EC148-1.Prof-maxTiming&Dens

EC148-1.Prof-maxTiming&Dens - Richard Arnott April 25, 2010...

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Richard Arnott April 25, 2010 Economics 148 Land and Resource Economics Spring 2010 Profit-maximizing Timing and Density of Development These lecture notes are a supplement to Wheaton and DiPasquale, Chapter 4. In an earlier lecture, I presented a model of the profit-maximizing FAR (floor-area ratio) of a building. The model assumes that the builder bases this choice only on the current rent. This would be correct if the builder is able to change the FAR continuously over time. But he isn’t because buildings are durable. When he develops a vacant lot, the FAR will stay the same for perhaps 50, for perhaps 100 years, until he or a future owner redevelops the site at a higher density. The profit-maximizing FAR then depends not only on today’s housing rent but on future housing rents as well. Future housing rents are of course not known, but to keep the model simply I shall assume that they are. Later in the course, we shall see how the builder should take uncertainty into account. To further
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This note was uploaded on 10/05/2010 for the course ECON 148 taught by Professor Richardarnott during the Spring '10 term at UC Riverside.

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EC148-1.Prof-maxTiming&Dens - Richard Arnott April 25, 2010...

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