Solution Manual For Sports Economics, 1st Edition

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Chapter OneStudy Questions1.According to Thorstein Veblen, who primarily played sports in the latter 19th century?Solution:The wealthyor the leisure classprimarily played sports in the latter 19thcentury.2.How many boys and girls play highschool sports today?Solution:More than 4 million boys and more than 3 million girls play high school sportstoday.3.How does viewership of the Super Bowl (the biggest game in American football)compare to viewership of a regular-season soccer match (international football) in Spain?Solution:Viewership for the Super Bowl is160 million,while viewership for a regular-season soccer match in Spain is400 million.4.What percentage of sports fans are women? What percentage of the sports media arewomen?Solution:Thirtyto 45% ofsports fans are women;10% ofthe sports media are women.5.According to former President Barack Obama (and he was far from alone in making thisargument), what is the relationship between player salaries and ticketprices?Solution:Higher player salaries cause higher ticket prices.6.According to Humphreys andRuseski (2009), what is the size of the U.S. sports market?

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Solution:The size of the U.S. sports market is$44 to $60 billion.7.According to JohnMaynard Keynes, what is the purpose of economic analysis (accordingto Alfred Marshall)? What does an economist need to engage in such an analysis? If weapply this perspective to the study of sports economics, what does an economist need tostudy sports?Solution:According to Keynes, Marshall says that the purpose of economic analysis is toapply the theory to “current economic life.” To do this, one must know the facts of theindustry. So to study sports, an economist needs to know sports in addition to economics.8.What are the tongue-in-cheek steps to the Marshallian method? How can they be appliedto the question that was the starting point for this chapter?Solution:Use mathematics as a shorthand language rather than as an engine of inquiry,and keepat it until you are done. Translate into English and illustrate by examples thatare important in real life.The question at the beginning of the chapter is,Whatdeterminesticketprices in professional sports?The Marshallian method was appliedthroughout thechapter,firstformulating a demand curve,thenstating it in English, andthenexamining real-worlddata to see how this works.9.What are the key words in the definition of supply and demand?Solution:You must be “willing and able.” To be in supply or demand of a good,youhave to be able and willing to participate in the market.

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10.With respect to the demand for baseball tickets, what are factors that:cause movement along the demand curve?Solution:Achange in the price of the goodcauses movement along thedemand curve.cause the demand curve to shift?Solution:Achange in any demand factor besides the price of the goodwill cause the demand curve to shift. This includes personal income,market size, changes in quality of the good,and so on.11.What part of the demand curve changes when the curve is shifted? What part of thedemand curve should not change?Solution:They-intercept changes when the curve shifts. The slope does not change.12.What has determined the price of Honus Wagner’s baseball card over time?Be able toillustrate this story (i.e., draw a supply and demand graph).Solution:As incomes have increased among baseball fans, demand for the cardhasincreased.But since only a certain number of cards were printed, supplyhas remainedfixed.With a fixed supply, demand solely determines the price, so the price of the cardshasincreased significantly.At a 2013 auction, one of Wagner’s cards sold for $2.1million.

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13.How is the market period different from the normal period in Marshall’s analysis ofprices?Solution:Market period is when supplied is fixed, so prices are determined entirely bychanges in demand. Normal period has an upward-sloping supply curve.14.Why did Nike take Reebok to court over the production of Tim Tebow jerseysin theSpring of 2012?Be able to illustrate thisstory.Solution:Nike had the right to make and sell the jersey. If Reebok also made the jersey,supply would increase and the price of the jersey would decline.

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15.According to Marshall’s supply and demand model,what determines the price of ticketsin the NBA? Be able to illustrate this story.Solution:Priceof ticketsis determined by demand.16.How does the NBA’s salary cap impact quantity demand and quantity supplied of laborin the NBA’s player market? What is the intent of this cap? According to the text,what isthe actual impact of this cap?

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Solution:The NBA’s salary cap is a price ceilingsetbelow the equilibrium wage for theNBA player’s market. With this price ceiling in place, no team can offer more moneythan the NBA maximum even thoughitmight be willing to pay this maximum.This capwas intended to prevent the richest NBA teams from assembling a team that woulddominate the league. By forcing the price of stars below the equilibrium wage, all teamsshould be able to acquire top talent. But in reality, star players consider factors besidesthe wage in determining where they will play, such as their chances of winning a title.Sothe policy falls short of preventing a team that dominates the league.17.Is there a “right” price for labor? Utilize the perspective of John Stuart Mill in answeringthis question.Solution:There is no“right”price for labor. What labor is paid depends on the laws ofsociety.18.What is the difference between positive and normative economics (according to JohnNeville Keynes)? How are “morality” and “economics” summarized by Steven Levitt andStephen Dubner?Solution:Positive economics is the study of“what is,”and normative economics is thestudy of“what ought to be.”Morality, it could be argued, represents the way that peoplewould like the world to work—whereas economics represents how it actually doeswork.19.What is deductive reasoning?What is inductive reasoning?

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Solution:Deductive reasoning is moving from the general to the specific. With deductivereasoning one begins with basic principles and then logically derives a model of how theworld works.Inductive reasons begins with data and then derives a theory.20.According to Marshall, what is the basic approach to economics?Solution:Economics is not dogma, and it is not a collection of universal truths. The tools ofeconomics, including bothdeductive and inductive reasoning, simply provide us with themeans to uncover how the world appears to work.Thought Questions1.Tim Tebow’s NFL career ended with the New York Jets in 2012. How would his lack ofsuccess with the Jets impact the price ofhis Jets jersey? Now imagine Tebow becomes amedia celebrity in New York when his athletic career finally ends (currently he is a minorleague baseball player). How might that impact the price of this jersey? If Tebowbecomes a media celebrity in New York, could we deduce the price of his Jets jersey inthe future (i.e.,ascertain its value without analyzing data)?Solution:His lack of success in football lowers demand for the jersey and thereforelowers the price. But media success might causedemand to increase. If both eventshappened, the price of Tebow’s jersey could not be simply deduced.2.At the conclusion of the 2016 college football season, the University of Alabama’sfootball team had existed for 113 years, appeared in 66 bowl games, and won 26

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conference titles. Utilize what you know about the NCAA’s limit on compensation ofcollege athletes to explain the dominance of this football team.Solution:Because all NCAA schools essentially pay the same wage, athletes use adifferent criteria to select their school. The most obvious criteria is the likelihoodthat theteam will win. That means the top athletes,who have the most choices,tend to choosethe same schools with a history of winning.And that means schools like Alabama willpersistently win.Math Questions1.Define the elements of the following equation:P = a0–a1×Qd.Solution:P= dependent variableQd= independent variablea0=y-intercepta1= slope coefficient2.GivenP= $150–0.005×Qdas the demand for a professional sports team:a.IfP= $60, what isQd?Solution:18,000b.IfP= $40, what isQd?Solution:22,0003.Imagine these two possible changes from the demand curve listed in Question 2:a.P= $175–0.005×Qd

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b.P= $125–0.005×QdFor each, identify whetherQuestion 3(a) or3(b) would be consistent with the followingstated changes:i.increase in the size ofthe market where the team playsSolution:aii.decrease in the per-capita income in the market where the team playsSolution:biii.move to a newer stadiumSolution:aiv.decline in the quality of players employed by the teamSolution:b4.Define the elements of the following equation:P=b0+b1×QS.Solution:P= price of a goodQS= quantity supplied of a goodb0=y-interceptb1= slope coefficient

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Chapter TwoStudy QuestionsStudy Questions (Deductive)1.For any given price, how would the following changes impact a team’s revenue?a.Increase in the size of the marketSolution:revenue increasesb.Building a new stadiumSolution:revenueincreasesc.Decline in the quality of the team’s rosterSolution:revenue declines2.For a typical firm, what is the shape of the marginal cost curve? Why does it have thisshape?Solution:Upward-sloping. This is because of thelaw ofdiminishingreturns. As a firmexpands,it must hire more labor to produce theadditional output. Because capital isfixed, the productivity of labor declines and the marginal cost increases.3.For a sports team, what might the shape of the marginal cost curve be? Whydoes it havethis shape?Solution:It is zero until a team reaches capacity. Then it is vertical. This is becauseadding additional fans (i.e.,increasing output for a team) essentially costs nothing until ateam reaches capacity.Then the cost is essentially infinite.4.What is the profit-maximizing rule?Solution:Marginal revenue equalsmarginal costStudy Questions (Inductive)5.GivenWins =a0+a1×Population +eiwhat is the regression term that describes eachelement in this equation?a.WinsSolution:dependent variableb.a0

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Solution:y-intercept or constant termc.a1Solution:slope coefficientd. PopulationSolution:independent variablee.eiSolution:error term6.What is a “constant term”? Why is this term included in a regression equation,and whatinformation does it convey?Solution:The constant term is they-intercept. It is the value of the dependent variablewhen the independent variables are zero. It is included to enforce a zero mean for theerror term. But it doesn’t convey any practical information because zero values for theindependent variablesareoften outside the realm of what is possible.7.We have a rule-of-thumb that at-statistic should be, in absolute value, greater than 2.Explain the reasoning behind this rule.Solution:We are 95% certainthatthe true value of any estimated coefficient is within2standard errors of the coefficient. So if a coefficient is 8 and the standard error is 6, weare 95% certainthatthe true value of the coefficient is between-4 and 20. Such a rangewould meanthatthe true value could be negative, zero, or positive. In other words, wedon’t really know the direction of the relationship. But if the standard error were2, thenthe true value would lie between 4 and 12. Now we would be 95% certainthatthe truevalue is not zero and not negative.Now imaginethatthe standard error is 4. In that instance, the confidence interval wouldextend from 0 to 16. So zero is on the edge of our interval. In this instance thet-statistic—or the coefficient divided by the standard error—would be 2. So if thet-statisticis 2, zero lies on the edge of the confidence interval and can’t be eliminated.Hence we prefer a value that in absolute termsisgreater than 2.8.How do we calculateR-squared? What does this tell us?Solution:R-squared is eitherESS / TSSor1−(RSS/TSS)It tells us the percentage of the dependent variable explained by our model.

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9.What is the relationship between market size and win in North Americanprosports?Answer this question using both deductive and inductive analysis.Solution:Deductive analysis saysthatmarket size and wins are strongly linked.Inductive analysis of the four major North American sports leagues failed to find a strongempirical link.10.Use the following econometric model and results to answer thesequestions.Dependent Variable:Team Winning Percentage from the WNBA (1997‒2013)a.Interpret each slope coefficient.Solution:An additional point scored per game will increase winning percentageby 3.15%.An additional point surrendered per game will decrease winningpercentage by 3.11%.b.For which variables are we at least 95% certain that the coefficient is differentthan zero?Solution:Points Scored and Points Surrenderedc.Explain the reasoning behind your answer.Solution:To answer this question,you need to calculate thet-statistic. Thet-statistic for points per game is 31.5. For points surrendered per game,it is−28.27. Both values are greater than 2 in absolute terms,so both coefficients—according to our rule-of-thumb—are statistically significant.d.For which variables are we not at least 95% certain that the coefficient is differentthan zero? Explain the reasoning behind your answer.Solution:Nonee.Calculate theR2and interpret your answer.

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Solution:Explainedsum ofsquares is 4.609. SoR-squared is 4.609/5.5652,which is 0.828.11.What is the relationship between payrolland wins in MLB, the NFL, NBA, and NHL? Isthe deductive study consistent with the inductive study?Solution:Payroll does not explain as much as 25% of the variation in winningpercentageandfails to explain 75% of the variation in winning percentage. The deductivemodel suggeststhatpayroll is very important to team wins. But the empirical analysis—or the inductive analysis—suggests a different story.12.When weestimate the model in Question 10for the NBA, wesee a higher explanatorypower than what we do for MLB,theNFL, and the NHL.Why is explanatory powerhigher for the NBA?Why are we unable to explain 100% of the variation in winningpercentage with points scored and points surrendered per game?Solution:The NBA has fewer blowouts than the other three leagues.In each gamedecided by more than1point,there are points scored and surrendered that do notactually impact the outcome of the game. These excess points reduce our explanatorypower.13.What factors should we consider in evaluating a regression? Should we make sure theregression conforms to prior beliefs?Solution:These are listed in the text. And prior beliefs are not part of our list. We haveto allow our empirical analysis to change what we think about the world.14.What is the difference between statistical significance and economic significance?Solution:Statistical significance tells us if the estimated coefficient is different fromzero. Economic significance is what we think about when we wonder how large of aneffect we have uncovered.Thought Questions1.Why doNFL, NBA, and NHL teams tend to sell outwhile MLB teams do not?Solution:The NFL, NBA, and NHL appear to reach a profit-maximizing level ofattendance beyond the capacity of the stadium/arena where they play. This is not thestory in baseball.2.According to deductive reasoning,how successful should the New York Mets be on thefield relative to the Detroit Tigers? From 1962 to 2016, the Mets won 48.1% of their

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regular season games while the Tigers won 49.9% of their contests. Do these recordsmatch your deductive reasoning? Why or why not?Solution:The Mets—playing in a much bigger market—should be much moresuccessful. The inductive reasoning, though, tells us that there is more to team successthan market size.3.Consider the following regression for the WNBA:Wins =b0+b1×Points per Game +eiDependent Variable: Team Winning Percentage from the WNBA (1997‒2013)a.What is the 95% and 99% confidence interval around (b1)?Solution:The 95% confidence interval ranges from 0.006 to 0.013. The 99%confidence interval—or threestandard errors in each direction—is 0.005 to0.014.b.Is (b1) statistically significant?Solution:By our rule-of-thumb (i.e.,thet-statisticmust be greater than 2),wewould conclude it is statistically significant. Thet-statisticis 6.195.c.According to the results below, what is the chance that (b1) could equal 0.0315?Solution:Less than 1%. A value of 0.0315 is outside the 99% confidenceinterval.d.What lesson do we learn when we compare the results below to the results fromQuestion 10above?Solution:If you do not specify a model correctly,you can be very misled. Theestimated coefficient in the model below is statistically significant. And the rangepossible is not even close to what we see whenwespecify the model correctly.This highlights why specifying a model correctly is so important and how we haveto be careful interpreting a model.

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Math Questions1.IfP=a0–a1×Q,what is theequation for total revenue?Solution:TR=P×Q,soTR= [a0–a1×Q]×QTR =a0×Q–a1×Q22.IfP= $150–0.005×Q,what is the equation for total revenue?Solution:TR = $150×Q–0.005×Q23.Complete the following table:4.IfP= $50–0.005×Q,a.what is the equation for marginal revenue?Solution:MR= $50–0.01×Qb.how many tickets will the team sell when it maximizes revenue?Solution:To answer this, setMR= 0 and solve forQ:50,000c.whatwill the price be when the team maximizes revenue?Solution:$25d.how much revenue will the team earn when it maximizes revenue?Solution:$1,250,000

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