ECON0041 - Economics of Migration and Job Search (ECON0041)
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By: AdamLee12 • 8 months ago
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Economics of Migration and Job Search: Problem Set 3
Suphanit Piyapromdee
1. Suppose workers prefer low s locations but firms prefer high s locations, what would
the Roback model predict in terms of relative wages and rents between city 1 and
2 where s1 < s2 ? Use a diagram, explain the intuition and give an example of such
amenities.
Solution: In this case, we have the firm’s cost curve in city 2 lies above that of city
1. Since city 2 has higher s, for firms to be indifferent between city 1 and 2, it must
be that factor prices are also higher in city 2. For workers, as they prefer city 1 given
the same factor prices, the indifference curve of city 2 has to lie below city 1’s. In
equilibrium, wage in city 2 has to be higher than wage in city 1, while relative rents
are ambiguous. This is because workers prefer city 1, but firms prefer city 2. w
and r have to be such that the indifferent conditions hold for both firms and workers.
Because a higher wage attracts workers and discourages businesses, wage in city 2
is unambiguously higher. On the other hand, high rents discourage both firms and
workers to locate in the area. So r may be higher or lower in city 2. Industrial waste
disposal facility can be an example. Such facilities can reduce firms’ cost but those
may be undesirable for residents.
2. Now allow each individual to have idiosyncratic preference shocks. The utility of
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