The Economics of Sports 5th Edition

By Michael A. Leeds -Test Bank

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Sample Questions
 

Chapter 4

1. 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.
2. When Mark Lemke said that Greg Maddux “played to a hitter’s strength—
just when he doesn’t expect it” he meant that Maddux

(a)  forces the hitter into a prisoner’s dilemma.

(b)  is subject to the winner’s curse.

(c)  is following a dominant strategy.

(d)  is following a mixed strategy.

Answer:     (d) Greg Maddux would follow a mixed strategy to keep the

opposing player from gaining an advantage by guessing what he will do.

3. In game theory, a prisoner’s dilemma is interesting because:

(a)  Individually, each player’s best strategy leads to the worst results for the
players as a whole.

(b)  A player’s strategy is determined by the strategy of the other player.

(c)  A player’s strategy is a single, unique Nash equilibrium.

(d)  A player’s strategy is independent of the choice made by his/her opponent.

That is, each player has a dominant strategy.

Answer:     (a) While all these are true about the prisoner’s dilemma, only (a) is
a truly interesting result. All applications of game theory involve strategic
behavior and the strategy of other players. Many games, such as rock, papers,
scissors, have a single, unique Nash equilibria. Finally, many games can be
designed that allow for dominant strategies that do not result in a prisoner’s
dilemma.

4. In game theory, a dominant strategy is one in which:

(a)  A player’s strategy leads to a bad outcome.

(b)  A player’s strategy is determined by the strategy of the other player.

(c)  A player’s strategy is mixed.

(d)  A player’s strategy is independent of the choice made by his/her opponent.

Answer:     (d) A dominant strategy is one that is the best response for the
player regardless of what the opponent is doing.

 
5. 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.

6. The NCAA arose in response to

(a)  increasing violence in college football.

(b)  point-shaving scandals in college basketball.

(c)  the desire to act like a monopolist.

(d)  the desire to act like a monopsonist.

Answer:     (a) In response to eighteen deaths, President Theodore Roosevelt

insisted that the major football powers cooperate on creating and enforcing a
set of rules that would reduce the violence in the game. Once they had done so,
the schools turned to other ways they could cooperate.

7. 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
exemption from 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.

8. The true cost of monopoly power to society is attributable to

(a)  the higher price that consumers must pay.

 (b)  the reduction in output by the monopolist.

(c)  the excess profits enjoyed by the monopolist.

(d)  the failure of other firms to enter the industry.

Answer:     (b) Lower output means lost production and consumption. This

reduces consumer and producer surplus without causing a gain by someone else
in the economy.

9. The earliest antitrust law enacted in the United States was

(a)  The Sherman Act.

(b)  The Clayton Act.

(c)  The Curt Flood Act.

(d)  The Rozelle rule.

(e)  None of the above.

Answer:     (a) The Sherman Act.

10. In most professional sports leagues, over the course a single season, the
largest proportion of team cost is

(a)  shared by other teams in the league.

(b)  fixed.

(c) variable.

(d)  zero.

Answer:     (b) The majority of costs for most teams are player contracts and
playing facilities which are both a fixed cost within a season.

11. The NCAA has often been called an “incidental cartel.”

(a)  What is an “incidental cartel?”

(b)  How has the NCAA exercised its cartel power? Give two distinct examples.

Answers:   (a) An incidental cartel is a group of firms that come together to act
cooperatively in order to maximize monopoly profits. However, it does not
 initially form in order to act like a cartel. In this case, the NCAA formed in order
to make football safer and only later began to see its economic power.

(b) The NCAA acted like a monopoly when it limited the number of football
broadcasts. It continues to act like a monopoly when it negotiates broadcasts
rights to its basketball tournament. It also acts like a monopsony when it limits
the returns to college athletes.

12. 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

this view, 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 legal.

13. What is the loss to fans from the monopoly power that sports franchises
exert? Be precise in your reasoning.

Answer:     A monopolist sets MR = MC. This occurs at a lower level of

output than an otherwise identical perfectly competitive industry would chose
(where P  = MC). The result is a deadweight loss that occurs because of the
producer and consumer surplus that disappear due to the lower output. This is
illustrated in Figure 4.3.

Figure 4.3

For simplicity, we assume that MC is constant. The competitive industry would

produce QC and charge PC. The monopolist charges the higher price, PM, and
produces the lower output, QM. Consumer surplus falls, some of it going to
producers in the form of profits. Some, however, is not gained by anyone. This
lost consumer surplus is a deadweight loss to society (DWL in the above
picture).

14. Explain with a graph how a ticket price ceiling placed on a monopoly
sports franchise (that does not sell out its games) may actually lower ticket
prices and raise attendance. Assume that marginal costs are fixed.

Answer:    

In the absence of a price ceiling the monopolist will maximize profits by

setting MR = MC. This results in a monopoly ticket price of Pm and a quantity
of tickets of Qm. When the monopolist is forced to accept a ceiling price
 of Pc per ticket, his effective MR schedule becomes PC. Since PC is greater
than MC the monopolist will sell as many units as he can. He is eventually
constrained by the demand curve. The price ceiling if properly placed
(above MC and below Pm) actually results in lower ticket prices and increased
ticket sales.

15. Differentiate between first and second degree price discrimination.

Answer:     First degree price discrimination occurs when the monopolist

charges each consumer the maximum amount that they are willing to pay for a
given amount of the good (i.e. each person pays the maximum ticket price that
they are willing to pay for a football game). On the other hand, second degree
price discrimination occurs when the monopolist charges different prices (per
unit) when the consumer buys different quantities of the good (i.e. season ticket
prices per game are lower than single game ticket prices for the same seats).

16. Differentiate between second and third degree price discrimination.

Answer:     Second degree price discrimination occurs when the monopolist

charges different prices (per unit) when the consumer buys different quantities
of the good (i.e., season ticket prices per game are lower than single game
ticket prices for the same seats). On the
other hand, third degree price discrimination occurs when the monopolist
charges different prices for the same good in different segments of the market
(i.e. single game tickets cost less in the student section of an NCAA football
game than they do for a
non-student seat).

17. Given that a minor league baseball monopolist faces a market demand
function of Qd = 12 – P

(a)  Write down this monopolist’s demand and MR equations.

(b)  If the monopolist faces a constant marginal cost of $3 per unit, how many
units will she produce?

Answers:   (a) Demand equation: P = 12 – Qd

Revenue = PQd = (12 – Qd)Qd = 12 Qd – Qd2

Marginal revenue equation: MR = 12 – 2Qd

(b) A monopolist maximizes profits when MR = MC.

12 – 2Qd = 3 => Q* = 4.5, P* = $7.50

18. (a) Define producer surplus.

 (b)  Calculate producer surplus in the following graph at Q*

Answers:   (a) Producer surplus per unit is the difference between the market
price that the producer receives at Q* and the least amount that the producer is
willing to accept in order to sell Q* (shown by the height of the supply
curve S at Q*)

(b) Producer surplus = $5 – $5 = 0

19. (a) Define consumer surplus.

(b)  Calculate consumer surplus in the following graph at Q*

Answers:   (a) Consumer surplus per unit is the difference between the

maximum price that the consumer is willing to pay for Q* (shown by the height
of the demand curve D) and the market price that the consumer pays for Q*.

(b) Consumer surplus = ¥ – $5 = ¥

20. Write down the different costs associated with putting on an NFL game.
Classify these costs as either fixed costs or variable costs. Assume that a
single playing season constitutes the short run.

Answer:     Salaries (fixed), travel (fixed given the schedule), marketing

(variable) and venue expenses (mostly fixed, but somewhat variable depending
on attendance and
post-season appearances).

21. How did the rise of privately owned cable TV networks affect the revenue
structure of European soccer teams?

Answer:     Most importantly, cable TV contracts resulted in a huge increase

in the revenues accruing to sports teams in general. This revenue, however, was
largely skewed toward the top teams and the top leagues resulting in more
revenue disparity between the “haves” and the “have nots” than had previously
been the case.

 
  

**Questions #22 and #23 utilize the information provided below**

Inverse Demand Equation: P = 170 – 4Qd

Marginal Costs = $10

MR = 170 – 8Qd

22. A perfectly-competitive firm would charge a price of:

1. $20
2. $10.
3. $100
4. 0

Answer: b. Perfectly-competitive firms are “price-takers” who charge a price

equal to their marginal costs (MC). That price is $10 in this case.

23. A monopoly firm would charge a price of:

90. $90.
91. $170.
92. $680.
93. $20

 
 Answer: a. Monopoly firms are “price-makers” who equate marginal revenue
(MR) with marginal costs (MC) and price off their demand curve. In this case,
equating MC with MR yields the following: 170-8Qd = 10; solving for Qd yields a
quantity demanded of 20. Plugging 20 into the original inverse demand equation
yields a monopolist’s price of $90.

24. The NCAA operates as a(n):

1. Natural monopoly.
2. For-profit cartel.
3. Incidental cartel.
4. Perfect-competitor in collegiate athletics.

Answer: c. Unlike firms who purposefully collude with the express intent of
agreeing to restrict output and drive market prices up, the not-for-profit NCAA
has morphed into an “incidental cartel” by gradually emerging as the single
governing body to regulate (most) collegiate athletics.

25. If a seller is able to charge each consumer exactly their maximum

(marginal) willingness-to-pay, they are practicing:

1. First-degree price discrimination.

2. Second-degree price-discrimination.
3. Third-degree price discrimination.
4. Hyperbolic price discrimination.

Answer: a. First degree price-discrimination would be very difficult to

accomplish in the real world, as it would require each consumer to reveal their
maximum willingness-to-pay for a good or service (which they are
understandably reluctant to do), allowing firms to capture all consumer surplus
by charging each customer their maximum willingness-to-pay.

26. Which popular American sport enjoys an “antitrust exemption”?

1. Football.
2. Basketball.
3. Baseball
4. Hockey.

Answer: c. A Supreme Court ruling in 1922 ruled unanimously that baseball was
not subject to antitrust laws.

27. Monopsony means:

1. One seller of an output.

2. One buyer of an input.
3. One ideal capital/labor ratio.
4. The same thing as externality.

Answer: b. A monopsony can be thought of as a “monopoly upside-down”; rather

than only one seller of an output in a market, as we observe with monopolies
(and which therefore harm the consumer), a monopsony occurs when there is
only one buyer of a factor of production, which drives down factor prices (thus
harming the factor of production, such as labor).

 
  

28. Price discrimination:

1. Reduces deadweight loss.

2. Creates mutually-beneficial exchanges that would not happen under a
single-price scheme.
3. Increases consumer surplus.
4. Both “a” and “b”.

Answer: d. Since price discrimination allows for mutually-beneficial gains from

exchange that would not occur under a single-price monopoly scheme, we also
observe a reduction in deadweight loss as the quantity that gets exchanged in
the marketplace is enhanced vis-à-vis a single-price scheme. As an example,
imagine a Las Vegas hotel with marginal costs of $25 per room per night who
charges $300 every day of the year (single-price scheme) v. one who charges
$450 for peak times, $300 for normal times and $75 for slow times. The price of
$75 for slow times cause consumers to book those rooms under a price
discrimination scheme (and the hotel to benefit from receiving a price in excess
of their marginal costs), whereas they would have been “left out in the cold”
under a single price scheme because their maximum willingness-to-pay was less
than the hotel’s price of $300.

29. Natural monopolies are distinguished by:

 
1. Zero fixed costs.
2. Increasing average total costs (ATC) over the entire range of output.
3. Decreasing average total costs (ATC) over the entire range of output.
4. The existence of only one firm in the industry.

Answer: c. A natural monopoly is characterized by falling ATC over their entire
range of output. This cost advantage differentiates them from “regular
monopolies” and provides them with an advantage over possible competitors.
Thus, one could say “they are a natural” to become a monopoly.