(A) You are a ?nal voter in the brand new start-up league, the Ultra Fun Foosball League (UFFL). Directors are looking to you to make decisions on how many teams to place in a region, owners have narrowed the ?eld down to letting the Lichtenstein Lobsters compete as a monopoly or add a second identical team in the region, the Lichtenstein Lobos. One of the interns was able to derive the attendance function for the region, which is given as: P = 60 − Q where Q = q1 + q2 if two teams are in the league. Both teams would face the similar cost structure: T C = 6q, which means that their marginal cost is M C = 6.
Question1) How many tickets could the Lobsters sell as a monopoly? What price will they charge? How much pro?t will they earn?
Question2) If the UFFL allows Lobos into the league and they compete as a Cournot duopoly, how many tickets can EACH team charge? What will be the market price? How much pro?t can EACH team earn?
Question3) Can the teams act as a cartel and gain more pro?t? Show why or why not. (Note: Cartels are illegal in Lichtenstein)
Question4) Draw the 4 individual cost curves on one graph: marginal cost, average total cost, average ?xed cost, and average variable cost. Place costs ($) on the y-axis and quantity (Q) on the x-axis. What causes marginal cost to look the way that it does?
(B) Supply and Demand in Professional Sports
You’ve been contacted by the local semi-professional team in Colfax, known locally as the Colfax Thunder. They play their home games at the HS baseball park for only $100 per month. They split the concession stand revenue with the school district 50/50, but get to keep all the merchandise sales for themselves. The season lasts 3 months with 2 home games per month, playing games against teams in the Paci?c Northwest, including the Pullman Pirates, the Lewiston Lapdogs, and the Spokane Seawolves. The following are questions which the management team are asking you since they knew you took sports economics class at WSU. Please answer the questions thoughtfully, and with detail to economic principles.
Question1) “We don’t understand all this supply and demand stu? you’re telling us. Can you draw us a graph to make it more clear? We like to think of our product as the attendance.”
Question2) “Wait, I’m confused, the Pullman Pirates are a substitute for our team? What does that mean? What happens if we raise our prices? Are there any other substitutes in the area?”
Question3) “We’re selling all our tickets right now for $10 each. We have roughly 30 people come to our games, and they each spend another $7 on average for concessions. Our payroll is only $500 per home game. We don’t make any payments during away games. Our accountant mumbled something about our demand is inelastic. What does that mean, and what should we do? How much pro?t are we making each season?”
Question4) “How many tickets do we required to sell for each game in order to break even (zero pro?t)?”
Question5) “What are some ways we could increase revenue, we need to know at least 3 unique ways to increase revenue.”
Question6) “Someone mumbled something about price discrimination in the bathroom the other day, isn’t that illegal? How does that work?”
(C) You work in a front o?ce of the Spokane Indians, a minor league baseball team that plays in the Northwest League of Minor League Baseball. Your boss wants to know the di?erent costs associated with di?erent levels of advertising, including the average and the marginal costs. Each ticket to the game is $10. One of the junior economists in your o?ce has run some regressions and found that demand for the Indians is:
Q = 200 + 120A − 10A^2
Where Q is the nightly attendance and A is the amount of advertising units they could purchase. Boss says he will never budge on price, therefore you have to make use of advertising. Luckily, advertising agency you contacted will work with you on the price, if you buy enough ad spots. They gave you following equation to calculate the cost of the ads based on the number you bought:
CA = 500 + 220A − 2A^2
Question1) Fill in the table shown below, it may help you to answer the questions that follow.
Question2) If the ads didn’t cost anything, how much would be the optimal selection? What’s the optimal number of ads now that you consider the cost structure above?
Question3) What if the ads really cost MORE whenever you purchased more ads? (Imagine the costs of switching from billboards to tv commercials). How does your answer change when the total costs of ads are CA = 500 + 220A + 2A^2 ? Compare your answer with the previous one. Is the original experiencing diminishing return or is this new one?
Question4) Would you consider advertising a short-run or long-run input? Is it variable or ?xed? Why?
Question5) Give the example of the short-run variable cost, a short-run ?xed cost, a long-run variable cost, and a long-run ?xed cost.
Question6) Describe two types of di?erent contract options that leagues as a whole can decide from. Give examples of current leagues which use each type of TV contracts.
Ads Bought Attendance TC of Ads Mc of ads AC of ads Marg-product MRP
1 310 718 - 718 - -
2 400 932 214 466 90 900
3 470 1142 210 380.67 70 700
4 520 1348 206 337 50 500
5 550 1550 202 310 30 300
6 560 1748 198 291.33 10 291.33
7 550 1942 194 277.43 -10 277.43
8 520 2132 190 266.5 -30 266.5