B. Office Space and Tall Buildings

• Firms using offices gather, process, and distribute tacit information - information that requires face-to-face interaction between workers

• Ex. - Bankers, accountants, financial consultants, marketing strategists, product designers, lawyers

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1.  Price of office space

• Accessibility is the key factor in determining the price of office space

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a.  Interaction travel cost

• Travel cost includes opportunity cost of time

• Directly related to distance travelled

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b.  Willingness to pay for office space

• Based on leftover principle

• WTP = TR - TC

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c.  Impact of labor accessibility and wages

• Suppose labor costs vary with location

• Higher wages needed if commute is longer

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2.  Building height and land prices

• Height of buildings can vary

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a.  Price of office space and building height

• Tradeoff as height increases

(1)  Intra-building travel cost - more time travelling within a building as height increases

(2)  Altitude amenity - more status and better view with higher levels

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b.  Profit maximizing building height

• Profit maximization occures when MB = MC

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c.  Willingness to pay for land

• Sum of the total profit at each level

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• Taller building, higher price of land closer to city center

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d.  Input substitution

• Isoquant - shows the different combinations of inputs that can produce the same level of output

• Cost minimization - want to produce a given level of output (office space) at the lowest possible cost

• Taller buildings requirement more capital for construction - reinforcement of lower levels, space needed for elevators and stairs

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• Optimal combination of inputs depends on the relative prices of the inputs

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3.  Competition to be tallest

• Suppose there is a value ("bonus" or "prize") for having the tallest building

• Could lead to inefficient result

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4.  Office subcenters

• High density (at least 7.5 million sf per square mile) - primary downtowns

• Medium density (2 - 3.5 million sf per square mile) - secondary downtowns, edge cities, urban envelopes, corridors

• Low density (less than 2 million sf per square mile) - dispersed