Since the end of World War II, manufacturing firms in the United States and in Europe have been moving farther and farther outside of central cities. At the same time, firms in finance, insurance, and other parts of the service sector have been locating near downtown areas in tall buildings. One major reason seems to be that manufacturing firms find it difficult to substitute capital for land, while 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 very 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?)