Question

Suppose that a developer is choosing tenants for a shopping center. There are four possible tenants: a department store, a toy store, a shoe store, and a hardware store. If each store were to be located in isolation outside a shopping center it would earn a certain level of gross profit per period ( this is the level of profit before subtracting out space rent). In addition, each store requires a certain number of square feet of floor space, which is the same regardless of whether or not it locates in a shopping center. The relevant values for each store type are as follows: Gross profit in Required square footage 9,000 1,000 isolation Department store Toy store $100,000 $11,200 $7,800 $7,000 800 Shoe store Hardware store 1,100 When the stores are located together each store earns a greater gross profit from the additional customer traffic generated by the nearby locations of other stores. The increase in gross profit for each store type ("affected store type") resulting from the presence of other store types ("added store type") is as follows: Added store type Department Affected store type Department Toy Shoe Toy $6,000 $8,000 Shoe Hardware $1,000 $600 $300 $2,000 $2,000 $1,000 $200 $500 $400 $200 Hardware qual to each store's gross profit, leaving Suppose that the shopping center developer charges a rent the store with a net profit of exactly zero. Total rent from the shopping center is then equal to the total gross profit of all its stores. The developer's profit is thus equal to total gross profit of all 2

Answer 1

(a) People visiting other shops will visit the nearby shops, hence its natural to increase profits due to nearby shops.

Other shops will earn more incremental profits due to nearby department shops since its have the highest customer traffic because of its product diversity.

The incremental profits earning from nearby shops is most lower for Hardware shop.

(b)

STORE	RENT	REQUIRED SQUARE FOOTAGE	COST PER PERIOD PER SQ.FEET (AT $10)	DEVELOPER'S PROFIT
Department	$1,00,000.00	9000	$90,000.00	$10,000.00
Toy	$11,200.00	1000	$10,000.00	$1,200.00
Shoe	$7,800.00	800	$8,000.00	$-200.00
Hardware	$7,000.00	1100	$11,000.00	$-4,000.00

(C)

STORE	Profit of store(standalone)		Increase in profit from added store type		TOTAL RENT	REQUIRED SQUARE FOOTAGE		COST PER PERIOD PER SQ.FEET (AT $10)	DEVELOPER'S PROFIT
	computation	Amount	computation	Amount		computation	Sq. Feet
Department+ Toy	100000+11200	$1,11,200.00	6000+2000	$8,000.00	$1,19,200.00	9000+1000	10000	$1,00,000.00	$19,200.00
Department+ Shoe	100000+7800	$1,07,800.00	8000+2000	$10,000.00	$1,17,800.00	9000+800	9800	$98,000.00	$19,800.00
Department+ Hardware	100000+7000	$1,07,000.00	1000+1000	$2,000.00	$1,09,000.00	9000+1100	10100	$1,01,000.00	$8,000.00
Toy+Shoe	11200+7800	$19,000.00	600+500	$1,100.00	$20,100.00	1000+800	1800	$18,000.00	$2,100.00
Toy+Hardware	11200+7000	$18,200.00	300+400	$700.00	$18,900.00	1000+1100	2100	$21,000.00	$-2,100.00
Shoe+Hardware	7800+7000	$14,800.00	200+200	$400.00	$15,200.00	800+1100	1900	$19,000.00	$-3,800.00

(d)

STORE	Profit of store(standalone)		Increase in profit from added store type		TOTAL RENT	REQUIRED SQUARE FOOTAGE		COST PER PERIOD PER SQ.FEET (AT $10)	DEVELOPER'S PROFIT
	computation	Amount	computation	Amount		computation	Sq. Feet
Department+Toy+shoe	100000+ 11200+ 7800	$1,19,000.00	6000+ 8000+ 2000+ 600+ 2000+ 500	$19,100.00	$1,38,100.00	9000+ 1000+ 800	10800	$1,08,000.00	$30,100.00
Department+Toy+Hardware	100000+ 11200+ 7000	$1,18,200.00	6000+ 1000+ 2000+ 300+ 1000+ 400	$10,700.00	$1,28,900.00	9000+ 1000+ 1100	11100	$1,11,000.00	$17,900.00
Department+Shoe+hardware	100000+ 7800+ 7000	$1,14,800.00	8000+ 1000+ 2000+ 200+ 1000+ 200	$12,400.00	$1,27,200.00	9000+ 800+ 1100	10900	$1,09,000.00	$18,200.00
Toy+shoe+hardware	11200+ 7800+ 7000	$26,000.00	600+300+500+200+400+200	$2,200.00	$28,200.00	1000+ 800+ 1100	2900	$29,000.00	$-800.00
Department+Toy+shoe+Hardware	100000+ 11200+ 7800+ 7000	$1,26,000.00	6000+ 8000+ 1000+ 2000+ 600+ 300+ 2000+ 500+ 200+ 1000+ 400+ 200	$22,200.00	$1,48,200.00	9000+ 1000+ 800+ 1100	11900	$1,19,000.00	$29,200.00

(e)

Comparing the answers from (b), (c), (d), the optimal shopping centre(the one yielding the highest profit to the developer), is "Department+Toy+Shoe". It will earn a profit of $30100 to the developer.

This is optimal since these stores earn more 'profit per square feet' compared to hardware shop. Additionally, these stores have more incremental profit due to nearby shops compared to hardware shops. Hence these 3 type of store is selected.