End of Chapter 2 Questions and Answers

End of Chapter 2 Questions and Answers - End of Chapter 2...

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End of Chapter 2 Discussion Questions and Answers 1. Define a submarket. How does an office submarket differ from a residential submarket? Answer: The market in which the property of interest (the ‘subject’ property) competes is called a submarket. Submarkets are arbitrary but should be based on properties that compete in the mind of the typical buyer or tenant for such property, thus they tend to have a geographic component, a price or rental range, and some form of quality range. For example with office property we have class A, B, and C. For residential properties we may have neighborhoods for the geographic component and size and price range as important submarket parameters. Submarkets could be based on zip codes or census tracts or counties depending on the size of the relevant market in which the subject property competes. 2. Why is the supply of real estate considered inelastic in the short run? What are the implications of changes in demand if supply is held fixed? Answer: The supply of real estate is considered inelastic in the short run because of the inability of the market to add real estate in the near to intermediate term. It often takes years to conceive, design, permit and build a new property. Graphically a short term supply curve is a vertical line at one point on the supply side. Due to the inelasticity of supply in the short run any changes in demand have a direct impact on vacancy, rents and prices. An increase in demand instantly causes an increase/decrease in vacancy, rents or prices. 3. What is the implication of the kink in a kinked supply curve? What level of price is necessary in the market before new supply would be added? Answer: The kink (or corner) in the supply function occurs at the economically feasible rent level that equates (on a present value basis) to the long-run marginal cost of supplying additional space into the market. When prices are below the kink the current value of real estate is below replacement cost (including acquisition, construction costs and normal profit) and no new space will be built. When prices are above the kink, new supply will begin. 4.
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End of Chapter 2 Questions and Answers - End of Chapter 2...

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