Econ 149 Midterm 2

What are some of the costs of having uneven prize distributions in rank order tournaments?

1) Cheating or sabotage. When there is an uneven prize distribution in rank order tournaments, athletes may resort to cheating or sabotage. Ex) Women's figure skating 2) High reward structure puts pressure on athletes + coaches to succeed

Explain why the public share of the construction costs of a new stadium may understate the true burden to the city

1) Costs do not reflect any additional costs associated with construction of new stadium (e.g. new roads built, providing utilities, police services and sanitation) 2) Costs do not reflect the opportunity costs the city incurs when a new stadium is built (i.e. Phoenix spent $455M on Cardinals stadium. Money could have been used to finance schools, roads, health care etc...)

Describe the three distinct historical phases of stadium funding.

1) Entrepreneurial Period (1890-1930): Baseball owner built and maintained own ball parks. Stability of teams, owners kept teams playing in facilities built by owners. Ballparks typically had "park" v "field". Most ballparks had name of team owners. 2) Civic Infrastructure Period (1953-1980): Franchises became more mobile. Cities would bid against each other to attract or retain teams. Public often paid entire construction of stadium construction. Stadiums named after countries that funded them or for some geographical feature. 3) Public-Private Partnership Period (1980-Present): State/local government pay for roughly half of construction cost, team/league will pay balance. Less public subsidies, teams seek other funding sources (PSL or stadium naming rights)

What are the assumptions we make for the demand of labor?

1)Firms use capital (K) and labor (L) in the production process 2)K is fixed in short-run. If firms want to produce more; hire more labor (L) 3)MPL (Marginal product of labor) decreases as labor increases 4)Assume firm is perfectly competitive (MR=P)

What are the three salary cap exceptions that exist in the NBA?

1)Midlevel exemption: team is allowed to sign 1 player to average NBA salary even if team is already over (or would go over) the salary cap 2)Rookie exemption: team is allowed to sign a rookie player to his first contract even if the team would go over the salary cap 3)Larry Bird exemption: team can resign player already on their roster (as long as player has never been a free agent) even if resigning would put team over salary cap

Discuss the historical overview of franchise movement in baseball.

1903-1953: "Golden Age" of baseball where there was franchise stability. No team entered, left or changed cities. 1953-1954: 3 teams that moved were secondary teams in their cities, few fans cared. Relocation of Brooklyn Dodgers was a gamechanger. Owner Walter O'Malley moved the most successful, profitable team in NL. Teams was beloved by Dodger fans.

What are bonds? What are municipal bonds? Explain the reason why issuing municipal bonds is a popular way to raise revenues for stadium construction. Explain how municipal bonds can export the tax burden to future generations.

A bond is a promise to pay the bondholder a fixed amount (face value/par value) at a future date (maturity). Municipal bonds are bonds that are issued by local governments. Issuing municipal bonds to finance stadium construction would reduce the total cost of construction since municipal bonds pay less interest. Future generation will have to pay for the stadium, even though the stadium no longer exists or has been abandoned.

What is the difference between a hard salary cap and a soft salary cap? Which one does the NFL have? Which one does the NBA have?

A hard salary cap is a salary cap that can't be exceeded for any reason. A soft salary cap allows teams to sign players that would result in the team going over the salary cap under certain conditions. NFL: hard NBA: soft

What is a luxury tax? How does the salary cap work in the NBA? How does the salary cap work in baseball? How effective has the salary cap been in limiting spending by big market teams?

A luxury cap is a surcharge on teams whose payroll exceeds a specific level. NBA: teams pay a tax rate that increases for every $5M by which a team is over the luxury tax threshold. MLB: Teams pay a 17.5% tax rate on the amount they are over the threshold. Evidence that luxury taxes have not been very effective.

What is a reverse order draft? How is it designed to promote competitive balance? Why do some critics argue that it worsens competitive balance? Why do some leagues implement a draft lottery?

A reverse order draft is one in which teams select new players entering the league according to their standings in the previous season. Purpose of reverse order draft: Allocate best new players to the weakest teams to improve competitive balance. Some have argued that reverse order draft has worsen competitive balance. Once a team is eliminated from making playoffs, have strong incentive to lose and improve draft position. In response, NHL and NBA implemented a draft lottery. Team with worst record has best adds to get the top pick, but not guaranteed. Reduces incentive for teams to lose, reduces chances that weakest team will get best incoming player.

What is a salary cap? Which of the four major professional sports leagues does not have a salary cap?

A salary cap is a restriction on how much a team is allowed to spend on total player payrolls. Sets a maximum (ceiling) on what teams can spend on players. MLB has no salary cap.

What are sin taxes. Why are sin taxes a popular method to raise revenues?

A sin tax is a tax imposed to raise revenues and discourage undesirable activities

What is an externality? What is a positive externality? What is a negative externality? When will the market produce less output than is socially optimal? When will the market produce more output than is socially optimal? Under what circumstances should the government subsidize a sports team, stadium or sporting event?

An externality is a cost or a benefit imposed on a third party not directly involved in the transaction. A positive externality occurs when a third party not directly involved in a transaction receives benefits from the transaction. A negative externality occurs when a third party not directly involved in a transaction incurs a cost from the transaction. When a positive externality exists, the market will produce less output than is socially optimal. When a negative externality exists, the market will produce more output than is socially optimal.

What are the average salaries for professional salaries? How do these salaries compare to the average household income?

Average NBA salary: $7.7 M Average NFL salary: $2.91M Average NHL salary: $2.78M In 1970 average baseball salary: $29,303 In 2020 average baseball salary: $4,400,000 Increased by 14,915% In comparison, per capita GDP increased by 121.8% during same period

How much of new sports facilities have been financed by the public and by teams?

Between 1995-2009, $18 billion spent on new sports facilities (or improvements). Approximately 40% financed by teams and the rest by the public sector.

What is between season variation? How is between-season variation measured? What does a low standard deviation imply in between-season variation? What does a high standard deviation imply in between-season variation?

Between season variation looks at team's performance over several seasons by considering the change in a team's standing each year. A high variation implies more competitive balance. A low variation implies less competitive balance.

Where are the best seats in a football stadium? Where are the best seats in baseball stadium? What is the biggest drawback of a multi-purpose stadium in terms of seating?

Biggest problem with multipurpose stadiums is that playing field baseball and football are different. This ideal sets are different.

Why do hockey and basketball teams still share multi-purpose arenas while football and baseball do not anymore? In arenas where hockey and basketball share an arena, which team is typically the primary tenant?

Both sports play on a rectangular surface with scoring on opposite ends of rectangle. Best seats for basketball also best seats for hockey.

Explain why standard deviation of winning percentage cannot be used to compare competitive balance across sports. What is the "ideal" standard deviation? Use the "ideal standard deviation" with actual standard deviation to derive a ratio.

Cannot use within season to compare competitive balance between sports league. Standard deviation is affected by number of games played. The ideal standard deviation is the standard deviation of the league if each team had a 0.5 winning percentage. Calculate ratio: within season variation/ideal standard deviation

What is competitive balance? Why is competitive balance important for leagues?

Competitive balance is the degree of parity within a league. Competitive balance is the key to a successful league, if few teams win, most teams lose then fans will lose interest in the league

Why would the government find it more attractive to tax a good that has inelastic demand? Illustrate this graphically.

DWL is smaller if good has inelastic demand. If government wanted to minimize the DWL to society from a tax to finance a new stadium should tax hospitals not hotels.

What is the difference between explicit costs and implicit costs? What is the difference between accounting profits and economics profits? Use the difference between accounting profits and economic profits to explain why the Brooklyn Dodgers, the most profitable team in the National League, would move to Los Angeles in 1957.

Explicit costs are costs of resources used in the production process. Implicit costs are the opportunity costs of the firm. Accounting Profit: Total revenue - Explicit costs Economic Profit: Total revenue - Explicit costs - Implicit costs Dodgers suffering negative economic profit by staying in Brooklyn

What are some possible positive externalities associated with a sporting event/team?

Fans will spend in local businesses: stores, hotels etc. Job opportunities for local residents

What is free agency? Why do some argue that free agency would hurt competitive balance? Why do some argue that free agency would have no impact on competitive balance?

Free agency is a system where a player can sell their services to the highest bidder. Many teams owners have argued that free agency has hurt competitive balance. Teams in large media markets have more revenue, can outbid teams from smaller media markets and will have all the good players. Teams from large media markets will outperform teams from small market teams. Economist argue that eliminating free agency will not impact competitive balance. Only affect who gets paid, not where players will play

What is the Herfindahl-Hirschman Index (HHI)? How is the HHI calculated? What is the maximum value that the HHI can have? What is the minimum value that HHI can have? Does a high or low HHI indicate competitive balance?

HHI measures the competitive balance by calculating the frequency of championships by teams. The maximum value is 1. the minimum value is 1/N The closer the HHI is to 1 the less competitive balance in league.

Discuss the potential inequities that may arise from stadium construction between urban residents and suburban residents. How have some communities sought to address these inequities?

Horizontal equity: Takes into account that suburban residents are likely to receive just as much benefit from a new stadium as urban residents will. Suburban households are generally wealthier than urban households. Given high cost of attending sporting events, most fans enjoying game are suburban fans - should pay more in taxes

What is the formula for present discounted value (PV)? How can present discounted value be used to determine if a stadium should be built or a sporting event should be hosted?

If cost of construction of stadium (C) exceeds the PV of benefits from stadium, then the stadium should not be built

What is the benefit to team owners of having more luxury boxes in new stadiums?

In NFL, luxury box revenue doesn't have to be shared with other teams. High revenue teams > have newer stadium > have more luxury boxes

What are multi-purpose stadiums? What are the differences between multi-purpose stadiums and baseball-only and football-only stadiums in terms of seating capacity?

In past, many baseball + football teams shared a stadium called multipurpose stadium. Multipurpose stadiums were circular, too big for baseball, too small for football. Avg baseball capacity: 43,074 (53,048 in multipurpose) Avg football capacity: 71,247 (60,779 in multipurpose)

Discuss why NASCAR has a reward structure that is much more even than other individual sports such as golf or tennis.

In racing all drivers are on the same course at the same time. A large gap in payouts result in a "win at all cost" mentality. More reckless driving > more serious (even fatal) accidents.

What is the invariance principle? Explain how the elimination of free agency would still result in good players playing for large market teams. Who benefits if free-agency is eliminated?

Invariance principle argues that the allocation of resources does not vary when property rights change. Team owners have exclusive rights to a players services (reserve clause) Elimination of free agency results in stary players for large media markets.

What is investment? Describe the two types of investment in human capital: general training and specific training. Give examples of both types of training in sports. Why might teams be willing to pay for specific training over general training?

Investment is the commitment of current resources in the expectation of receiving future benefits. General training increases worker's productivity and is useful to all employers. Ex) Basketball. General skills: how to dribble, pass the ball, make free throws, hit jump stats. Specific training are skills that are useful to only 1 firm. Ex) Learning a team's playbook, learning a specific system, learning hand signals in baseball. Skills are not transferable, players less likely to leave. Teams will be willing to pay for investment in specific skills.

What is the Lorenz curve? How is the Lorenz curve derived? If a league was perfectly balanced how would the Lorenz curve appear? How can the Lorenz curve be used to measure competitive balance?

Lorenz curve shows how evenly distributed a resource is in a given population. In a league with perfectly competitive balance, the Lorenz curve will be a straight line. The more the Lorenz curve sags from the ideal Lorenz curve the greater the competitive balance.

Discuss the history of competitive balance across the major North American sports leagues. In what periods was competitive balance weak in each league? How about other leagues such as the English Premier League and college football?

MLB: NY Yankees (1936-48) & (1947-58) NBA: Boston Celtics (1959-66) NHL: Montreal Canadians (1965-79) NFL: Packers (1960s), Steelers (1970s), 49ers (1980s), Cowboys (1990s), Patriots (since 2000) English Premier League: Since 1995, only 4 out of 20 teams have won the title College: USC and UCLA have won 2/3 conference titles since 1951

What is marginal revenue product (MRP)? What is the rule that firms use in deciding how many workers to hire? Use the rule to graphically illustrate the labor demand curve.

MRP is the extra revenue generated by hiring an additional worker. Firms will hire workers until the marginal revenue from the worker equals the marginal cost of hiring that worker. MRP=W

How is marginal revenue product determined for athletes?

MRP=MRwin x changeWins

What is the marginal propensity to import (mpi)? What is the multiplier effect formula taking into account mpi? Discuss why the economic impact is typically less than what the multiplier effect

Marginal propensity to import (mpi) is the fraction of an additional dollar of income that a household will spend on goods sold outside the local economy.

What are some possible negative externalities associated with a sporting event/team?

More traffic, noise, pollution, general inconvenience

Discuss the historical overview of franchise movement in football.

NFL had franchise stability in 1960s and 1970s. In 1980, Raiders owner Al Davis tried to move team to LA. Voted down 22-0 by owners. Davis filed an anti-trust lawsuit, against the NFL. Court ruled in favor of Al Davis, court forced NFL to approve the move, and pay $18M to Al Davis. Ruling led to other franchises relocating. Raiders ruling led to franchise movement in NHL and NBA.

How does revenue sharing work in each of the four major professional sports leagues?

NFL: Teams share national TV broadcast rights equally. Gate revenue is split: 60% goes to home team, and 40% goes to a common pool (shared equally among teams) NBA: National TV and sponsorship revenue shared equally. All teams submit 50% of local revenues to a common pool. Each team will receive back an amount equal to average team payroll. MLB: Teams pay 31% of local revenue into a pool, divided equally. There is a control fund. Teams with smallest revenue will receive a larger share of control fund. NHL: Transfer funds. To qualify for transfer funds, teams has to be among bottom 15 teams in terms of revenue, and play in media market with less than 2 million people.

What could be a factor that could cause the labor supply curve to shift?

New study finds long-term brain damage from playing football

Discuss some of the studies looking at the economic impact of hosting major sporting events such as the Super Bowl or Olympics. What have been the conclusions of these studies?

One study looked of hosting Super Bowl on Miama, Tampa Bay and Phoenix. In 5 out of 6 Super Bowls, the Super Bowl had no impact on the economy of host country. One study looked at hosting Olympics on U.S. economy. No lasting economic impact on the last 3 Olympic games hosted in the U.S.

Why were leagues historically reluctant to expand? Discuss the expansion phase for baseball—what factors led to expansion in baseball? Discuss the expansion phase for football--- what factors led to expansion in football?

One way leagues try to protect its monopoly power is league expansion. 1961 MLB: Public outcry over Giants/Dodgers and movement of Washing Senators to Minneapolis. Pressure on Congress to revoke baseball's anti-trust exemption. Talk of a third league (Continental League) with key franchise in NY and Houston. MLB responded by creating 4 franchises: Astros, Mets, Senators, Angels. NFL: Used expansion to promote its monopoly power. In 1967, the NFL proposed merger with AFL. Merger would violate anti-trust laws would require special legislation by Congress. Standing in the way of powerful legislators from Louisiana. NFL got merger approval by creating New Orleans Saints. Congress approved merger of AFL-NFL.

What is the difference between a private cost curve and a social cost curve? Graphically illustrate using private cost and social cost curves the socially optimal level of production and the market outcome.

Private cost curve: only includes costs directly incurred by Cubs. Social cost curve: includes Cubs costs and costs incurred by local residents.

What is the difference between a private value curve and a social value curve? Graphically illustrate using private value and social value curves the socially optimal level of production and the market outcome.

Private value curve: revenues received by Cubs from playing game. Social value curve: additional benefits to local residents and businesses from Cubs playing a game.

What is public choice theory? Why are politicians more likely to support stadium construction even if a majority of voters may be against its construction?

Public Choice Theory argues that public officials want to maximize their political standing (take actions to maximize their chances of re-election) New stadium construction will benefit specific influential interest groups (construction companies, hospitality industry, and team owners). These groups will be highly motivated to see new stadium built. Special interest groups have disproportionate influence over politicians through campaign contributions. Politicians are more responsive to organized groups that advocate the building of a new stadium.

What are rank-order tournaments? How do rank order tournaments give athletes an incentive to give their best performance?

Rank-order tournaments are tournaments where the prize depends only on the order of finish and not on the quality of the performance. In tournaments winning is all that matters. Objective is to beat all other players. Prize money is unevenly distributed, tournament organizers want athletes to give their best performance. Athletes will give high effort > fans get exciting tournaments > TV ratings increase > Increase profits for tournament Rank-order tournaments with uneven prize distribution gives athletes a powerful incentive to give their best effort.

What is revenue base? What is player share?

Revenue base specifies the sources of revenue to be split between players and teams. Player share specifies the percentage of the revenue base to be split between players and teams.

How do fixed roster spots have an effect on the labor market in the sports industry? How would wages change if the number of roster spots change?

Shifts the supply curve to the right if players are increased. Wages decreases as players increase

Explain how promotion and regulation works in English soccer leagues. How does promotion and regulation promote competitive balance?

Soccer in U.K.: Top league (Level 1) is called Premier League has 20 clubs, Level 2 is called Football League Championship has 24 clubs. Under promotion + regulation, the 3 worst Premier League clubs are "relegated" to Level 2. The top 2 Level 2 clubs get promoted to Premier League (the 3rd spot determined by playoffs.) In North America, if a team is out of playoff contention more likely to trade good players or start rookies to prepare for next season. Result in more losses, less competitive balance. With promotion and relegation, teams at bottom have every incentive to win. Result is a more competitive league.

Explain why most stadiums are built far from the city center.

Stadiums require lots of space for parking + playing surface. Space cost money and costs increase as you move closer to center in town.

Use an economic model to show that construction of a new stadium can lead to higher number of wins? What do studies find about the impact of a stadium's age on a team's winning percentage?

Studies find that the age of stadium has no impact on winning percentage in any sport except baseball (that effect on baseball is small)

Discuss why the true economic impact of a new stadium or sporting event may be less than reported. What is substitution spending?

Substitution spending. Even if there was no Championship game, tourists from other regions might visit Indianapolis (probably tourists who couldn't afford nicer places). These tourists would have spent money on other activities in the region. Also the Championship game might have scared some normal tourists away who didn't want to deal with the crowds. Thus the spending by the college football fans just replaced the spending that would have occurred by ordinary tourists

How does the NFL try to achieve competitive balance through schedule adjustments? How effective is schedule adjustments towards promoting competitive balance in the NFL?

Team's schedule partially determined by the teams prior year standing. In theory: Teams with poor records should receive an easier schedule next season. In reality: 14 out of 16 games are pre-determined every year.

Why might teams be reluctant to pay for general training for its players? How does baseball, basketball and hockey get the players to pay for part of their general training?

Teams have little incentive to pay for general training since players have unrestricted mobility. Player can take his/her human capital to another team. A team would have paid for training without receiving any of the benefits. In baseball (basketball and hockey also to some extent) teams requiring players to pay for part of their general training in the form of low minor league salaries.

How does competitive balance arise? Derive a model of competitive balance. Show graphically why a team in a large market will tend to have a higher winning percentage than teams from smaller media markets.

Teams owners have different motivations Teams located in large media markets enjoy greater increases in revenue from an additional win than teams in smaller media markets

How effective is a new stadium in increasing attendance? In which sport is the impact of a new stadium greatest? What is the long-run impact of new stadiums on attendance?

The following groups may benefit: 1)Team owner will benefit 2)Fans will benefit 3)Cities will benefit Studies found that new stadiums have the greatest impact on baseball. Attendance on average increased by 1/3 the following season. Studies show that boost in attendance disappear after: 10 years (baseball), 9 years (basketball), 5-8 years (hockey).

Show graphically how taxes on firms work. Which curve shifts and how much does the curve shifts? What happens to the price that firms receive after the tax? What happens to the price that consumers pay after the tax? What happens to quantity after the tax? Find the deadweight loss (DWL) graphically.

The supply curve shifts left by the exact amount of the tax. tax = Pc-Pf Q will fall

Discuss why the true economic impact of a new stadium or sporting event may be greater than reported. What is the multiplier effect? What is the marginal propensity to consume (mpc)? What is the formula used to measure the total economic impact of a new stadium or sporting event. Why might the true economic impact be less than the estimated multiplier effect?

True economic impact of a new stadium may be greater than estimated. It's possible that there are spillovers (indirect benefits) on the broader economy from a new stadium. If we take into account these indirect benefits, the true economic impact may be larger than direct spending from the new stadium. The multiplier effect argues that a $1 increase in direct spending will lead to a greater than $1 increase to the overall economy. Marginal propensity to consume (mpc) is the fraction of an additional dollar of income received that a household will spend. T= Initial direct spending x 1/1-mpc However, the multiplier is based on the assumption that households spend additional income only in the local economy. Must take into account any spending that takes place outside the local economy.

How does a typical labor supply curve look like? What is the key difference between a regular labor market and the labor market for the sports industry? How does labor supply look for players in team sports? How does labor supply look for players in individual sports (such as tennis, golf or boxing)?

Typical labor supply: Labor supply (Ls) curve is upward sloping Key difference in labor market for sports industry: Athletes cannot choose how many hours to work. They sign a contract which obligates them to work a fixed amount of time.

How is player performance measured in baseball? What difficulties exist in measuring player performance in football?

Various measures of player performance: 1) WAR (wins above replacement) 2) WHIP (wins plus hits per innings pitched) 3) ERA (earned run average) Football has difficulty in measuring player productivity. Difficult to separate an individual player's performance from their teammate. Ex) QB that throws for a lot of yards + TDs

What is vertical tax equity? Give an example of vertical tax equity. What is horizontal tax equity? Give an example of horizontal tax equity.

Vertical equity is the idea that taxpayers with greater ability to pay should pay more taxes. Example: progressive tax system Horizontal equity is the idea that taxpayers who receive more benefits from public spending should pay more in taxes. Example: Hotels, bars and restaurants near a new stadium will benefit more from stadium construction. These businesses should pay more in taxes than other businesses.

Explain how fluctuations in exchange rates could lead to relocation of franchises from one country to another country. Specifically focus on the reasons why NHL franchises moved from Canada to the US in the 1990s.

Weak Canadian dollar put financial pressure on Canadian teams, forced some to relocate.

What is the "Winner's Curse"? Describe a situation where the Winner's Curse could occur.

Winner's Curse is when a bidder in an auction places a winning bid that exceeds the intrinsic value of item purchased. Two reasons this might occur: 1) Bidder has incomplete or incorrect information on the intrinsic value of item 2)Bidders are influenced by emotions. Caught up in the bidding process

What is within-season variation? How is within-season variation measured? How can we use within-season variation to determine whether or not a league has competitive balance?

Within-season variation focuses on team performance over the course of a given season The larger the value of standard deviation, the less competitive is the league. The smaller the value of standard deviation, the more competitive is the league.