Study Questions

These questions are designed to give yourselves practice with the material. The final
exam will have questions of this type, so working through these questions is good
practice for the final.

Answers will be posted separately.

Lecture Notes 1

1.1 How would you assess the importance of real estate to companies that are not
primarily in the real estate business?

1.2 Explain 3 ways the market for real estate is different from the market for goods like
apples

Lecture Notes 2

2.1 Does the monthly change in median house prices reflect the state of the housing
market? Why or why not?

2.2 How will rent control affect cap rates? Show why mathematically.

For Questions 2.3-2.5, make use of the following tables. These tables use home attributes
and sales data from Vancouver West (high income) + Vancouver East (low income),
North Vancouver (a different city than Vancouver, high income), Coquitlam, and
Burnaby.

Included are hedonic regressions run separately for each of these five areas.

Summary Statistics
BURNABY COQUITLAM NORTH VANCOUVER
VANCOUVER EAST & WEST
POPULATION 145161 69291 103940 431150
LAND AREA
(sq. km) 88 123 173 113
POP. DENSITY
(per sq. km) 1641 562 601 3818
MEAN INCOME
PER HSHD ($) 35085 39475 40992 32384

Below, “units” of 0/1 mean that these are dummy variables that take on values 1 or 0.
Below is a table of means for continuous variables and modes for categorical variables.
Table 1.4 Sample Means

VARIABLE BURN COQ NORTH VANC VANC ALL

VANC EAST WEST REGIONS
ROOMS 7.62 7.68 7.75 6.56 7.85 7.72
AGE 21.62 11.56 24.51 31.28 35.04 24.86
ROOF RAS RAS RAS RAS RAS RAS
BASEMENT BSF BSP BSF BSF BSF BSF
HSE SIZE 2292 2151 2000 1860 2566 2174
LOT SIZE 6487 7046 6886 4166 6976 6312
FIREPLACE yes yes yes yes yes yes
GARAGE yes yes no yes yes yes
BATHROOM BA2 BA3 BA2 BA2 BA2 BA2
FIN. BSMT yes no yes yes yes yes
BEDROOMS BD4 BD3 BD4 BD4 BD4 BD4
Below are hedonic regression tables, with these regressions run separately for each area.
 Table 1.5.
Estimated
Coefficients

BURNABY COQUITLAM NORTH VAN

VARIABLE Coeff. t Coeff. t Coeff. t
RM 1063.4 0.55 1369 0.6 3989.7 1.68
AG -347.73 -0.78 -626.11 -1.52 -237.26 -0.82
RAS 2522.5 0.24 6189.1 0.55 -3178.9 -0.28
RT 28808 2.25 -8385.4 -0.35 -10873 -0.47
RS 23650 1.71 32965 2.7 25858 1.9
BSP 26118 1.31 10487 1.28 24507 2
BSF 27706 1.38 11138 1.2 24679 2
HSZ 30.884 4.81 36.326 6.19 28.814 2.85
LSZ 2.2212 1.33 7.1668 7.05 4.1204 2.02
FP -130.21 -0.01 9048.4 0.85 -1480 -0.1
GA 482.8 0.07 13358 1.95 22177 2.77
BA3 13978 1.27 2490.2 0.36 14609 1.33
BA4 35514 2.23 25850 2.09 15078 0.83
BF -22051 -2.18 -22167 -3.22 -3689.2 -0.38
BD3 29423 2.73 13420 0.91 10255 0.69
BD4 27344 2.29 14165 0.91 1041.3 0.06
CONSTANT 117369.999 37312.349 119420
R2 0.6685 0.8192 0.5521

Table 1.5. Estimated

Coefficients (cont.)

VANC
EAST VANC WEST
VARIABLE Coeff. t Coeff. t
RM 1281.7 0.82 403.6 0.04
AG -227.41 -1.05 551.99 0.57
RAS -7728.5 -0.9 -25780 -0.28
RT 58837 4.06 -41643 -0.37
RS 34500 1.61 -6667.9 -0.07
BSP -9787 -0.76 -20537 -0.18
BSF -33366 -2.48 16799 0.16
HSZ 25.215 4.29 97.382 4.8
LSZ 19.547 9.77 45.416 9.66
FP 9388.5 1.54 41800 0.5
GA -5689 -0.1 47957 1.21
BA3 10262 1.02 -8184 -0.18
BA4 36578 2.16 147410 2.36
BF 30263 2.84 -25421 -0.49
BD3 282.51 0.04 6456.9 0.12
BD4 9407.2 0.95 7113.3 0.11
CONSTANT 49256.4146 -103624.823
R2 0.9172 0.8539

2.3 What is the hedonic price of a fourth bathroom in Burnaby? Coquitlam?

2.4 Since adding a bathroom costs something like $10,000, does this result imply that
builders should add a lot more bathrooms to houses in Burnaby but not Coquitlam?
2.5 Using the estimated hedonic price data from Vancouver, calculate the value of the
typical Vancouver East house in
A in Vancouver East and
B if this same house were moved to Vancouver West

Questions 2.6-2.8 use the hedonic regression results from the last slide in set 2c “Main
Results”: Table 3: Key Coefficients from Baseline Hedonic Price Regressions

2.6 What is the estimated hedonic price of a one standard deviation increase in school
quality?

2.7 How much are people estimated to be willing to pay to live near black neighbors?

2.8 What is the implicit correlation between unobserved neighborhood quality and
fraction black? Neighborhood quality and percent of neighborhood with a college
degree?

Lecture Notes 3

3.1 Explain one advantage and one disadvantage of using a repeat sales home price index
over a generic (hedonic) one that does not only make use of repeat sales.

3.2 Since year 2000 home price growth has been more rapid in Vancouver than Toronto,
though both cities have experienced rising prices. However, wage growth has been more
rapid in Toronto than Vancouver. In fact, wages in Vancouver have hardly changed since
2000. Using the model of an individual metro area in Notes 2b, come up with a potential
explanation for these patterns in the data.

3.3 Wages are observed to be higher in Chicago than Denver even though they have
about the same housing prices and cost of living. What can you conclude about the
productivity of firms in Chicago relative to Denver with this information. What can you
conclude about the relative amenity value of Chicago vs. Denver? Explain why.

3.4 House prices are higher in Los Angeles than Boston even though wages are about
the same in these two cities. What can you conclude about the relative productivities and
consumer amenity values of these cities from this information?

3.5 The clean air act forced firms in counties with high levels of particulate pollution to
install scrubbers on their plants, increasing these firms’ costs. This policy also resulted in
cleaner air in these treated “non-attainment” counties while the air quality did not change
in other counties. You can assume that the treated counties are few in number and
represent a small share of population and employment in the country.
a) What can you predict happened to housing prices and wages in the treated counties
after the Clean Air Act was implemented? Make your argument using the Roback Model
and with a graphical explanation.
b) It has been found that housing prices went up in these treated counties. What does that
say about how the benefits of this policy to consumers relates to the cost to producers?
c) In the world of the Roback Model, did this provision of the Clean Air Act ultimately
have any effect on consumer welfare (utility)? If so, for whom? Explain.

Lecture Notes 4

4.1 Suppose that there are two crops, corn and wheat. Normalize output so that one
acre of land produces one unit of each. Corn sells for $100, wheat for $50. Nonland
costs are $20 for corn and $10 for wheat.
A. Solve for bid-rent for both crops. Which crop will be grown?
B. Now suppose that the shipping cost is $1 per unit distance to a nearby rail
terminal for wheat and $3 for corn. Which crops will be grown where?

4.2 Suppose one small farm receives in a large region is the only one to receive a new
road. How will this affect bid-rent for this farm? Will bid-rents for other farms be
affected?

4.3 Now suppose that the road network in this same region is expanded to serve all
farms there. In this case, who benefits if A. farm goods are mostly exported to other parts
of the world for some set price? or B. farm goods are primarily sold nearby, and the price
adjusts in response to fluctuations in farm output?

4.4 Farmer Brown grows wheat on 1 acre of land. He rents this plot of land from an
absentee landlord. Excluding rent, the total cost to him of producing Q bushels of wheat
is 100+5Q+10Q2 and the marginal cost is 5+20Q. You can think of this as including all
labor, capital and material costs given that Farmer Brown is optimizing choice of inputs.
The price Farmer Brown can get for a bushel of wheat on the open market is $105. The
purpose of this question is to think about how much rent Farmer Brown pays for his plot
of land.
a) Graph MC, ATC, P and the quantity Farmer Brown chooses to produce on his
acre Q*. Indicate on the graph total revenues, total costs and bid-rent that
Farmer Brown has for this acre of land.
b) What is Farmer Brown’s bid-rent in dollars?
c) Suppose that the Liberal government implements immigration reform that
increase the supply of unskilled labor and thereby lowering the wage that
Farmer Brown can pay his workers? Nothing else, including the price of
wheat, changes. What happens to bid-rent? Indicate the new situation on
your graph. Make sure to show in which direction each curve shifts and
explain why.
d) Suppose that Farmer Brown buys his land, and then the price of wheat goes
up. Does this mean that his farming business is now economically profitable?
Explain why/why not.
4.5 Consider the model of manufacturers in a monocentric city, in which each firm
produces the same amount and firms are all making 0 profits. Suppose for the purpose of
this question that only firms use space in the area – there are no viable competing uses.
What happens to bid-rent functions and firm density as a function of distance to the
transport node when:
A. The cost of non-land inputs increases
B. The output price increases
C. Firm productivity increases
D. Transport costs fall

4.6. Suppose that you work at the Rotman School. You are considering buying a
house in the Annex for $700,000. There is another house that you judge to be identical in
every sense except its physical location. The second house is located in Oakville. You
judge the two neighborhoods to be equally attractive in terms of amenities and schools.
How much would you be willing to pay for the second house? Be as precise as possible.

4.7. Over time, how will the Sheppard subway extension (off of the Yonge-University
line in North Toronto) affect housing prices in Toronto?

4.8. Oil prices have fallen drastically in recent years. How will this affect various
residential submarkets in Toronto (i.e., downtown condominiums vs. suburban single-
family houses)?

4.9 There is a town of workers who earn income (Y) of $1,000 per month. The town has
one location where everybody works and is one long strip of width 1 in one direction
from the town center. That is, everybody lives on one side of the town center. Others
(like farmers) are willing to pay $0 per square foot to rent any land in the area.
Individuals have preferences over space s and other consumption z. Their budget
constraint is Y-tx = sR(x) + z. Individuals have preferences u(z,s) and the two goods are
substitutable. The town has a zoning regulation stipulating that each person can only live
in a home on 1 square foot. (These are very small people.) Assume that if people had a
choice, they would all choose to live on less than 1 sq foot of space. The town initially
has 500 people and has commuting cost per foot t of $1 per month. This is an open city.

a) What is the distance from the town center to the edge of town?
b) How much of good z does each person consume? To get this, think about the
person living at the edge of the city.
c) Draw the bid-rent for land as a function of x. Indicate its slope. Explain why the
bid rent has the shape that it does.
d) What happens to bid-rent, population and utility if the wage goes up to $1,500 per
month? Explain intuitively why.
e) What happens to bid-rent, utility and population if wages are again $1,000 but
travel cost now decreases from $1 per foot to $0.50 per foot? Explain why.
 f) Graph bid-rents with and without fixed lot size on the same graph. Explain
intuitively why the bid-rent curve without fixed lot size is above the fixed lot size
bid-rent at all distances.
g) What happens to utility and population of the town when the zoning regulation is
lifted?
h) Suppose that before lifting the zoning regulations, the town decided to make
themselves a closed city. Draw and explain bid-rents before and after zoning is
lifted under this situation.
i) Given your answers to parts g and h, which interest groups will lobby for or
against zoning regulation in the open and closed city cases?

Lecture Notes 5

5.1 Explain intuitively how the monocentric city model can generate the following
documented empirical patterns.

a) The poor live in cities while the rich live in the suburbs.
b) Conditional on income, people with kids live in the suburbs while people
without kids live in the city.
c) Dual-earner couples are more likely to live in cities than single-worker
couples.
d) Cities with more transportation infrastructure are more spread out than other
cities.

5.2 Consider a monocentric city where land is differentiated in two ways: by distance
to the CBD where everyone works and by the amount noise pollution, which falls with
distance to the CBD. How would this enter into bid-rent analysis?

5.3 Suppose that you live in Mississauga and can work in Mississauga or in
downtown Toronto. Suppose that the jobs are equally good in terms of job satisfaction
and career prospects. You are offered $90,000 downtown. How much would you require
to be just as happy working in Mississauga?
5.4 Suppose that you are a large owner of residential rental properties in the growing
city of Phoenix. Would you support imposing an urban growth boundary around existing
development in the city?
5.5 Suppose that a city is experiencing growth of low income jobs. Many of the
landlords of rental apartments in the city are high income people who live in the suburbs.
These high income landlords also have a personal interest in keeping out the poor from
their suburban communities. What kind of zoning policy can they implement to achieve
this goal? What other advantages of such a policy will they enjoy?