Wages, Service Prices and Rent: Urban Division of Labor and Amenities

Abstract

This study proposes an equilibrium model to explain differences in living costs between two cities within a perfectly competitive framework. The economic system consists of two production centers. Each production center specifies in supplying one commodity which is demanded by the residents in the two cities. Services are city-specified in the sense that services are consumed only by the households who work in the city. We assume that all the households have an identical preference and that professional changes and movement between the two cities are costless and the two cities have different levels of amenity and technology. It is proved that the system of the economic geography has equilibria at which the land rent, service prices and wage rates are different between the two cities. We also examine the impact of changes in amenity upon the economic geography.