Consider a city in which urban density averages 4 housing units per acre. The city is fully circular with distance from CBD to the boundary equal to 10 miles. Land beyond the boundary of the city is used for agriculture, and earns $2000 per acre annually. It costs $200,000 to build a typical house in the city, and the interest rate is currently 8%. Everyone in the city works at the CBD, and it costs $400 per mile annually in commuting. The city is currently neither growing nor shrinking.

a. What would be the "structure rent"? (How much would you pay per year if you finance 100% of the construction cost of a house on permanent basis?)

b. What would be annual house rent at the boundary of the city? What would be the house rent for a house 5 miles from the CBD? What would be the highest rent in the city?

c. How much would it cost to buy the house 5 miles from the CBD?

d. How much would it cost to buy one acre land at the CBD? How much would it cost to buy one acre land 12 miles from the CBD?

e. Suppose the transportation (commuting) cost increases to $450 per year per mile due to a rise in crude oil prices. What would be an effect on the value of the house 5 miles from the CBD?