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Problem Set #31. Suppose that the demand curve for tickets to see a football team is given by Q 100,000  100p and marginal cost is 0.(a) How many tickets would the team be able to sell (ignoring capacity constraints) if it behaved competitively and set p  MC?(b) How many tickets would it sell – and what price would it charge – if it behaved like a monopoly. (Hint: In this case the marginal revenue curve is given by MR  1000  0.02Q.)Answer: (a) If the team sets prices at competitive levels, p  MC, with MC  0. Plug p  0 into the demand equation, Q  100,000  100p, so Q  100,000.(b) If the team acts like a monopoly, it will set MC  MR.MR  1000 – 0.02Q  0  MCQ  50,000P  $5002. Why was the limited exemption form antitrust laws so crucial to the developmentof the NFL?Answer: The limited exemption allowed the NFL to act as a monopolist over one of its most important sources of revenue—broadcast rights. The monopoly position granted by the limited exemption meant that teams would not undercut oneanother in negotiations with television networks. The agreement also had the effect of galvanizing the owners into a unified group rather than a loose collection of teams that competed both on and off the field. The off-field cooperation brought about by the joint television contracts and the sharing of resulting revenues significantly strengthened the league.3. Suppose that all St. Louis Rams fans feel the same as Jane, who values every game at $28, regardless of the opponent. Can the Rams increase profits by bundlingthe Rams–Bears game with three others? Why or why not?Answer: Bundling will not increase team revenues in this case. Product bundling works when firms take advantage of differing demand across products. In this case, however, the demand is the same for all games, so product bundling will be ineffective.4. Suppose the typical Buffalo Bills fan has the following demand curve for Bills football games: P  120  10G where G is the number of games the fans attends.(a) If the Bills want to sell the fan a ticket to all eight home games, what price must they charge? What are their revenues?(b) Suppose the Bills have the chance to offer a season ticket that is good forall eight home games, a partial season ticket that is good for four home games, and tickets to individual games. What price should they charge? Whatis their revenue?Answer: (a) If the Bills want to sell tickets to all 8 games by selling eight individual tickets, they have to set the price P  120  10(8)  120  80 $40. This yields revenue of $40(8)  $320 from each fan.(b) If the Bills practice second degree price discrimination, they can effectively charge P  120  10(1)  120  10  $110 for single games, P  110  100  90  80  $380  $95/ticket for a 4-game package, and P 110  100  90  80  70  60  50 +40  $600  $75/ticket for an 8-game package. Revenues are clearly much higher for the price discriminating example than one where the team wishes to sell as many as 8 tickets to some fans but must sell tickets individually.5. An athletic director was once quoted as saying that he felt his school spenttoo much on athletics but that it could not afford to stop. Use game theory to model his dilemma.Answer: This is an example of the prisoners’ dilemma. If all schools either spend a lot or spend a little, they compete evenly. The problem arises because no school wants to suffer the consequences of being outspent by others. Thus, high spending is the dominant strategy. See the matrix below.School ASchool B High Spending Low SpendingHigh SpendingEven competitionwith high costsB dominates. B’s additional revenues exceed the higher spending. A loses revenue.Low SpendingA dominates. A’s additional revenues exceed the higher spending. B loses revenue.Even competition with low costs6. Baseball has not been convicted of violating the Sherman Antitrust Act because(a) baseball is the national pastime.(b) baseball was the first sport to institute the Reserve Clause.(c) the Sherman Antitrust Act does not apply to sports.(d) baseball has been exempt from the Antitrust laws.Answer: (d) Thanks to the 1922 Federal Baseball ruling, baseball received an exemption from antitrust laws that was later denied to other sports. While the Curt Flood Act now limits the exemption, baseball still has much greater freedom from antitrust legislation than the other sports.7. The monopoly power that the NCAA held over TV networks fell apart due to(a) the prisoner’s dilemma.(b) the winner’s curse.(c) the outlawing of the reserve clause.(d) the entry of new schools into the NCAA.Answer: (a) Many cooperative arrangements fall apart because of the prisoner’s dilemma, as each agent feels that it would be better off acting alone as long as the others continue to follow the agreement. When all agents act on these sentiments, however, everyone becomes worse off.8. The antitrust exemption that Major League Baseball enjoys(a) is shared by all major professional sports.(b) is not shared in any way by other professional sports.(c) is shared to a limited extent by the other professional sports.(d) is limited to baseball’s dealings regarding television and broadcast rights.Answer: (c) While other sports have long been denied the blanket exemptionfrom antitrust laws that baseball has, they have had limited exemptions from antitrust laws. These limited exemptions have allowed the leagues to negotiate broadcast rights or to merge with rival leagues.9. Some economists argue that cooperation between franchises should not be considered in violation of antitrust laws. What argument do they use?Answer: Some economists regard leagues as multiplant firms. According to thisview, sports franchises are members of a single entity rather than competing firms. Their cooperation should not be considered any less normal than a single firm’s individual departments getting together. Major League Soccer, in particular, is organized as a single-entity league where each team is considered an individual branch of the main company. In Fraser v. MLS (2002), the U.S. Court of Appeals upheld the league’s organizational structure as

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BU EC 385 - Problem Set #3

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