This Document Contains Chapters 1 to 5 Chapter One Study Questions It’s Just Supply and Demand 1. According to Thorstein Veblen, who primarily played sports in the latter 19th century? Answer: The wealthy or the leisure class primarily played sports in the latter 19th century. 2. How many boys and girls play high school sports today? Answer: More than 4 million boys and more than 3 million girls play high school sports today. 3. How does viewership of the Super Bowl (the biggest game in American football) compare to viewership of a regular-season soccer match (international football) in Spain? Answer: Viewership for the Super Bowl is 160 million, while viewership for a regular-season soccer match in Spain is 400 million. 4. What percentage of sports fans are women? What percentage of the sports media are women? Answer: Thirty to 45% of sports fans are women; 10% of the sports media are women. 5. According to former President Barack Obama (and he was far from alone in making this argument), what is the relationship between player salaries and ticket prices? Answer: Higher player salaries cause higher ticket prices. 6. According to Humphreys and Ruseski (2009), what is the size of the U.S. sports market? Answer: The size of the U.S. sports market is $44 to $60 billion. 7. According to John Maynard Keynes, what is the purpose of economic analysis (according to Alfred Marshall)? What does an economist need to engage in such an analysis? If we apply this perspective to the study of sports economics, what does an economist need to study sports? Answer: According to Keynes, Marshall says that the purpose of economic analysis is to apply the theory to “current economic life.” To do this, one must know the facts of the industry. So to study sports, an economist needs to know sports in addition to economics. 8. What are the tongue-in-cheek steps to the Marshallian method? How can they be applied to the question that was the starting point for this chapter? Answer: Use mathematics as a shorthand language rather than as an engine of inquiry, and keep at it until you are done. Translate into English and illustrate by examples that are important in real life. The question at the beginning of the chapter is, What determines ticket prices in professional sports? The Marshallian method was applied throughout the chapter, first formulating a demand curve, then stating it in English, and then examining real-world data to see how this works. 9. What are the key words in the definition of supply and demand? Answer: You must be “willing and able.” To be in supply or demand of a good, you have to be able and willing to participate in the market. 10. With respect to the demand for baseball tickets, what are factors that: cause movement along the demand curve and cause the demand curve to shift? Answer: Cause movement along the demand curve: A change in the price of the good causes movement along the demand curve. Cause the demand curve to shift: A change in any demand factor besides the price of the good will cause the demand curve to shift. This includes personal income, market size, changes in quality of the good, and so on. 11. What part of the demand curve changes when the curve is shifted? What part of the demand curve should not change? Answer: The y-intercept changes when the curve shifts. The slope does not change. 12. What has determined the price of Honus Wagner’s baseball card over time? Be able to illustrate this story (i.e., draw a supply and demand graph). Answer: As incomes have increased among baseball fans, demand for the card has increased. But since only a certain number of cards were printed, supply has remained fixed. With a fixed supply, demand solely determines the price, so the price of the cards has increased significantly. At a 2013 auction, one of Wagner’s cards sold for $2.1 million. 13. How is the market period different from the normal period in Marshall’s analysis of prices? Answer: Market period is when supplied is fixed, so prices are determined entirely by changes in demand. Normal period has an upward-sloping supply curve. 14. Why did Nike take Reebok to court over the production of Tim Tebow jerseys in the Spring of 2012? Be able to illustrate this story. Answer: Nike had the right to make and sell the jersey. If Reebok also made the jersey, supply would increase and the price of the jersey would decline. 15. According to Marshall’s supply and demand model, what determines the price of tickets in the NBA? Be able to illustrate this story. Answer: Price of tickets is determined by demand. 16. How does the NBA’s salary cap impact quantity demand and quantity supplied of labor in the NBA’s player market? What is the intent of this cap? According to the text, what is the actual impact of this cap? Answer: The NBA’s salary cap is a price ceiling set below the equilibrium wage for the NBA player’s market. With this price ceiling in place, no team can offer more money than the NBA maximum even though it might be willing to pay this maximum. This cap was intended to prevent the richest NBA teams from assembling a team that would dominate the league. By forcing the price of stars below the equilibrium wage, all teams should be able to acquire top talent. But in reality, star players consider factors besides the wage in determining where they will play, such as their chances of winning a title. So the policy falls short of preventing a team that dominates the league. 17. Is there a “right” price for labor? Utilize the perspective of John Stuart Mill in answering this question. Answer: There is no “right” price for labor. What labor is paid depends on the laws of society. 18. What is the difference between positive and normative economics (according to John Neville Keynes)? How are “morality” and “economics” summarized by Steven Levitt and Stephen Dubner? Answer: Positive economics is the study of “what is,” and normative economics is the study of “what ought to be.” Morality, it could be argued, represents the way that people would like the world to work—whereas economics represents how it actually does work. 19. What is deductive reasoning? What is inductive reasoning? Answer: Deductive reasoning is moving from the general to the specific. With deductive reasoning one begins with basic principles and then logically derives a model of how the world works. Inductive reasons begins with data and then derives a theory. 20. According to Marshall, what is the basic approach to economics? Answer: Economics is not dogma, and it is not a collection of universal truths. The tools of economics, including both deductive and inductive reasoning, simply provide us with the means to uncover how the world appears to work. Thought Questions 1. Tim Tebow’s NFL career ended with the New York Jets in 2012. How would his lack of success with the Jets impact the price of his Jets jersey? Now imagine Tebow becomes a media celebrity in New York when his athletic career finally ends (currently he is a minor league baseball player). How might that impact the price of this jersey? If Tebow becomes a media celebrity in New York, could we deduce the price of his Jets jersey in the future (i.e., ascertain its value without analyzing data)? Answer: His lack of success in football lowers demand for the jersey and therefore lowers the price. But media success might cause demand to increase. If both events happened, the price of Tebow’s jersey could not be simply deduced. 2. At the conclusion of the 2016 college football season, the University of Alabama’s football team had existed for 113 years, appeared in 66 bowl games, and won 26 conference titles. Utilize what you know about the NCAA’s limit on compensation of college athletes to explain the dominance of this football team. Answer: Because all NCAA schools essentially pay the same wage, athletes use a different criteria to select their school. The most obvious criteria is the likelihood that the team will win. That means the top athletes, who have the most choices, tend to choose the same schools with a history of winning. And that means schools like Alabama will persistently win. Math Questions 1. Define the elements of the following equation: P = a0 – a1 × Qd. Answer: P = dependent variable Qd = independent variable a0 = y-intercept a1 = slope coefficient 2. Given P = $150 – 0.005 × Qd as the demand for a professional sports team: a. If P = $60, what is Qd? Answer: 18,000 b. If P = $40, what is Qd? Answer: 22,000 3. Imagine these two possible changes from the demand curve listed in Question 2: a. P = $175 – 0.005 × Qd b. P = $125 – 0.005 × Qd For each, identify whether Question 3(a) or 3(b) would be consistent with the following stated changes: i. increase in the size of the market where the team plays Answer: a ii. decrease in the per-capita income in the market where the team plays Answer: b iii. move to a newer stadium Answer: a iv. decline in the quality of players employed by the team Answer: b 4. Define the elements of the following equation: P = b0 + b1 × QS. Answer: P = price of a good QS = quantity supplied of a good b0 = y-intercept b1 = slope coefficient Chapter Two Study Questions Market Size and Wins Study Questions (Deductive) 1. For any given price, how would the following changes impact a team’s revenue? a. Increase in the size of the market Answer: revenue increases b. Building a new stadium Answer: revenue increases c. Decline in the quality of the team’s roster Answer: revenue declines 2. For a typical firm, what is the shape of the marginal cost curve? Why does it have this shape? Answer: Upward-sloping. This is because of the law of diminishing returns. As a firm expands, it must hire more labor to produce the additional output. Because capital is fixed, the productivity of labor declines and the marginal cost increases. 3. For a sports team, what might the shape of the marginal cost curve be? Why does it have this shape? Answer: It is zero until a team reaches capacity. Then it is vertical. This is because adding additional fans (i.e., increasing output for a team) essentially costs nothing until a team reaches capacity. Then the cost is essentially infinite. 4. What is the profit-maximizing rule? Answer: Marginal revenue equals marginal cost Study Questions (Inductive) 5. Given Wins = a0 + a1 × Population + ei what is the regression term that describes each element in this equation? a. Wins Answer: dependent variable b. a0 Answer: y-intercept or constant term c. a1 Answer: slope coefficient d. Population Answer: independent variable e. ei Answer: error term 6. What is a “constant term”? Why is this term included in a regression equation, and what information does it convey? Answer: The constant term is the y-intercept. It is the value of the dependent variable when the independent variables are zero. It is included to enforce a zero mean for the error term. But it doesn’t convey any practical information because zero values for the independent variables are often outside the realm of what is possible. 7. We have a rule-of-thumb that a t-statistic should be, in absolute value, greater than 2. Explain the reasoning behind this rule. Answer: We are 95% certain that the true value of any estimated coefficient is within 2 standard errors of the coefficient. So if a coefficient is 8 and the standard error is 6, we are 95% certain that the true value of the coefficient is between -4 and 20. Such a range would mean that the true value could be negative, zero, or positive. In other words, we don’t really know the direction of the relationship. But if the standard error were 2, then the true value would lie between 4 and 12. Now we would be 95% certain that the true value is not zero and not negative. Now imagine that the standard error is 4. In that instance, the confidence interval would extend from 0 to 16. So zero is on the edge of our interval. In this instance the t-statistic—or the coefficient divided by the standard error—would be 2. So if the t-statistic is 2, zero lies on the edge of the confidence interval and can’t be eliminated. Hence we prefer a value that in absolute terms is greater than 2. 8. How do we calculate R-squared? What does this tell us? Answer: R-squared is either ESS / TSS or 1 − (RSS/TSS) It tells us the percentage of the dependent variable explained by our model. 9. What is the relationship between market size and win in North American pro sports? Answer this question using both deductive and inductive analysis. Answer: Deductive analysis says that market size and wins are strongly linked. Inductive analysis of the four major North American sports leagues failed to find a strong empirical link. 10. Use the following econometric model and results to answer these questions. Dependent Variable: Team Winning Percentage from the WNBA (1997‒2013) a. Interpret each slope coefficient. Answer: An additional point scored per game will increase winning percentage by 3.15%. An additional point surrendered per game will decrease winning percentage by 3.11%. b. For which variables are we at least 95% certain that the coefficient is different than zero? Answer: Points Scored and Points Surrendered c. Explain the reasoning behind your answer. Answer: To answer this question, you need to calculate the t-statistic. The t-statistic for points per game is 31.5. For points surrendered per game, it is −28.27. Both values are greater than 2 in absolute terms, so both coefficients—according to our rule-of-thumb—are statistically significant. d. For which variables are we not at least 95% certain that the coefficient is different than zero? Explain the reasoning behind your answer. Answer: None e. Calculate the R2 and interpret your answer. Answer: Explained sum of squares is 4.609. So R-squared is 4.609/5.5652, which is 0.828. 11. What is the relationship between payroll and wins in MLB, the NFL, NBA, and NHL? Is the deductive study consistent with the inductive study? Answer: Payroll does not explain as much as 25% of the variation in winning percentage and fails to explain 75% of the variation in winning percentage. The deductive model suggests that payroll is very important to team wins. But the empirical analysis—or the inductive analysis—suggests a different story. 12. When we estimate the model in Question 10 for the NBA, we see a higher explanatory power than what we do for MLB, the NFL, and the NHL. Why is explanatory power higher for the NBA? Why are we unable to explain 100% of the variation in winning percentage with points scored and points surrendered per game? Answer: The NBA has fewer blowouts than the other three leagues. In each game decided by more than 1 point, there are points scored and surrendered that do not actually impact the outcome of the game. These excess points reduce our explanatory power. 13. What factors should we consider in evaluating a regression? Should we make sure the regression conforms to prior beliefs? Answer: These are listed in the text. And prior beliefs are not part of our list. We have to allow our empirical analysis to change what we think about the world. 14. What is the difference between statistical significance and economic significance? Answer: Statistical significance tells us if the estimated coefficient is different from zero. Economic significance is what we think about when we wonder how large of an effect we have uncovered. Thought Questions 1. Why do NFL, NBA, and NHL teams tend to sell out while MLB teams do not? Answer: The NFL, NBA, and NHL appear to reach a profit-maximizing level of attendance beyond the capacity of the stadium/arena where they play. This is not the story in baseball. 2. According to deductive reasoning, how successful should the New York Mets be on the field relative to the Detroit Tigers? From 1962 to 2016, the Mets won 48.1% of their regular season games while the Tigers won 49.9% of their contests. Do these records match your deductive reasoning? Why or why not? Answer: The Mets—playing in a much bigger market—should be much more successful. The inductive reasoning, though, tells us that there is more to team success than market size. 3. Consider the following regression for the WNBA: Wins = b0 + b1 × Points per Game + ei Dependent Variable: Team Winning Percentage from the WNBA (1997‒2013) a. What is the 95% and 99% confidence interval around (b1)? Answer: The 95% confidence interval ranges from 0.006 to 0.013. The 99% confidence interval—or three standard errors in each direction—is 0.005 to 0.014. b. Is (b1) statistically significant? Answer: By our rule-of-thumb (i.e., the t-statistic must be greater than 2), we would conclude it is statistically significant. The t-statistic is 6.195. c. According to the results below, what is the chance that (b1) could equal 0.0315? Answer: Less than 1%. A value of 0.0315 is outside the 99% confidence interval. d. What lesson do we learn when we compare the results below to the results from Question 10 above? Answer: If you do not specify a model correctly, you can be very misled. The estimated coefficient in the model below is statistically significant. And the range possible is not even close to what we see when we specify the model correctly. This highlights why specifying a model correctly is so important and how we have to be careful interpreting a model. Math Questions 1. If P = a0 – a1 × Q, what is the equation for total revenue? Answer: TR = P × Q, so TR = [a0 – a1 × Q] × Q TR = a0 × Q – a1 × Q2 2. If P = $150 – 0.005 × Q, what is the equation for total revenue? Answer: TR = $150 × Q – 0.005 × Q2 3. Complete the following table: Answer: 4. If P = $50 – 0.005 × Q, a. what is the equation for marginal revenue? Answer: MR = $50 – 0.01 × Q b. how many tickets will the team sell when it maximizes revenue? Answer: To answer this, set MR = 0 and solve for Q: 50,000 c. what will the price be when the team maximizes revenue? Answer: $25 d. how much revenue will the team earn when it maximizes revenue? Answer: $1,250,000 5. Given the demand curve in Math Question 4, if marginal cost for a sports team is zero, a. how many tickets will the team sell when it maximizes profit? Answer: 50,000 b. what will the price be when the team maximizes profit? Answer: $25 c. how much revenue will the team earn when it maximizes profit? Answer: $1,250,000 6. How would your answers to Math Questions 5(a), 5(b), and 5(c) change if the team’s capacity was 10,000 seats less than your answer to Math Question 5(a)? Answer: This would mean that capacity for the team is at 40,000 seats. So capacity would be profit-maximizing for the team. So the team would sell out, and the price would be $30 (or what the demand curve indicates the price would be at $40,000). Revenue would be $30 × 40,000 or $1,200,000. Chapter Three Study Questions For the Money or the Glory? 1. Imagine you purchased a ticket to attend a baseball game. With respect to the decision to attend the game (after the ticket has been purchased), what are the benefits and costs? What cost(s) should be ignored in making such a decision? Answer: The benefit is the pleasure one gets from the game’s entertainment. The cost is the time and travel expense. The sunk cost is the price of the ticket, which traditional economics says you should ignore. 2. How did Thorstein Veblen describe decision making (according to classical economists) in 1898? Answer: People are lightning calculators of pleasures and pains. 3. How “profitable” are sports in North America and the United Kingdom? Answer: North American teams in four major sports generally show a profit. Teams in the UK historically did not. 4. When did baseball become a commercial product? What was the initial position of the NABBP with respect to players’ pay? Answer: 1858. The National Association of Base Ball Players was opposed. 5. What was the first team to entirely employ professionals? What year did this happen? Answer: Cincinnati Reds Stockings in 1869. 6. Who was Davy Force? What role did he play in the creation of the NL? Answer: He was a star baseball player in the early 1870s. William Hulbert thought he had a valid contract with Force, but the contract was declared invalid (details in the text). In response to this, Hulbert decided to create his own professional baseball league. 7. What “innovation” did William Hulbert introduce that still defines North American sports? How does this innovation impact profits in North American sports? Answer: Hulbert limited how many teams could be in each market. This gave teams monopoly power. 8. How many of the original NL teams survive today? Answer: The Atlanta Braves and Chicago Cubs are the only original National League teams that survive today. 9. Which medieval English kings banned soccer? What impact did this have on the battle of Agincourt? Answer: King Edward III, King Richard II, and King Henry IV banned soccer. The ban on soccer was done to get English peasants to focus on archery. And it was their prowess with archery that allowed the English to win the Battle of Agincourt despite being outnumbered 4 to 1. 10. How was the conflict between amateurs and professionals resolved in North American sports? How was this same conflict resolved in England? Answer: Amateurs and professionals in North America went their separate ways. In England the amateurs led the governing bodies of sports, which allowed them to control how the professionals organized their leagues. 11. If demand is inelastic, what can a team do to increase profits? Why? Answer: A team can increase the price. Inelastic demand means the percentage change in price exceeds the percentage change in quantity demanded (in absolute terms). Since total revenue is prices multiplied by quantity, an increase in price will cause revenue to rise (the price change is the bigger effect). But total cost will not increase (it will likely be unchanged since marginal cost in sports is zero). And that means profit will rise. 12. What is the elasticity of ticket demand in professional sports according to the sports economics literature? Answer: Studies show that demand is inelastic. And if demand is inelastic, the teams cannot be profit-maximizing since an increase in price would lead to higher profits. 13. Review the following explanation for inelastic demand in professional sports. a. Motive to maximize profits Answer: Teams are simply not profit maximizers. If that were true, then we might expect demand to be inelastic. b. Home field advantage Answer: David Boyd and Laura Boyd (1998) argued for what one could call the 12th man effect. Team success might be enhanced with more fans, so a team might want to lower ticket prices to maximize attendance (not profits). c. Public choice theory Answer: Teams often receive public subsidies. Low ticket prices might show local governments that teams are not interested in profits, thus helping the team receive subsidies. d. Nongate revenue Answer: Teams might keep ticket prices low to get fans into the stadium or arena. Once inside, the teams can then charge monopoly prices for concessions and merchandise. e. Endogeneity of models Answer: Because price coefficients have opposite signs in supply and demand equations, enogeneity causes an upward bias in the price coefficient and inelastic price elasticity of demand. 14. If MUtickets/Ptickets < MUfood/Pfood, what action will a utility-maximizing consumer take? Explain. Answer: The customer is getting more utility from food per dollar spent than he is getting from tickets. So the person will reallocate his budget to consume more food and fewer tickets. This will cause the marginal utility of food to decline and the marginal utility of tickets to increase. The person will continue to reallocate his budget until the marginal utility of each good per dollar spent is the same. 15. What is Gossen’s first law? Answer: Gossen’s first law is what we now know as the concept of diminishing marginal utility: the more you consume of a good, the less utility you will derive from each additional unit consumed. 16. What is Gossen’s second law? Answer: A consumer’s utility is maximized when the last dollar spent on each good yields the same level of utility. 17. What does an economist mean when he or she argues that a person’s decision making is consistent? Why would this property not apply when we talk about wins and losses in sports (in other words, can we apply this property to the ranking of teams)? Answer: The principle of transitivity is that if a person prefers A to B and B to C, then he or she must prefer A to C. In other words, preferences must be consistent. But imagine Team A defeats Team B and Team B defeats Team C. That doesn't mean Team A will defeat Team C. Luck plays a role in outcomes in sports. In other words, the “better” doesn’t always win. 18. What is the promotion and relegation system? Review the past 10 seasons of standings in the MLB, NFL, NBA, and NHL. Which teams would have been removed each year if the worst three teams were relegated? Which team in each league would have been demoted most often? Standings data for each league can be found at http://www.baseball-reference.com/, http://www.pro-football-reference.com/, http://www.basketball-reference.com/, and http://www.hockey-reference.com/. Answer: Leagues outside of North America are subject to the promotion and regulation system. Under this system, the worst-performing teams are demoted to a lower division and the top-performing teams are promoted to a higher level. The answer to this question requires students to look up the last 10 years of standings and record the worst three teams each season. These teams would have been relegated. The answer will vary each year. 19. Referring to the EPL standings (http://www.premierleague.com/tables), answer the following: a. How many EPL teams in 2006–07 managed to survive to 2016–17 without being demoted? Answer: The answer requires students to look at the last 10 years of standings and note who has survived all 10 years. This answer will vary each year. To determine how many EPL teams from the 2006–07 season managed to survive to the 2016–17 season without being demoted, we need to identify which teams were in the Premier League in both seasons and check for continuity. From the 2006–07 EPL season, the teams were: 1. Arsenal 2. Aston Villa 3. Blackburn Rovers 4. Chelsea 5. Everton 6. Fulham 7. Liverpool 8. Manchester City 9. Manchester United 10. Middlesbrough 11. Newcastle United 12. Portsmouth 13. Reading 14. Sheffield United 15. Tottenham Hotspur 16. Watford 17. Wigan Athletic 18. Charlton Athletic (relegated) 19. West Ham United (relegated) 20. Manchester City (relegated) By the 2016–17 EPL season, the teams included: 1. Arsenal 2. Bournemouth 3. Burnley 4. Chelsea 5. Crystal Palace 6. Everton 7. Hull City (relegated) 8. Liverpool 9. Manchester City 10. Manchester United 11. Middlesbrough (relegated) 12. Newcastle United 13. Southampton 14. Stoke City 15. Swansea City 16. Tottenham Hotspur 17. Watford 18. West Bromwich Albion 19. West Ham United 20. Hull City Cross-referencing these lists, the teams that were present in both the 2006–07 and 2016–17 EPL seasons without being relegated are: 1. Arsenal 2. Chelsea 3. Everton 4. Liverpool 5. Manchester City 6. Manchester United 7. Tottenham Hotspur 8. Watford So, 8 teams from the 2006–07 season survived to the 2016–17 season without being demoted. b. How many EPL teams in 2006–07 were demoted over the next 10 seasons but managed to return to the EPL? Answer: The answer requires students to look at the last 10 years of standings and note who has not survived. This answer will vary each year. To find out how many teams from the 2006–07 EPL season were demoted but managed to return to the Premier League within the next 10 seasons, we need to track the status of each team from that season over the subsequent years. Here are the teams from the 2006–07 EPL season and their status in the Premier League over the next 10 seasons: 1. Arsenal - Remained in the Premier League throughout. 2. Aston Villa - Relegated in 2016–17 but returned to the Premier League in 2019–20. 3. Blackburn Rovers - Relegated in 2011–12 and has not returned to the Premier League. 4. Chelsea - Remained in the Premier League throughout. 5. Everton - Remained in the Premier League throughout. 6. Fulham - Relegated in 2013–14, returned for the 2018–19 season, and was again relegated in 2020–21 but returned for the 2022–23 season. 7. Liverpool - Remained in the Premier League throughout. 8. Manchester City - Remained in the Premier League throughout. 9. Manchester United - Remained in the Premier League throughout. 10. Middlesbrough - Relegated in 2008–09, returned for the 2016–17 season, and was relegated again but has not returned since. 11. Newcastle United - Relegated in 2008–09, returned for the 2010–11 season, and has remained in the Premier League since. 12. Portsmouth - Relegated in 2009–10 and has not returned to the Premier League. 13. Reading - Relegated in 2012–13 and has not returned to the Premier League. 14. Sheffield United - Relegated in 2006–07 and has not returned to the Premier League. 15. Tottenham Hotspur - Remained in the Premier League throughout. 16. Watford - Relegated in 2019–20, returned for the 2021–22 season, and was relegated again but is currently in the Championship. 17. Wigan Athletic - Relegated in 2012–13 and has not returned to the Premier League. 18. Charlton Athletic - Relegated in 2006–07 and has not returned to the Premier League. 19. West Ham United - Relegated in 2010–11, returned for the 2012–13 season, and has remained in the Premier League since. 20. Manchester City - (Duplicate mention; correct placement is already covered) From this analysis, the teams from the 2006–07 EPL season that were relegated but managed to return to the Premier League within the next 10 seasons are: 1. Aston Villa 2. Fulham 3. Newcastle United 4. West Ham United So, 4 teams from the 2006–07 EPL season were demoted over the next 10 seasons but managed to return to the Premier League. 20. In 2017–18, how many EPL teams were located in London? How many were situated in markets with fewer than 200,000 people? How many markets with more than 200,000 people did not have a team in 2017–18? Answer: In 2017–18, five EPL teams were location in London. Seven teams were in markets with fewer than 200,000 people. Out of the 23 cities in England with at least 200,000 people, 16 cities did not have a top division English soccer team in 2017–18. Math Questions 1. Given theseng demand curves for the Utah Jazz, answer the following questions: a. Calculate the own-price elasticity of demand for each demand curve. Answer: Own-price elasticity is ∆Q/∆P × P/Q From the above equation ∆P/∆Q = -0.0025 so ∆Q/∆P = - 400 So, for P = 90 ‒ 0.0025Q, Q = 12,000, Elasticity = − 400 × 60/12,000 = −2.00 for P = 90 ‒ 0.0025Q, Q = 18,000, Elasticity = − 400 × 60/18,000 = −1.00 for P = 90 ‒ 0.0025Q, Q = 24,000, Elasticity = − 400 × 60/24,000 = −0.050 b. If the Jazz increased its price by $10, what would happen to total revenue for each demand curve? Answer: For P = 90 ‒ 0.0025Q, Q = 12,000, revenue would fall by $220,000. For P = 90 ‒ 0.0025Q, Q = 18,000, revenue would rise by $80,000. For P = 90 ‒ 0.0025Q, Q = 24,000, revenue would fall by $80,000. c. If the firm decreased its price by $10, what would happen to total revenue for each demand curve? Answer: For P = 90 ‒ 0.0025Q, Q = 12,000, revenue would rise by $80,000. For P = 90 ‒ 0.0025Q, Q = 18,000, revenue would fall by $40,000. For P = 90 ‒ 0.0025Q, Q = 24,000, revenue would fall by $160,000. d. If the Jazz increased its profit by $10, what would happen to the total revenue for each demand curve? Answer: For P = 90 ‒ 0.0025Q, Q = 12,000, we cannot tell without information on cost. For P = 90 ‒ 0.0025Q, Q = 18,000, we cannot tell without information on cost. For P = 90 ‒ 0.0025Q, Q = 24,000, profit would rise. e. If the Jazz decreased its profit by $10, what would happen to the total revenue for each demand curve? Answer: For P = 90 ‒ 0.0025Q, Q = 12,000, we cannot tell without information on cost. For P = 90 ‒ 0.0025Q, Q = 18,000, profit would fall. For P = 90 ‒ 0.0025Q, Q = 24,000, profit would fall. 2. Given these scenarios for the Jazz, answer the following questions: •Ticket price increases by 10%, quantity demand falls by 5%. •Ticket price increases by 5%, quantity demand falls by 15%. •Ticket price decreases by 10%, quantity demand increases by 5%. •Ticket price decreases by 5%, quantity demand increases by 15%. a. What will be the impact of this change on total revenue? Answer: •Revenue would increase •Revenue would decrease •Revenue would decrease •Revenue would increase b. What will be the impact of this change on profit? Answer: •Profit would increase •Change in profit is unknown •Profit would decrease •Change in profit is unknown 3. Given the following information: •Own-price elasticity of ticket demand = ‒0.5 •Own-price elasticity of ticket demand = ‒0.8 •Own-price elasticity of ticket demand = ‒1.5 •Own-price elasticity of ticket demand = ‒2.4 a. If price increased by 10%, what would happen to: i. total revenue? Answer: •Own-price elasticity of ticket demand = ‒0.5, revenue would increase •Own-price elasticity of ticket demand = ‒0.8, revenue would increase • Own-price elasticity of ticket demand = ‒1.5, revenue would fall •Own-price elasticity of ticket demand = ‒2.4, revenue would fall ii. profit? Answer: • Own-price elasticity of ticket demand = ‒0.5, profit would increase •Own-price elasticity of ticket demand = ‒0.8, profit would increase •Own-price elasticity of ticket demand = ‒1.5, impact on profit would be unknown •Own-price elasticity of ticket demand = ‒2.4, impact on profit would be unknown 4. The Jazz learns that when it sells 15,000 tickets per game, total revenue is $1,000,000 per game. When it sells 16,000 units, total revenue is $900,000. From this information, what can we know about marginal revenue and own-price elasticity? Explain. Answer: The Jazz has increased quantity and revenue has declined. So marginal revenue is negative and own-price elasticity is, in absolute terms, is below 1. 5. The Jazz learns that own-price elasticity is ‒0.75. What does this tell us about total revenue and marginal revenue? Explain. Answer: Demand is inelastic, so marginal revenue is negative, and decreasing quantity (by raising price) will cause total revenue to rise. 6. Given the following: where T = ticket prices, F = food, MU = marginal utility, and P = price. For (a), (b), and (c): i. What action would a utility-maximizing consumer take with respect to the consumption of food and tickets? Answer: (a): MUtickets/Ptickets = 0.5 and MUfood/Pfood = 1.0 So the consumer would consume more food and fewer tickets. Answer: (b): MUtickets/Ptickets = 3.0 and MUfood/Pfood = 4.0 So the consumer would consume more food and fewer tickets Answer: (c): MUtickets/Ptickets = 2.0 and MUfood/Pfood = 1.0 So the consumer would consume more tickets and less food. ii. How would the action proposed in (i) impact the marginal utility of food and tickets? Answer: (a): Marginal utility of food would decline while marginal utility of tickets would increase. Answer: (b): Marginal utility of food would decline while marginal utility of tickets would increase. Answer: (c): Marginal utility of food would increase while marginal utility of tickets would decline. Chapter Four Study Questions The Competitive Balance Defense 1. What did the owners of the NL in 1879 argue must happen to player salaries for the league to survive? What did the NL do to reduce salaries at this time? Answer: The NL believed salaries had to decline. To accomplish this objective, the NL introduced the reserve clause. 2. How did the justification for the reserve clause change over time? Answer: Initially it was about reducing salaries, but eventually it changed to an issue of competitive balance. 3. Who was involved in the Federal League case? What did the Supreme Court 1922 ruling in this case establish? Why was that important? Answer: The Federal League case was between the owners of the Baltimore franchise in the Federal League and Major League Baseball. The Baltimore owners accused MLB of violating antitrust laws. The Supreme Court ruled in favor of MLB, arguing that since MLB was not engaged in interstate commerce the antitrust laws did not apply. This meant that players could not challenge the reserve clause on antitrust grounds. 4. What issues were involved in the 1953 Toolson case? How was it decided and was this decision justified? Why didn’t the Supreme Court reverse its 1922 ruling in the Federal League case? Answer: The Toolson case was a challenge to baseball’s reserve clause. The Supreme Court ruled again that baseball was immune to antitrust laws, not because it agreed with the 1922 Court but because it argued that it was up to Congress to make sure antitrust laws applied to baseball. 5. In what year was the first collective bargaining agreement reached in MLB? What were owners required to do with respect to a player’s contract as a result of this agreement? What was introduced with the 1970 collective bargaining agreement? Answer: The first collective bargaining agreement reached in MLB was in 1968. Owners were required to give the players a copy of the contract and all the rules that applied to the players. The 1970 agreement introduced binding arbitration. 6. In 1975, what ruling did an arbitration panel issue in the case of Andy Messersmith and Dave McNally? Why did this ruling introduce free agency? Answer: The MLB’s reserve clause only held for one year and was not a clause that tied a player to a team indefinitely. This introduced free agency because it meant that once that year expired a player could sign with any team. 7. How did Charles Finley, owner of the Oakland A’s, think baseball should respond to free agency? Answer: He thought baseball should allow all players to become free agents. This would increase the supply of players and drive down the price. 8. Why was the "reverse-order draft" invented? Answer: This was invented in the National Football League in the 1930s. It was done to stop teams from bidding up the price of players entering the league. The league also claimed it was done to promote competitive balance. 9. Why does Simon Rottenberg argue that a reserve clause is not necessary to prevent rich teams from accumulating talent? Answer: Because teams can sell talent under the reserve clause, players will migrate to where they generate the highest revenue, just as they would in a free market. 10. With respect to the NBA, MLB, NFL, and NHL, which labor market institutions exist? Answer: The NBA has a payroll cap, individual salary cap, rookie salary restrictions, luxury tax, and reverse-order draft. The MLB has a luxury tax, reverse-order draft, and salary arbitration. The NFL has a payroll cap, rookie salary restrictions, and reverse-order draft. The NHL has a hard cap, individual salary cap, rookie salary restrictions, reverse-order draft, and salary arbitration. 11. The text presents a “simple snapshot” of how league institutions impact competitive balance. What is the basic story this snapshot tells? Answer: The results are very inconsistent, suggesting the institutions do not impact balance as advertised. 12. What two pieces of evidence must a theory of competitive balance be able to explain? Answer: Any theory must tell us why balance varies by sport and why balance in sports like baseball and hockey has improved over time. 13. According to Stephen Jay Gould, why did the 0.400 hitter vanish in baseball? Answer: Athletic talent is normally distributed. At the far right tail of the distribution are the very best players. When leagues don’t draw upon a very large population of talent, the league will have to employ some players at the far right tail and others much closer to the mean. In this scenario the exceptional players will perform well beyond the average hitter, and some of them will be able to post a 0.400 batting average. As the underlying population expands, though, more players in that far right tail will be available, so it becomes much harder for a player to perform well beyond what we see from an average player. Consequently, the 0.400 hitter vanishes. 14. Why did balance improve in baseball and the NHL? Answer: The underlying population of talent in each sport has expanded. This means that each league has a greater supply of extremely talented players, and therefore games have become more competitive. 15. Why does the NBA have less balance than other major North American sports? Answer: Although the underlying population has expanded, basketball suffers from the short supply of tall people. The average height in the NBA is 6 feet 7 inches, and many players are over 7 feet tall. The supply of such people globally is quite small, so of all the major sports, the NBA persistently draws upon the smallest population of potential athletes. 16. Why did Walter Neale believe the Yankees must pray, “Oh Lord, make us good, but not that good”? Do the data confirm Neale’s analysis? Answer: Neale believed that demand for a team would decline if the team dominated too much. Therefore, a team like the Yankees would be better off not winning the World Series every year. The data reviewed in the text did not consistently confirm this prediction. It does not appear that competitive balance is that big of a factor in consumer demand. 17. According to Schmidt and Berri (2001) and Humphreys (2002), what is the relationship between competitive balance and attendance in Major League Baseball? Answer: Neither study found that competitive balance had a very large impact on attendance in baseball. Schmidt and Berri (2001) and Humphreys (2002) found that competitive balance positively affects attendance in Major League Baseball. When teams are more evenly matched, games are more exciting and unpredictable, which boosts fan interest and attendance. Fans are more likely to attend games when the outcomes are less predictable and teams have a fair chance of winning. Thus, increased competitive balance leads to higher attendance figures. 18. According to Coates and Humphreys (2010), do fans want the competitive balance that various league institutions are designed to create? What do these authors think fans really want? How does that analysis change the traditional view that economists (i.e., Rottenberg and Neale) have of how competitive balance impacts demand in sports? Answer: Coates and Humphreys (2010) did not think fans wanted competitive balance. What they prefer is the home team winning by a larger margin. This contradicts the view of Rottenberg and Neale that competitive balance is very important to the survival of a league. 19. We have seen that competitive balance is not quite as important to the demand of sports leagues. But let’s say you were charged with improving the balance in a league. Given what was learned in the text, what policies would you advocate to accomplish this objective? Answer: The answer to the question would not include any of the policies leagues tend to employ, so there should be no mention of drafts, salary caps, payroll caps, and so on. The student does have to think of things to increase the talent base the league draws upon. For example, in baseball there should be a greater investment in little league programs. This could increase the potential talent base and improve the quantity of top talent available. To improve competitive balance in a sports league, you could advocate for a range of policies based on principles observed in sports economics and management. Here’s a detailed approach to fostering greater balance: 1. Revenue Sharing • Policy: Implement or enhance revenue sharing mechanisms to ensure that all teams have a more equal share of league-wide revenues. • Purpose: Reduces financial disparities between teams, allowing smaller or less successful teams to compete on a more level playing field. 2. Salary Caps • Policy: Introduce or adjust a salary cap to limit the total amount of money teams can spend on player salaries. • Purpose: Prevents wealthier teams from outspending others and creating a significant talent disparity. 3. Luxury Taxes • Policy: Implement a luxury tax system where teams that exceed a certain payroll threshold pay a tax, which is then redistributed to other teams. • Purpose: Discourages excessive spending and provides additional funds to teams with lower payrolls. 4. Draft Systems • Policy: Use a draft system where teams select players in a structured manner, with the worst-performing teams getting priority picks. • Purpose: Helps distribute talent more evenly across teams, giving struggling teams access to top prospects. 5. Salary Floors • Policy: Set a minimum payroll level (salary floor) that teams must meet. • Purpose: Ensures that all teams invest in competitive rosters and prevents teams from spending too little. 6. Equalization Measures for International and Domestic Transfers • Policy: Implement rules to regulate the transfer market, such as limits on the number of high-profile signings or restrictions on transfer fees. • Purpose: Prevents a few teams from dominating the transfer market and ensures a fair distribution of talent. 7. Revenue and Resource Sharing Programs • Policy: Establish programs that provide additional resources or support to lower-performing or financially weaker teams. • Purpose: Helps underfunded teams improve their facilities, training, and overall competitiveness. 8. Performance-Based Incentives • Policy: Create incentives for teams to perform well in both domestic and international competitions, such as financial rewards or increased resources. • Purpose: Encourages teams to invest in improving their performance and competitive edge. 9. Youth Development and Academies • Policy: Support and invest in youth development programs and academies. • Purpose: Ensures a steady flow of talent and promotes long-term competitiveness across the league. 10. Fan Engagement and Market Development • Policy: Implement strategies to increase fan engagement and expand the market, including marketing initiatives and community programs. • Purpose: Increases overall revenue and financial stability for all teams, supporting a more balanced league. 11. League Governance and Oversight • Policy: Strengthen league governance with oversight committees to ensure fair play and adherence to balance-promoting policies. • Purpose: Maintains the integrity of competitive balance initiatives and prevents manipulation or circumvention of rules. By adopting and implementing these policies, you can address various aspects of competitive imbalance and work towards creating a more level playing field in the league. 20. Imagine you were named league commissioner and were charged with maximizing the profits of the league. Given what you learned in this chapter, what policies would you advocate to accomplish this objective? Answer: We learned in the chapter that wins are worth more in larger markets and competitive balance is not that important. So what you would want to do is create mechanisms that would increase the amount of talent located in larger markets and diminish talent in smaller markets. 21. Competitive Balance Problem Given the following standings data from the AL and NBA, which league is more competitive in terms of the standard deviation and the Noll‒Scully ratio? Note: Baseball played 154 games in 1954. The NBA’s schedule was 72 games long in 1953‒54. Hint: You might copy these data into Excel to do the calculations. Answer: The standard deviation of winning percentage for the AL in 1954 was 0.147. The standard deviation of winning percentage for the NBA in 1953–54 was 0.154. The idealized standard deviation for the AL in 1954 was 0.040. The idealized standard deviation for the NBA in 1953–54 was 0.059. The Noll–Scully for the AL in 1954 was 3.65. The Noll–Scully for the NBA in 1953–54 was 2.62. So the NBA in 1953–54 was more competitive than the AL in 1954. Chapter Five Study Questions Labor Negotiations in Sports 1. What was Babe Ruth paid in nominal and real terms in 1930? Which player was the first to be paid more than Ruth in nominal terms? Which player was the first to be paid more than Ruth in real terms? Answer: He was paid $84,098 in nominal terms and $1.21 million in real terms. Joe DiMaggio was the first to be paid more than Ruth in nominal terms. DiMaggio in 1949 was paid $100,000. Mike Schmidt in 1977 was the first player to be paid more than Ruth in real terms. 2. Can you determine “overpaid” and “underpaid” by just looking at the size of a worker’s salary? Why or why not? Answer: “Overpaid” or “underpaid requires” that we compare a person’s salary to what the person is generating in revenue for his or her employer. So a person paid $5 million is “underpaid” if that person generates $7 million in revenue. 3. How does Joan Robinson define “exploitation”? Answer: A worker is exploited if the wage the worker is paid is less than his or her marginal revenue product. 4. How did Karl Marx and J. B. Clark characterize the treatment of workers in a capitalistic system? Answer: Marx argued that workers are exploited in a capitalistic system. Clark argued that capitalism results in workers being paid what they are worth. 5. What is the “winner’s curse”? Answer: In a bidding process, the winner of the bid is likely to be the party that most overvalues the object being bid upon. Hence, the winner of the bid will likely overpay, making winning an auction actually a curse. 6. What is the primary source of conflict between owners and players in professional sports? Answer: Players want a labor market where teams are able to bid on players without any restrictions. Owners prefer a labor market where competition is restricted. 7. In what years did baseball see a labor dispute from 1970 to 2000? When was this dispute a “strike” or a “lockout”? How many times were games canceled (and when)? Answer: Baseball saw labor disputes in 1972, 1973, 1976, 1980, 1981, 1985, 1990, and 1994–95. All were strikes except for 1973, 1976, and 1990. Games were lost in 1972, 1981, and 1994–95. 8. When have strikes and lockouts occurred in the NFL, NBA, and NHL? Why have lockouts become more common in recent labor disputes? Answer: The NFL lost games in 1982 and 1987, the NHL in 1994 and 2004–05, and the NBA in 1998–99 and 2012–13. The four most recent dispute were lockouts. It appears the owners have learned to lock out players early in a season to prevent a playoff disrupting a strike later on. 9. With respect to strikes and lockouts, a. briefly explain the difference between a strike and a lockout. Answer: A strike is when workers do not come to work. A lockout is when owners prevent workers from working. b. at what point in a season are players likely to strike? Explain your answer. Answer: Players are likely to strike at the end of the season. Players are only paid for the regular season. At the end of a season, players have essentially been paid. Owners, though, earn substantial revenues from the playoffs, revenues that are lost from a strike. c. at what point in a season are owners likely to lock out the players? Explain your answer. Answer: Owners tend to lock out players at the start of a season. Players are then not able to get paid while the playoff revenue is still months from being threatened. 10. How does the frequency of strikes and lockouts in professional sports in North America compare to the rest of the economy? What explains the difference? Answer: Relative to the rest of the economy, professional sports leagues are 17 times more likely to see a strike or lockout. The explanation for this is simple. There are only a few people involved in professional sports, and they are fighting over large sums of money. 11. Why did baseball’s labor union have more success than the NFL’s player union? Answer: There are examples in baseball of players who were not stars becoming stars. So any effort to restrict the pay to stars could potentially impact the earnings of every player. This is not possible in football. The back-up offensive tackle will never become the star quarterback on a team. So the offensive tackle will not sacrifice to increase the earnings of a player that the offensive tackle can never become. 12. According to Schmidt and Berri (2004), what has historically been the long-term impact of player strikes and lockouts on attendance in MLB, the NFL, and the NHL? Answer: Fans tend to return very quickly. Attendance returns to the prestrike or prelockout levels in the season after the players return. 13. Attendance in baseball declined from 1993 to 1996. Why do Schmidt and Berri (2004) argue that this decline is not about the strike that occurred in 1994‒95? Answer: Baseball had a very large attendance spike in 1993. It was the largest spike since 1946 (end of World War II). This spike was linked to the addition of the Colorado Rockies and Florida Marlins, two expansion teams who played in football stadiums. After the 1994–95 strike, attendance did return in 1996 to what we saw in 1992 (before the spike). It seems likely that the 1993 spike was temporary and the 1992 attendance level is the better comparison for 1996. 14. Why do the fans tend to return when the players return from a strike or lockout? Answer: Our model of individual behavior helps us understand why fans can’t stay angry. Fans go to games because the utility or happiness of seeing the game exceeds the price of the ticket. When games are taken away, this happiness is taken away. So fans are angry. But when the games return, again the level of happiness created by games exceeds the price and therefore fans once again return. 15. If you really like free markets, whom should you support in labor-market negotiations in sports: the owners or players? Answer: The players want a free labor market, and the owners want market restrictions. So people who really like free markets should support players in labor disputes in sports. 16. Why have the owners in baseball often failed in their negotiations with players? How does the story of Jerry Reinsdorf and Albert Belle illustrate this point? Answer: Owners in baseball were historically divided between small and large markets. The teams in large markets tended to spend more on players. Because the owners were not cohesive, in labor negotiations they tended to work against each other. The signing of Albert Belle illustrates this point. Owners in 1994 and 1995 insisted that spending on players had to come down. Right after the dispute ended, though, Reinsdorf—owner of the Chicago White Sox—signed Belle to a very large contract, hence contradicting the owners’ position throughout the 1994 and 1995 labor dispute. Solution Manual for Sports Economics David Berri 9781319106157
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