Answers to Selected Review Questions for Section 1

1.  Comparative advantage is the key to Ruth's use as a hitter rather than a pitcher.

2.  To convert past dollars into today's dollars you will need a measure of the price level across time.  The CPI is a standard measure of the price level.  The CPI in 1931 was 15.2 and in 2011 it was 224.939.  In other words, for a given market basket of goods and services, what cost $15.20 in 1931 now costs $224.94.   We can now compare dollars across time by converting past 1931 dollars into 2011 dollars as follows: Ruth's 1931 salary in 2011 dollars = ($80,000)*(224.939/15.2) = 1,183,889.  Thus, Ruth's $80,000 salary back in 1931 is the equivalent of earning $1.1m today.

3. 

4.

5. NHL.  Assume that the supply of of seats is upward sloping for league as a whole.
a)  Demand would fall: price and quantity would fall
b)  Demand would fall: price and quantity would fall 
c)  Demand would increase: price and quantity would rise 
d)  You can model this as either a decrease in demand or a decrease in supply.  In either case, the price to fans will rise and the quantity will fall.  (Note that a tax drives a wedge between the price that fans pay and the price that franchises get to keep.)

6.  Demand for tickets at an NFL stadium.
a)  Demand rises: price will rise
b)  Demand will rise (if TV viewing is a substitute for attendance): price will rise.
c)  Demand will fall: price will fall
d)  Demand will fall: price will fall
e)  see #17 below.

7. a) P = 40
b) An increase in income will increase demand, thereby raising price. Quantity, however, would remain at 100,000.
c) A price ceiling at $20 would cause a shortage of 100,000 tickets for the game. A price ceiling at $50 would have no effect on the market outcome since it is above the market price.

8.  The attendance that maximizes profits occurs where MR = MC. Thus,
              100 - 2Q = 0               Q = 50
               P = 100 - Q = 100 - 50 = 50
Thus, TR = 50x50 = 2500.  TC = 500 (since there are no variable costs).  Profits = 2000.

9.  Pricing decisions:
a)  Competitive pricing requires P = MC:  thus, P = 0 (since MC = 0), and Q = 100,000.
b) Monopoly pricing requires P to be set off of demand curve when output occurs at MR = MC: Q = 50,000 and P = $500

10. Using the midpoint formula, Elasticity = 20%/[(20-15)/17.5] = -0.70, making the demand for Indians tickets price inelastic.

11.

12.  This is in your notes and the text.

13.  Think risk aversion.  Season tickets might be discounted to entice risk averse fans to purchase a block of tickets.

14.  This is in your textbook and notes.

15.  Do owners in sports leagues operate to make a profit? Consider the Florida Marlins baseball team. Immediately after they won the World Series in 1997 they began ridding their team of high-priced players in order to reduce payroll.

16.  Check your notes.

17. 

18.  On the one hand, the greater the number of teams in a league, the more revenue that must be shared (think about the TV contract). On the other hand, more teams mean more league entry fees and expanded market penetration. There is a danger, however, of over saturation: watered-down talent and geographic market encroachment.

19.  Increased games will probably result in lower ticket prices overall; consequently, total gate receipts may be adversely affected if the demand for games is price inelastic. In addition, extending the season may overlap into another sport's season, thereby resulting in lower ticket demand.

20. 

21.  Review the handout on the San Antonio Spurs and the effect of roster depreciation on book profit.

22.  Annual depreciation is $40m (= $200m/5 years).  This makes the annual tax savings $16m (=$40m*0.40).

23. Describe the tax advantage from doing this.

24.   Because league-wide marketing campaigns are non-rival in consumption, we add the demand curves vertically (the intercept is multiplied by 20).
Each team’s demand function can be rewritten as  P
= 200 – .2Q.
Thus, the market demand curve is  P
= 4,000 – 0.2Q.
When P
= 1,000, the equilibrium quantity of ads purchased is
                      1,000
= 4,000 – .2Q
                             Q
= 15,000

25.  Yawnnnnnnnnnnn.   Except for Tiger's family, who would want to watch a PGA event if Tiger will win it every time?

26. Would teams be more likely to relocate?  What else would be different?

27. 

28.  The Marlins can afford to severely cut payroll because no matter how poorly they perform, they will still remain in MLB. A team in the Premier League would not engage in such a drastic slash in their payroll as a poor performance on the field during the season would relegate them to the minor leagues.

29.  Vertical integration.
a)  Both act as monopolists.
    Upstream firm: produces where MR = MC
                                                    100 - 10Q = 20
                                                                   Q = 8 
                                                       and P = $60 (found by plugging 8 into the demand function)
                                                       Profit = (P-MC)Q = (60-20)8 = $320

    Downstream firm: produces where MR = MC
                                                         150 - 10Q = 60
                                                                        Q = 9 
                                                       and P = $105 (found by plugging 8 into the demand function)
                                                       Profit = (P-MC)Q = (105-60)9 = $405
    Total profits are $725.

b)  Upstream behaves competitively; downstream is monopolistic.
    Upstream firm: produces where P = MC
                                                    100 - 5Q = 20
                                                                Q = 16 
                                                       and P = $20 (found by plugging 16 into the demand function)
                                                       Profit = (P-MC)Q = (20-20)16 = $0

    Downstream firm: produces where MR = MC
                                                         150 - 10Q = 20
                                                                        Q = 13 
                                                       and P = $85(found by plugging 13 into the demand function)
                                                       Profit = (P-MC)Q = (85-20)13 = $845
   Total profits are $845.


30.  We discussed a similar problem in class.

31.  We did this one in class.

32.