Consider the following model for the office space and the capital market: Demand for Office (millions...

 

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Consider the following model for the office space and the capital market: Demand for Office (millions of sqm): D = E(11.4295 -0.07% XR) Property Price per sqm : P = ● ● ● Construction (millions of sqm): P = 60000 + 781909.9C • Stock Adjustment (millions of sqm)AS = C-8xS ● Ending Stock of Space = S + AS where R= annual rent per square meter; r is the annual capitalization rate; & is the annual depreciation rate of stock of space. Suppose the initial stock of space (S) is 12 million square meters, the employment level E is 1.8 million employees and the capitalization rate is 3.4%, the depreciation rate of the stock of space is 1.4933%. a) Determine the equilibrium rent level (R*), price level (P*), construction (C*) and the ending stock of office space (S*). (10 points) b) Suppose the capitalization rate next period decreases from 3.4% to 3.0% and stays at that level for the indefinite future. What is the short-term effect on the construction level, the ending stock, the rent and the price level? What is the corresponding long-term effect? (10 points) Consider the following model for the office space and the capital market: Demand for Office (millions of sqm): D = E(11.4295 -0.07% XR) Property Price per sqm : P = ● ● ● Construction (millions of sqm): P = 60000 + 781909.9C • Stock Adjustment (millions of sqm)AS = C-8xS ● Ending Stock of Space = S + AS where R= annual rent per square meter; r is the annual capitalization rate; & is the annual depreciation rate of stock of space. Suppose the initial stock of space (S) is 12 million square meters, the employment level E is 1.8 million employees and the capitalization rate is 3.4%, the depreciation rate of the stock of space is 1.4933%. a) Determine the equilibrium rent level (R*), price level (P*), construction (C*) and the ending stock of office space (S*). (10 points) b) Suppose the capitalization rate next period decreases from 3.4% to 3.0% and stays at that level for the indefinite future. What is the short-term effect on the construction level, the ending stock, the rent and the price level? What is the corresponding long-term effect? (10 points)

Answer rating: 100% (QA)

a To determine the equilibrium rent level R price level P construction C and the ending stock of office space S we need to solve the given equations s... View the full answer