3.4 Since the 1980s, manufacturing firms in Hong Kong have been relocated to places with lower land rental rates and labor costs, most notably the Pearl River Delta. At the same time, firms in finance, insurance, and other parts of the service sector have been locating near the city centers of Hong Kong in tall buildings. One major reason seems to be that manufacturing firms find it difficult to substitute capital for land, whereas service-sector firms that use office space do not.

a. What kinds of buildings represent substitution of capital for land?

b. Why do you think that manufacturing firms might find it difficult to substitute capital for land?

c. Why is it relatively easier for a law firm or an insurance company to substitute capital for land?

d. Why is the demand for land likely to be high near the center of a city?

*e. One of the reasons for substituting capital for land near the center of a city is that land is more expensive near the center.

What is true about the relative supply of land near the center of a city? (Hint: What is the formula for the area of a circle?)