance cost (expressed in %=.01-.02)
In the User Cost Model, what does tp mean?
property tax (usually .01-.10)
In the User Cost Model, what does pie (#) stand for?
price inflation (0)
What are the three factors that explain data source of the Hedonic Model?
- Time Period
- Geographic Scope
What are reasonings for missing variables?
- Bias (B)-betaYou don't have enough variables to explain price differences
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