Assume you are a real estate broker with an exclusive contract-the condo association rules state that everyone selling their condominiums must go through you or a broker designated by you. A typical condo costs $500,000 today and sells again every 5 years. This will last for 50 years, and then all bets are off. Your commission will be 3%. Condos appreciate in value at a rate of 2% per year. The interest rate is 10% per annum
(a) What is the value of this exclusivity rule? In other words, at what price should you be willing to sell the privilege of exclusive condo representation to another broker?
(b) If free Internet advertising was equally effective and if it could replace all real estate brokers so that buyers' and sellers' agents would no longer earn the traditional 6% (3% each), what would happen to the value gain of the condo?