Question

Reba manages a commercial office building in downtown El Paso. The occupancy level is 98%. What should Reba consider in determining the rent for office space?

a) Ignore occupancy rates; rent should be based solely on market demand.

b) Increase rent to maximize revenue since the building is almost fully occupied.

c) Consider market trends and competition when setting rent prices.

d) Decrease rent to attract more tenants and achieve 100% occupancy.

Answer 1

c) Consider market trends and competition when setting rent prices.

Reba should consider market trends and competition in setting rent prices for office space, as market demand can shift and affect equilibrium prices and quantities, indicating the need for a thoughtful approach despite the 98% occupancy rate.

Step-by-step explanation:

When determining the rent for office space, Reba should consider market trends and competition when setting rent prices. This is because the demand for rental space can be influenced by factors such as higher incomes, changes in tastes, or the expansion of locally-based businesses, which can shift the demand curve to the right, resulting in a higher equilibrium price and quantity, as illustrated in various economic models. Additionally, if the market reaches a new equilibrium with a higher price, such as rising from $500 to $600, and the quantity of units rented increases from 15,000 to 17,000, it indicates a robust market. However, she must be cautious, as rent control laws could interfere with market rates and potentially create a shortage if the controlled rent is set below the market equilibrium. Therefore, while the building's high occupancy rate of 98% suggests that demand is strong, any decision to adjust rents should also weigh the potential market or regulatory shifts.