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1

Explain why a location quotient larger than one generally indicates that an industry is producing for export from a particular region. Are there conditions under which this would not be true? Explain.

A location quotient larger than one indicates that the region in question has a larger fraction of its labour
force employed in a particular industry than does the nation as a whole. This should indicate that the
region is producing more of this good than it needs for its own consumption, and is therefore producing
some for export. However, this assumes that consumption patterns and labour productivity are the same
in every region, which may not be correct

2

Consider a country with two regions, A and B, where each region has a single, basic industry. Suppose that workers in the country are mobile, and that they migrate between the regions in response to wage differentials. The value of the marginal product of labour in region A is VMPa = Pa (10 - La ), while the value of the marginal product of labour in region B is VMPb = Pb (20 - La ), where p and p are the prices of the outputs of the basic industries (the export goods), and La and Lb are the number of workers employed in A and B, respectively. The total population of the country is 20: La + Lb = 20.

(a) To begin, assume that Pa = Pb = 5. Find the equilibrium wage and the equilibrium number of workers in each region. Illustrate this solution in a diagram.

(b) Now suppose that the price of region A's export good, Pa , increases to 7. How would this change impact wages in the short-run in region A and B, when the populations of the regions are fixed? Solve for the new short-run equilibrium, and show it in your diagram from part (a).

(c) How would this change impact wages and the number of workers in each region in the long-run, when the populations of the regions can change via migration? Solve for the new long-run equilibrium and show it in your diagram from part (a).

a) Since workers migrate in response to wage differentials, equilibrium occurs where VMPa = VMPb . Using the information given above, we have VMPa = 5(10 - La ) and VMPb = 5(20 - Lb ). Then, VMPa = VMPb and La + Lb = 20 implies 5(10 - La ) = 5(20 - (20 - La )), so La = 5 and Lb = 20 - 5 = 15. The wage is equal to the common VMP, which, from either of the VMP expressions, equals 25. The diagram is shown below.
Diagram located in R&D answers Lesson 2 Question 2 (a)

b) With this change, VMPa = 7(10 - La ), so with La fixed at 5 in the short-run, the wage in region A rises to 7(10 - 5) = 35. The wage in region B is unaffected.

c) In the long-run, workers will migrate from region B to region A in response to the difference.
The new long-run equilibrium must again satisfy VMPa = VMPb, or 7(10 - La) = 5(20 - (20 La )), so La = 5.83 and Lb = 20 - 5.83 = 14.17.
Equilibrium wage = 29.17 [Wa = 7(10 5.833) and Wb = 5(20 - 14.167)]

3

Which of the following does NOT explain why a location quotient larger than one generally indicates that an industry is producing for export from a particular region?

1) A location quotient larger than one indicates that the region in question has a larger fraction of its labour force employed in a particular industry than does the nation as a whole.
2) A location quotient larger than one indicates that the region is producing more of the product than it needs for its own consumption.
3) A location quotient larger than one assumes that consumption patterns and labour productivity are the same in every region.
4) A location quotient larger than one assumes that all the region's demand for the product has been satisfied and the region is now producing for export.

Answer: (4) A location quotient larger than one does not assume that all the region’s demand has been met. It assumes that all the regional demand for the product at prices higher than that demanded by export customers has been met. If the export demand is unlimited (whatever is supplied will be bought), all the regional customers that are willing to pay a price for the product that is less than the export price demanded will not be satisfied. It is possible for all the regional demand to be satisfied if the regional demand curve is above the export demand curve at all points, but this cannot be assumed given that the location quotient is larger than one.

4

The marginal product of labour changes as we move along the production function. Assuming that the marginal product of labour is decreasing as we move to the right of the curve, what does the slope of the line look like when the marginal product of labour equals zero?

1) The slope of the line is approximately 1.
2) The slope of the line is horizontal.
3) The slope of the line is vertical.
4) The slope of the line cannot be determined without more information

Answer: (2) The slope of the line will look horizontal because as we move to the right of the curve the amount that each worker adds to output gets smaller as the number of worker grow. As we move farther and farther to the right, the slope decreases. When it hits zero, the line showing the slope will be horizontal.

5

Suppose that there are two regions, Wow and Pow. The firms in each region are identical and there is a total of X identical workers in the country that must be split between the two regions. Workers decide where they want to live based only on wages (there is no unemployment). At what point will the country be in equilibrium?
A) When the labour demand curve for Wow crosses the labour demand curve for Pow.
B) When the wage in Wow is equal to the wage in Pow. C) Where the fraction of workers (Workers in Wow/Workers in Pow) is equal to the fraction of wages (Wages in Wow/Wages in Pow).

1) Only Statement A is true.
2) Only Statement B is true.
3) Only Statements A and B are true.
4) All of the above statements are true.

Answer: (3) The two regions are exactly the same and therefore the point where individuals stop migrating between regions is when the wages are equal. They will have no reason to move to the other region. The equilibrium occurs at the intersection of the labour demand curves. This is the only point that is consistent with both the profit maximizing choices of firms and the location and labour supply decisions of workers.

6

What kind of a change in the economic environment would cause the price of a region's export good to increase?
A) An increase in the demand for the product.
B) A decrease in supply of the product by other regions. C) A rise in world prices of the product.

1) Only Statements A and B are true.
2) Only Statements B and C are true.
3) All of the above statements are true.
4) None of the above statements are true.

Answer: (3) An increase in price of a region’s export good could be caused by an increase in world demand, a general economic slowdown of a foreign or domestic producer of the same product, or a rise in world prices.

7

If the marginal product of labour for the North region is MPLn = 16 - 1/8 x Ln and the marginal product of labour for the South region is MPLs = 11 - 1/3 x Ls, where Ln and Ls are the number of workers in the corresponding region. The price of a basic or export product in the North region is Pn = 4 and in the South region it is Ps = 6. The Country's labour force is L = 50 and the equilibrium wage is $44.40.

What are the labour demand curves?
North region South Region
A) MPLn = 16 - 1/8 x Ln A) MPLs = 66 - 2 x Ls
B) Dn = Pn - Wn x Ln B) Ds = 66 - 2 x Ls
C) Dn = 64 - 1/2 x Ln C) MPLs = 11 - 1/3 x Ls
D) MPLn = 64 - 1/2 x Ln D) Ds = Ps - Ws x Ls

1) For the North region C. shows the demand curve and for the South region B. shows the demand curve.
2) For the North region A. shows the demand curve and for the South region C. shows the demand curve.
3) For the North region B. shows the demand curve and for the South region D. shows the demand curve.
4) For the North region D. shows the demand curve and for the South region A. shows the demand curve.

Answer: (1) The demand curve for the North region is equal to Dn = Pn × MPLn, which equals Dn = 4(16 ! 1/8 × Ln) = 64 ! 1/2 × Ln. The demand curve for the South region is calculated the same way, Ds = 6(11 ! 1/3 × Ls) = 66 ! 2 × Ls.

8

If the marginal product of labour for the North region is MPLn = 16 - 1/8 x Ln and the marginal product of labour for the South region is MPLs = 11 - 1/3 x Ls, where Ln and Ls are the number of workers in the corresponding region. The price of a basic or export product in the North region is Pn = 4 and in the South region it is Ps = 6. The Country's labour force is L = 50 and the equilibrium wage is $44.40.

What happens if there is a sudden decrease in the demand for the South region's basic industry?
1) In the long run, only the wages in the South region decrease.
2) In the long run, migration will occur from the South region to the North region thereby increasing the wages in the North region.
3) At the new equilibrium, both regions will have lower wages that are still equal to each other.
4) The decrease in demand in the South region will shift the demand curve up and to the right.

Answer: (3) Workers will continue to migrate from the low wage South region to the higher wage North region until wages are again equalized. The movement of people from the South region will cause wages in the South to raise and the movement of people into the North region will cause a reduction in wages. The equalization point will be at a lower wage than before the decrease in demand in the South region.

9

If changes in demand cause migration of residents from one city to another, how is it possible to implement regional economic development programs?
1) It is possible to implement regional economic development programs by concentrating on each area of a region separately. If each area does the best it can individually, the region will always be able to implement regional economic development programs.
2) Since the process of migration is very time consuming, the effects of regional movement will not harm the implementation of regional economic development programs.
3) Since interregional movement is very prominent in almost all regions, it is basically impossible to implement regional economic development programs.
4) It is possible to implement regional economic development programs if the residents can move extremely quickly between regions.

Answer: (2) Regional economic development programs can be ineffective because if the programs raise earnings or improve job prospects, residents from other regions will move and fill the positions. This is true, yet because it takes a considerable amount of time to move, this transfer of residents from other regions does not happen in the short run. Therefore, the effects of movement between regions does not eliminate the potential for growth-oriented policies.

10

If the marginal propensity to consume is equal to 0.6, the marginal propensity to import is 0.7, and the government tax rate is 35%, what does the exogenous spending multiplier equal?
1) 12.82
2) 1.17
3) 1.13
4) 6.80

Answer: (3)
The exogenous spending multiplier is equal to 1/{1 - c(1 - t)(1 - m)}. C represents the fraction of
every dollar of disposal income that is spent, known as the marginal propensity to consume, 0.6. M
represents the fraction of every dollar of consumption that is imported to the region, known as the
marginal propensity to import, 0.7. T represents the tax rate 0.35. Plugging the corresponding
numbers into the equation gives us 1/{1 - 0.6 (1 - 0.35)(1 - 0.7), which equals 1.13.

11

Sid's Seafood is a fast food restaurant that delivers its orders. The CEO must decide upon a location for an additional restaurant. She would like to put it on Oak Street between 0 mile road and 100 th mile road (there are 100 miles between 0 mile road and 100 th mile road and every mile road is the corresponding distance from 0 mile road, and Oak Street is straight). She has the option of either placing the restaurant at 18 mile road and Oak Street or 70 mile road and Oak Street. Assume that th th Sid's Seafood's sole objective is to minimize transportation costs. 40% of individuals make one order and all orders are delivered. Sid's Seafood serves 4 markets, A, B, C, and D. Market A is located at 20 mile road and Oak Street and has a population of 30,000 residents. Market B is located at 60 th th mile road and Oak Street and has a population of 10,000 residents. Market C is located at 75 th mile road and Oak Street and has a population of 5,000 residents. Market D is located at 85 th mile road and Oak Street and has a population of 20,000 residents. Using the "Gravity Law" of market potential, what is the market potential of locating Sid's Seafood's new restaurant at 18 th mile road and Oak Street? Assume in this case that the positive constant b=1.
1) 6,249.729
2) 1,564.102
3) 249.729
4) 154.762

Answer: (1)
The “Gravity Law” of market potential for the location at 18th mile road and Oak is equal to T18 =
Ya/da + Yb/db + Yc/dc + Yd/dd, where Yx represents aggregate sales to the corresponding market.
d is the distance from the market location to the location of the new restaurant. (30,000 × 0.4)/(20 - 18) + (10,000 × 0.4)/(60 - 18) + (5,000 × 0.4)/(75 - 18) + (20,000 × 0.4)/(85 - 18) = 6,249.729.

12

Mark's lumber is located next to Ever Green Forests because it is more costly to ship unfinished lumber than finished lumber. What will Mark's cost curve look like if the horizontal x axis, represents distance from the forest and the vertical y axis represents cost? (Ignore all other factors besides minimizing transportation costs.)
(1) The cost curve will increase as we move to the right of the graph. As we get farther away from the forest, costs will increase.
(2) The cost curve will decrease as we move to the right of the graph. As we get farther away from the forest, costs will decrease.
(3) The cost curve will increase as we move to the right of the graph. As we get farther away from the forest, costs will decrease.
(4) The cost curve cannot be determined with the information given.

Answer: (1)
Mark is located next to Ever Green Forests because it costs him a lot of money to ship unfinished lumber. As Mark moves away from the Forest his cost will increase because he will now have to pay to ship unfinished lumber which is more expensive than shipping finished lumber. The farther Mark is away from the forest the higher his costs will be, leading to a curve that is increasing as we move to the right.