PRACTICE 2:

Ex1)
Dressmakers will share a buttonmaker if economies of scale in button production are
large relative to demand in dress production, and will cluster if fase-to-face
intercectional is required to produce buttons.

Ex2)
Consider the model of labor pooling, with each firm locating either in an isolated site
or in a cluster with other firms. Fill the blanks with "fixed" or "variable".

a. In an isolated site, the wage is variable and the firm's workforce is fixed because
b. In a cluster, the wage is fixed and the firm's workforce is variable because
c. Illustrate with two graphs, one for the isolated site and one for the cluster.

Ex3)
a. Use a figure like Figure 3-3 (see: textbook edition 8, or lecture slides) to illustrate the
situation.

b. During good times, the benefit of being in the cluster as opposed to being isolated is
550, computed as (50X10) + 50.
c. During bad times, the cost of being in the cluster as opposed to being isolated is 450,
computed as (10X40) + 50.
d. The benefit exceeds the cost because a firm in a cluster can adjust the production.

Ex4)
a. Using Figure 3-3 as a model, illustrate with two graphs, one for the typical small
city and one for the typical big city. Assume that the demand curves for labor are linear
and parallel, with vertical intercepts of $18 (high demand) and $12 (low demand).

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 b. In the typical big city with high demand, his profit is 135 computed as (9X30) /2.
c. In the typical big city with low demand, his profit is 15 computed as (3X10) /2.
d. In the typical small city with high demand, his profit is 60 computed as (6X20) /2.
e. In the typical small city with low demand, his profit is 60 computed as (6X20) /2.
f. His expected profit is 75 in a big city, compared to 60 in a small city.

Ex5)
Consider an industry subject to agglomeration economies. The profit per firm is $120
for an isolated firm and increases to the maximum of $180 per firm in a 7-firm cluster.
The profit curve is linear, with a slope of +$10 per firm along the positively sloped
portion and -15$ per firm along the negatively sloped portion.

Illustrate the equilibrium number of firms and profit per firm.

We substrac 15 till

Ex6)

Consider a 10-firm industry that produces computer equipment, a set of goods with
rapidly changing demand and production technology. The industry has the following
characteristics:
i. The 10 firms produce computer equipment using labor and raw materials.
ii. Raw materials are ubiquitous (available at all locations at the same price).

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 iii. Each firm produces one new product per year, and each product becomes
obsolete after a year.
iv. Only 3 of the 10 new products will be successful (sell more than a trivial
amount).
v. The monetary and time costs of switching a worker from one firm to
another are zero, regardless of the spatial distribution of firms.

a. Will the firms in the industry form a cluster? Why or why not?

Given the characteristics described in the scenario, it is likely that firms in the
computer equipment industry will form a cluster. Here's why:

- Rapidly Changing Demand and Technology: The industry experiences rapidly changing
demand and production technology. Clustering facilitates knowledge sharing,
collaboration, and quick adaptation to evolving market trends and technology.

- Ubiquitous Raw Materials: Raw materials are available at the same price everywhere,
reducing the importance of location for resource access.

- Short Product Life Cycle: With products becoming obsolete after a year, firms benefit
from being close to each other to share knowledge and stay innovative.

- Limited Success: With only 3 out of 10 new products expected to be successful,

clustering allows firms to share risks and resources, making it easier to survive market
uncertainties.

- Zero Costs of Worker Switching: Labor mobility between firms is costless, encouraging
labor sharing and collaboration within the cluster.

b. How would your answer to (a) change if workers incur moving costs when they
switch from one firm to another?

If workers incur moving costs when switching between firms, it could reduce the
likelihood of forming a cluster. Here's how:

- Increased Barrier to Labor Mobility: With moving costs in place, it becomes less
convenient for workers to switch between firms within close proximity. This may
discourage firms from clustering since acquiring skilled labor from other firms within
the cluster would come at a higher cost.

- Potential Dispersion: Firms may opt for more dispersed locations to reduce labor
mobility costs, potentially leading to a less concentrated cluster.

- Moderated Clustering: While the presence of labor mobility costs might moderate the
clustering effect, other factors such as rapidly changing technology and the need for
knowledge sharing may still encourage some degree of clustering.

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 Ex7)
Using Table 3-2 as a starting point, suppose the gross wage is $36 and the unit
training cost is $48. Complete the following table.

Skill gap = 1/Nº workers X Nº firms. Training cost = tc X skill gap. Net wage = GW - tc.

Ex8)
Consider corporations that use advertising firms to develop marketing campaigns. Each
corporation buys one campaign per year, and the cost per campaign is $120/n, where n= the
number of corporations in the cluster (and campaigns per year). The cost of labor per firm is
$30 * n. A corporation’s profit equals its total revenue of $200 minus the sum of its marketing
and labor costs.
There are two location options: an isolated site (n=1) or cluster with up to five corporations.

a. Use a graph like Figure 3-2 to show the profit gap (profit in cluster- profit in isolation) for one
through five corporations.

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 a. If initially all corporations are isolated and then one joins another to form a two-
corporation cluster, other firms [will, won’t] have an incentive to join the cluster
because the p·gap is positive, 4 cluster.

c. In the long-run equilibrium, there will be a cluster of 4 corporations, each of

which will earn a profit of 50 differing from the profit of an isolated site by 0.

Ex9)

Suppose that personal grooming and pet grooming are complementary products.
Betty Beehive could move her beauty shop from an isolated location to a minimall that also
contains Peter’s pet-grooming shop. If she moves, she will attract some of Peter’s customers
and her pre-rent profit will increase by $180. Her current rent is $100, compared to $300 in the
minimall.

a. Betty [will, won’t] make the move because....

Betty will make the move because the additional profit of $180 is greater than the additional
rent ($200) in the minimall. Her profit will increase, even though she'll have to pay higher rent.

b. Betty’s presence in the minimall would increase Peter’s profit by $100. If you were
the manager of the minimall, with the power to set the rent of each tenant, what
would you do?

If I were the manager of the minimall, I would consider adjusting the rents as suggested. I
would cut the rent to be charged to Betty by at least $20 and increase Peter's rent by no more
than $100. For instance, cutting Betty's rent by $30 and increasing Peter's by $90 would
increase the total rent by $60. This change would make Betty better off by $10 and make Peter
better off by $10 as well. This balanced approach would benefit both businesses while
maximizing the minimall's total rental income.

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