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1 Use the all or nothing demand curve to explain why the IOC is unlikely to accept a bid by Los Angeles to host only the track and field events in its bid for the 2020 Summer Olympics Answer In Figure 6 1 the deadweight loss that results from a simple monopoly price is area abc When the monopolist sets price p and quantity at Q the deadweight loss is transferred to the monopolist s revenue and is not a loss to society The consumer loss that is created aec is not a deadweight loss but a transfer to the monopolist as well Thus efficiency improves but of course equity is adversely affected from the consumers standpoint In the case of the Los Angeles Olympic bid in effect the city is forced to purchase more events that it would normally choose such as say equestrian rifle rhythmic gymnastics and in homage to Saturday Night Live men s synchronized swimming in order to get the events it wants such as men s basketball and track and field 2 Use the rent gradient to show why New York did not build a new stadium for the Yankees in Figure 6 1 midtown Manhattan Answer The city would not likely build a new stadium for the Yankees in the middle of town due to the relative value of the land that would be required a high value of the rent gradient The land that lies on the outskirts of town is less valuable than the land at the center That is one reason why Yankee Stadium and Shea Stadium were built in the outer boroughs of Bronx and Queens Similarly in 2005 New York City s bid to host the 2012 Olympics faltered when public support for a new upper West Side stadium for the NFL s Jet s an integral piece of the city s Olympic bid waned due to estimated construction costs that exceeded 1 1 billion mainly due to the cost of the land required for the project 2011 Pearson Education Inc Publishing as Addison Wesley Answer Answer 54 Leeds von Allmen Economics of Sports Fourth Edition 3 Critics of referenda often complain that this method of determining expenditure often results in the community spending more than it really wants to Do they have a point Explain your answer The referendum itself is likely to bias expenditure upward due to the all or nothing nature of the choice Voters do not get to decide on the precise public commitment If they view it as better than nothing they will support it Additional overspending can occur for several additional reasons First the referendum may commit the city to building a stadium that subsequently suffers significant cost overruns for which the city may be responsible Second once a referendum is approved it may increase the bargaining strength of the team with respect to the details of the stadium amenities which may also increase the cost to the city as was the case in Cleveland Finally because the benefits from the project are concentrated in the hands of a few owners and players while the costs are small and diffuse spread over many taxpayers political economy suggests the owners will have an advantage over the taxpayers The owner has the incentive to commit significant resources to campaigning while no individual taxpayer has a strong incentive to strongly oppose the plan Therefore stadium proponents typically outspend opponents on election lobbying by a wide margin 4 Why does the fact that the NFL does not have a franchise in Los Angeles give its teams greater leverage with their host cities than teams in the other sports have Los Angeles has the second largest fan base and second largest media market The potential profit from the Los Angeles market gives NFL franchises a more lucrative alternative market for franchises that are thinking of moving Since teams can make a credible threat to move to L A this in turn gives the NFL teams much more bargaining power with their home cities than teams in other leagues have In MLB and the NHL due to recent over expansion there are few remaining cities that could host a team therefore when teams threaten to leave cities can often call their bluff This is one reason MLB attempted to contract two teams back in the early 2000s Further evidence of the value of an open market to the NFL comes from the last expansion of the league The NFL had two lucrative offers of 600 million each from Houston and L A during the last expansion The league easily could have accepted both offers and expanded by two teams but decided that the value to the league of an open market in L A exceeded the value of an immediate 600 million paycheck 5 If a new baseball stadium has only a very short term impact on a team s attendance why do MLB teams still pursue them Answer While attendance falls back to previous levels after a few years the teams still have the potential to increase their profits because of new revenue sources New stadiums have had far more luxury boxes than the stadiums they have replaced In addition teams generally get a larger percentage of the revenue from luxury boxes and other sources of venue revenue such as parking or concessions Next the tickets themselves are generally 2011 Pearson Education Inc Publishing as Addison Wesley Chapter 6 The Public Finance of Sports The Market for Teams 55 more expensive in the new facilities Finally if the overwhelming majority of the stadium is paid for by taxpayers even a short term increase in ticket sales is worth the very small outlay that some teams must provide 6 The winner s curse suggests that a teams that do well one season will do less well the next season b teams that win will be a burden to the team that hosts them c cities often lose teams with winning records d cities that attract a franchise typically pay too much Answer d The winner s curse says that the winner of an auction will typically pay more than the item is worth This can happen either because the winning bidder overestimates the value of the item or because he or she attaches a value to winning the auction as well as to the item being auctioned off 7 True or False A monopolist can force a consumer to buy a quantity larger than that dictated at by the consumers demand curve at a given price Answer True In the case of all or nothing demand Figure 6 2 the monopolist forces the consumer to buy Q2 units at a price of P1 The consumer goes along as long as the consumer surplus measured by area AP1E is larger than or equal to the consumer surplus loss measured by area EFG For this very reason you may buy a foot long hot dog at a ball game eat some and throw the rest away because the consumer surplus from the part you eat is

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BU EC 385 - PS 5

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