Solutions to Back-Of-Chapter Problems – Chapter 1

 Solutions to Back-of-Chapter Problems – Chapter 1

1.1 Why might Kobe Bryant employ someone to answer his fan mail even if he can read the letters and type the responses more quickly than the person he employs? Answer: If Kobe were able to answer his fan mail quick quickly than someone he hires, this would imply Bryant has an absolute advantage in answering fan mail. Kobe is still likely, however, to have a comparative advantage in playing basketball, and therefore he should specialize in playing basketball and hire someone else to answer his fan mail.

1.2 Is the following statement true or false? Explain your reasoning. “I am attending college on a full athletic scholarship, so the opportunity cost of attending college is zero for me.” Answer: False. The student is also giving up his or her time. A prime example of this is players who leave college early to enter the pros. The opportunity cost of attending college for a top basketball player is the lost chance to play in the NBA.

1.3 From 1946 through 1967, the placekicker for the Cleveland Browns, Lou Groza, was successful on 54.9 percent of his field goal attempts. From 1999 through 2008, the Browns’ kicker was Phil Dawson, who was successful on 82.8 percent of his attempts. Use the theory of comparative advantage to explain the massive improvement in the Browns’ kicking game. Answer: While Groza was best known for his kicking, he also played offensive tackle for most of his career. In the modern game, players are able to specialize, thereby improving players’ skills resulting in higher field goal percentages for more recent players.

1.4 The term “figure skating” refers to the shapes that skaters used to trace in the ice as part of skating competitions. In the 1970s, this aspect of the sport was deemphasized and eventually eliminated. Use the theory of comparative advantage to explain this change. Answer: The elimination of tracing figures allows skaters to specialize in other techniques such as jumps and spins that most fans find more exciting. It also encourages more athletic skaters with a comparative advantage in these skills to enter the sport.

 Solutions to Back-of-Chapter Problems - Chapter 2

2.1 Some cities have several teams in England’s Premier League (the country’s top soccer league). Explain how this affects the monopoly power of those teams. Answer: The presence of another team in the same city reduces each team’s monopoly power since the other team(s) provides a substitute for the team’s product. Manchester United, for example, can’t charge too much for their tickets for fear of fans abandoning the team and becoming fans of Manchester City instead.

2.2 The marginal cost of admitting an additional fan to watch the Sacramento Kings play basketball is close to zero, but the average price of a ticket to a Kings game is about $60. What do these facts tell you about the market in which the Kings operate? Justify your answer. Answer: The Kings must have some degree of monopoly power since under perfect competition firms set P = MC while the Kings set P > MC.

2.3 Suppose the St. Louis Cardinals sign Yu Darvish, a star pitcher in Japan, to a five-year contract worth $70 million. a. What is likely to happen to ticket prices in St. Louis? Why? b. Five years later, the Cardinals sign Darvish to another five-year contract, this one worth $100 million. What is likely to happen to ticket prices in St. Louis? Why? Answer: a. If Darvish increases the expected quality of the team, the Cardinals will be able to raise ticket prices since fans are willing to pay more to watch a winning team. b. Resigning Darvish, even at a higher price, is not likely to improve the quality of the Cardinals above the status quo. Therefore, in this case the Cardinals will not be able to pass on the higher cost of the player’s contract onto ticket buyers.

2.4 The major North American sports leagues prohibit teams from locating within a specific distance of an existing team. Why do they have such a rule? Answer: The presence of another team in the same city reduces each team’s monopoly power since the other team(s) provides a substitute for the team’s product. By limiting competing teams’ ability to locate within a specific distance of an existing team, in effect the league is granting each franchise a local monopoly.

2.5 Use supply and demand to show why teams that win championships typically raise their ticket prices the next season. Answer: Since fans typically like winning and since their good memories persist for at least one season, championship teams generally experience an increase in demand for their product. An increase in demand shifts the demand curve to the right leading to an increase in equilibrium prices.

2.6 Use a graph with attendance on the horizontal axis and the price of tickets on the vertical axis to show the effect of the following on the market for tickets to see the Vancouver Canucks play hockey. a. The quality of play falls, as European players are attracted to play in rival hockey leagues in their home countries. b. Vancouver places a C$1 tax on all tickets sold. c. A recession reduces the average income in Vancouver and the surrounding area. d. The NBA puts a new basketball franchise in Vancouver. Answers: In each case, the student should show a supply and demand graph, with the appropriate shift of the correct curve. a. Demand shifts left, price decreases, equilibrium quantity decreases. b. This can either be shown as a leftward shift of the demand curve or a leftward shift of the supply curve. In either case, if a fixed (per unit) tax is placed on tickets the vertical distance between the new and old curves should equal the tax. c. Demand shifts left, price decreases, equilibrium quantity decreases. d. Demand shifts left, price decreases, equilibrium quantity decreases.

2.7 Suppose the market demand for tickets to a University of Tennessee basketball game is Qd = 40,000 – 1,000p and the supply is Qs = 20,000. a. What is the equilibrium price of a ticket to the game? b. What would happen to the market for tickets if the university set a price ceiling on tickets of $10 and if Tennessee had strict antiscalping laws? c. What would happen to your answer to (b) if the price ceiling were $30?

Answers: a. Set Qd = Qs, so 40,000 – 1,000p = 20,000. Solving for p, p = 20. See Figure 2.1 below. b. Since the equilibrium price is above the price ceiling, the price ceiling will be binding and the new price will become p = 10. Qd = 40,000 – 1,000p = 30,000. See Figure 2.1 below. c. Since the equilibrium price is below the price ceiling, the price ceiling will not be binding. Thus, the price will stay p = 20. Qd = Qs = 20,000.

Figure 2.1

2.8 The New York Jets football team raises ticket prices from $100 to $110 per seat and experience a 5 percent decline in tickets sold. What is the elasticity of demand for tickets? Answer: ε = %ΔQ / %Δp = -.05 / (10/100) = -0.50. Demand is inelastic since | ε | < 1. Alternatively, if a price increase of 10.0% leads to a 5% decline in ticket sales, the elasticity is -5/10 or -0.50. Since the law of demand states that an increase in price always leads to a decrease in the quantity demanded, it is common practice to drop the negative sign when discussing a good’s own-price elasticity of demand.

2.9 Since the 1990s, many Major League Baseball teams have moved to new stadiums that are far smaller than the ones they have replaced. Use the appropriate curves to show what this has meant for ticket prices. Answer: Starting with a regular supply and demand graph, a reduction in the number of seats shifts supply to the left. Equilibrium prices rise. (As an aside, newer stadiums also provide more amenities to the fans which should serve to shift demand to the right raising equilibrium prices even further.)

2.10 Suppose the Tampa Bay Rays baseball team charges $10 bleacher seats (poor seats in the outfield) and sells 250,000 of them over the course of the season. The next season, the Rays increase the price to $12 and sell 200,000 tickets. a. What is the elasticity of demand for bleacher seats at Rays games? b. Assuming the marginal cost of admitting one more fan is zero, is the price increase a good idea?

Answer: a. ε = %ΔQ / %Δp = ((200,000 – 250,000)/250,000) / ((12-10)/10) = -1.00. Demand is unit elastic since | ε | = 1.00. Alternatively, if a price increase of 20.0% leads to a 20% decline in ticket sales, the elasticity is -20/20 or -1.00. b. The price increase is not a good idea. Total revenues have fallen from $2,500,000 = (250,000)(10) to $2,400,000 = (200,000)(12). Anytime elasticity is greater than one, an increase in prices will result in a drop in total revenue.

 Solutions to Back-of-Chapter Problems – Chapter 3

3.1 Suppose that you were the owner of a professional baseball team in a major city. If the league decided to allow a second team in your city, as long as you were compensated for this infringement, on what basis could the appropriate compensation be determined? Answer: Another team’s locating in your city would dilute your monopoly power. Compensation should be based on the magnitude of the loss of expected profits. If the payment is a lump sum, then the present discounted value of the future stream of profits that you will lose as a result of the infringement is the appropriate charge. If the payment occurs annually, each payment should represent the difference between actual profits and the profits that you would have received if you were still a monopolist.

3.2 Draw a graph that shows the demand for seats at an NFL stadium. Show how each demand would be affected if: (a) The prices of parking and food at the games increase. (b) Televised games switch from free TV to pay-per-view only. (c) A new league forms with a team that plays nearby. (d) The quality of the team decreases dramatically. (e) The length of the season increases. Answers: (a) Increase in the price of a complement; demand shifts leftward. (b) Increase in the price of a substitute; demand shifts rightward. (c) Decrease in the price of a substitute (as the new league decreases the cost of viewing an alternative game); demand shifts leftward. (d) The quality of the good falls, and fans’ taste for seeing the team declines. Demand shifts leftward. (e) The availability of possible games increases, creating more substitutes for each individual game; demand shifts leftward.

3.3 True or false; explain your answer: “If all teams are of equal quality, it doesn’t matter whether they share gate receipts or not – revenue will remain unchanged. Answer: False. Revenue for each team is determined by more than simply team quality. For example, teams with the biggest venues will receive more revenue from home games if they do not share gate receipts than if they do. Conversely, small venue teams will benefit from revenue sharing, as they stand to gain a share of the larger gate receipts enjoyed by other teams. The same holds true for market size. Large market teams that have high average attendance figures will be net losers under revenue sharing.

3.4 Some researchers argue that revenue sharing is like socialism in that it removes the incentive to outperform rivals. Do you agree with this statement? Why or why not?