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Problem Set 1

The document outlines problem set questions for an Urban Economics course focusing on real estate market dynamics. It discusses the effects of increased demand and development costs on rent, prices, construction, and stock, as well as the implications of imperfect competition in property development. Additionally, it addresses the constraints on housing supply in Hong Kong and the dynamics of reaching new steady states in response to demand changes.

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3 views1 page

Problem Set 1

The document outlines problem set questions for an Urban Economics course focusing on real estate market dynamics. It discusses the effects of increased demand and development costs on rent, prices, construction, and stock, as well as the implications of imperfect competition in property development. Additionally, it addresses the constraints on housing supply in Hong Kong and the dynamics of reaching new steady states in response to demand changes.

Uploaded by

magiuero84
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

ECON2266 Urban Economics

Problem set #1

For tutorial discussions for the week 1/2 to 5/2.

1. We have argued in class that an increase in the demand for space in the market for real
estate use would result in (1) an increase in rent, (2) an increase in price, (3) an increase
in construction, and (4) an increase in stock. Verify that this is indeed what must happen.

2. We have argued in class that an increase in the cost of real estate development would
result in (1) an increase in rent, (2) an increase in price, (3) a decrease in construction,
and (4) a decrease in stock. Verify that this is indeed what must happen.

3. The FDW model assumes perfect competition in the property development industry.
In Hong Kong, property development is everything but perfectly competitive. The few
large property developers collectively possess a great deal of market power to set price
above the cost of development. In terms of the FDW model, which quadrant will be
affected? How does this equilibrium (where property development is imperfectly
competitive) compare with the equilibrium under the assumption of perfect competition
in property development?

4. In the southwest quadrant of the FDW model, we assume that the supply of new
housing can increase without bounds so long as it is justified by a sufficiently high real
estate asset price. In Hong Kong, this assumption may not be very realistic, for the
supply of new housing is constrained by the supply of land. How may the analysis in that
quadrant be amended to take into account the fact that new housing supply cannot exceed
some absolute level dictated by the available land supply?

5. Refer to question #1 above. The comparison is between the old and the new steady
states. In the short run, before the new steady state is reached, would the respective levels
of rent, price, construction, and stock be higher or lower? Is this pattern of rent and price
dynamics consistent with what usually happened in the real world real estate market in
response to demand increases. Do you think the new steady state would be reached
sooner or later when construction is more or less price elastic?

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