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Suppose that a firm would like to construct a new office in a city. The total space it needs is one hectare. The firm earns
Suppose that a firm would like to construct a new office in a city. The total space it needs is one hectare. The firm earns a total revenue of $1, 500. (a) (5 pts) Suppose the firm is considering buying a site with 0.5 hectares to build a building with 2 floors. The capital cost of building is given by Capital Cost of Building = $400 + $50 x Building Heights. To build a building with 2 floors, it requires $500. The travel cost to its clients decreases when the location gets closer to the the city center, as is specified below. Distance Building Heights Site Size Total Capital Cost Travel Total Bid Rent (Blocks) (Floors (Hectares) Revenue of Building Cost Rent per Hectare $ 1,500 $ 500 $ 300 $ 700 $ 1,400 19 1 0.5 $ 1,500 $ 500 $ 200 0.5 $ 1,500 $ 500 $ 100 In the above table, calculate the total rent and the bid rent per hectare for locations 2 blocks and 1 block away from the city center. Show the calculation steps. (b) (10 pts) Suppose now the firm engages in factor substitution by substituting site size with building heights. In particular, it decides to build a building with 5 floors in the site 2 blocks away from the city center, and one with 10 floors in the site 1 blocks away from the city center. Suppose the total space is still fixed at 1 hectare. Calculate the site sizes and the capital cost of building in the following table. Distance Building Heights Site Size Total Capital Cost | Travel Total Bid Rent (Blocks) (Floors (Hectares Revenue of Building Cost Rent per Hectare 0.5 $ 1,500 $ 500 $ 300 $ 700 $ 1,400 $ 1,500 $ 200 10 $ 1,500 $ 100 (c) (5 pts) In the second table with factor substitution, what are the total rents and the bid rent per hectares? Show the calculation steps
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