BU EC 385 - Midterm #1 Solutions 2

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Boston University EC385 Economics of Sports Solutions Professor Todd Idson Spring 2018 Midterm 1 Instructions Answer all questions below in your blue books be sure to show all of your calculations Please label all parts of your diagrams and draw them large enough so that all aspects can be readily assessed 1 Omitted variable misspecification is when a variable is not taken into account i e included in the regression but it does affect the dependent variable This will bias the estimated effect of any included variables that are correlated with the omitted variable The example focused on in this paper is estimating an attendance function Turnover was always ignored in the earlier models when we estimate attendance function However fans care about roster stability i e form attachments to players Attendance is negatively correlated with turnover Thus turnover should belong in the regression So firstly the author measure the degree of roster turnover different ways to measure this but they opt for weighting by salary to give name players a greater weight importance and tests whether they have a statistically and quantitatively significant effect on attendance As a result the coefficient of turnover is negative and significant Then author pointed out if we omitted the turnover variable it will cause misspecification problem here 1 winning percentage has a positive effect on attendance 2 roster turnover has a negative effect on attendance and 3 winning percentage and roster turnover are negatively correlated As a result if you omit roster turnover from the attendance regression the effect of roster turnover on attendance will be partly reflected in the estimated winning percentage effect of turnover acting to upwardly bias the estimated effect of winning percentage on attendance To see this note that low turnover yields higher attendance and low turnover is associated with higher winning percentage and higher winning percentage leads to higher attendance i e part of the estimated positive effect of winning percentage on attendance will also be reflecting the fact that when winning percentage is high turnover tends to be low which in itself is exerting a positive effect on attendance If turnover was included in the regression then the estimated winning percentage effect would fall More specifically consider simple estimation model as follow True model Misspecification Note that is negative is also negative and is always positive i e is positive and it means that the coefficient of winning percentage is upwardly biased if turnover is omitted in the regression Not necessarily The restriction will break a vertical integrated firm into separate 2 Answers upstream and downstream components This may actually worsen the well being of the consumer because the downstream firm will buy at an inflated monopoly price P up below from the upstream firms and treat this as the marginal cost and then price accordingly charging P down If it was vertically integrated i e one firm in the bottom diagrams then the media outlet would cost the games at marginal cost i e P up would be treated as the MC at the second stage and hence charge a lower price for the broadcast 3 Answer If the Bills practice second degree price discrimination they can effectively charge a price equal to the value of the eight tickets i e the sum of the WTP for each ticket P 135 120 105 90 75 60 45 30 660 for an 8 game package This would allow the team to capture all of the consumer surplus 4 Answer The owner can claim a depreciation expense of 40 million per year 200 million 5 The reduction of profits by 40 million which would have been taxed at a rate of 40 percent saves the owner 16 million per year or 80 million over the five year period 5

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# BU EC 385 - Midterm #1 Solutions 2

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