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 1 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 2 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