Chapter 8 Appendix

8.1 Business game “Spatial distribution of activities in a monocentric city”

8.1.1 Purpose

The purpose of the game is to illustrate the Alsonso-Mills-Muth theory of spatial distribution of different economic activities in monocentric cities. The students should understand the notion of land rent gradient pointing to a declining rental price for land as a function of distance from the city center.

8.1.2 Course of game

The game is conducted in form of an auction. Each student chooses the industry he is going to represent: offices, restaurants, manufacturing, housing, or agriculture. Then, a discussion is conducted, how in each industry the price is set — how does it depend on the distance from the city center. The rent each agent can pay for land plot is described by the following formula: \[\begin{equation*}\label{eq:Land_rent} R_i = (P_i - t_i\times d)\times Q_i \end{equation*}\] where \(R_i\) is the land rent an agent is of industry \(i\) is ready to pay; \(P_i\) is the unit price for the products or services of \(i\)-th industry; \(t_i\) is the cost of transporting one unit of product for 1 km; \(d\) is the distance from the city center; and \(Q_i\) is the output. For simplicity, other cost than resulting from transportation can be set to 0.

The coefficients for each industry are provided in Table 8.1.

Table 8.1: Production parameters
Sector Unit price, P(i) Output, Q(i) Transportation cost, t(i)
Offices 50 10 5
Restaurants 40 10 3
Manufacturing 30 10 2
Housing 20 10 1
Agriculture 10 10 0

It is assumed that all the commodities must be transported to the city center (parcel 0) for sale. All the parcels, from 0 to the \(n\)-th, are offered for sale. For each parcel, each participants computes his expected revenue and sets his bid price. The closer the bid price to the revenue, the lower the profit. The higher the bid price, the higher the chance to obtain the parcel. After all parcels are sold, the profit of each participant is calculated. The winner is the person who obtained the highest profit.

8.2 Business game “Rental housing market”

8.2.1 Purpose

The purpose of the game is to show the students the functioning of a rental housing market. They can observe in a simplified way the factors governing the rent setting. Moreover, they learn how the society can change the rules of game and what are the possible outcomes of such changes. Preparation. The students are divided into two groups: landlords (about 40% of all students in the group) and tenants (about 60%). Every person has a minimum subsistence level of 50 RUR per period. The only source of income of landlors is renting out one of their two apartments. They bear 20 RUR of costs for the rental dwelling. Their own dwelling is available to them for free. Tenants, in turn, are divided into two subgroups: poor (150 RUR) and rich (300 RUR).

8.2.2 Course of game

The game is made up of several rounds. During each round, the tenants negotiate with the landlords to rent a dwelling. Those, who become homeless, are threatened by the death of cold. Those, who pay too high a rent, can starve, if the remaining income after deduction of rent is lower than 50 RUR. There can be at most two tenants per dwelling. Thus, subletting and shared renting are allowed. After each round, the negotiated rental price is written on the whiteboard in front of each dwellings’s number. Based on this price several performance measures for each game participant can be computed:

Table 8.2: Results of game round ***
Dwelling number Rent, RUR Tenant’s income, RUR Rental burden, % Net revenue of landlord, RUS
1 80 150 53.3 60
2 75 150 50 55
3 100 300 33.3 80
Average rent 85

After this, a new round begins. The participants are advised to change their negotiation partners, so that the pairs landlord-tenant are not always the same. Needless to say, the game participants are allowed to move across the class during the game.

8.2.3 Scenarios

Several scenarios can be considered:

  1. Landlord’s cost increase due
    • to change in the mortgage interest rate
    • or real estate tax rate.
  2. Incomes of poor increase.
  3. Some dwellings are destroyed.

After each change in conditions, a new round of game is carried out. Its results are put on the whiteboard and discussed with the game participants.

8.2.4 Governmental policy

When conditions become unbearable for the tenants, the game participants are reminded that they are a society and can adopt various social policies based on a majority vote. The alternative bills are discussed and voted. The corresponding policy is applied and its impact on rents, rental burden, and income distribution are analyzed.

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