9 terms

EC385: Chapter 3 Problem Set

STUDY
PLAY
According to the principle of comparative advantage Charles Woodson plays defensive back rather than receiver for the Green Bay Packers because
(a) he plays defensive back better than he plays receiver.
(b) his advantage as a defensive back exceeds his advantage as a receiver.
(c) he is the best defensive back on the team.
(d) the other receivers on the team are better than he is.
b) Comparative advantage states that nations or individuals should specialize in the activity in which they are relatively best. Woodson may be the best receiver on the team, but if he is only slightly better than the other receivers while he is much better than the other defensive backs (and playing both positions is not possible), then the team is better off having him play defensive back.
Tom holds the world speed record in typing. Comparative advantage leads you to expect:
(a) Tom has a comparative advantage in typing.
(b) Tom may hire another person to do his typing.
(c) Tom will not hire another person to do his typing.
(d) Both (a) and (c).
(b) Tom has an absolute advantage in typing but does not necessarily have a comparative advantage in typing. Trade is based on comparative advantage not absolute advantage. If this is Tom Brady we are talking about, he will almost certainly concentrate on playing quarterback not on typing.
Use supply and demand to show why teams that win championships typically raise their ticket prices the next season.
Since fans typically like winning and since their good memories persist for at least one season, championship teams generally experience an increase in demand for their product. An increase in demand shifts the demand curve to the right leading to an increase in equilibrium prices.
Use a graph with attendance on the horizontal axis and the price of tickets on the vertical axis to show the effect of the following on the market for tickets to see the Vancouver Canucks play hockey.
(a) The quality of play falls, as European players are attracted to play in rival hockey leagues in
their home countries.
(b) Vancouver places a C$1 tax on all tickets sold.
(c) A recession reduces the average income in Vancouver and the surrounding area.
(d) The NBA puts a new basketball franchise in Vancouver.
In each case, the student should show a supply and demand graph, with the appropriate shift of the correct curve.
(a) Demand shifts left, price decreases, equilibrium quantity decreases.
(b) This can either be shown as a leftward shift of the demand curve or a leftward shift
of the supply curve. In either case, if a fixed (per unit) tax is placed on tickets the vertical distance between the new and old curves should equal the tax.
(c) Demand shifts left, price decreases, equilibrium quantity decreases.
(d) Demand shifts left, price decreases, equilibrium quantity decreases.
Suppose the market demand for tickets to a University of Tennessee basketball game is Qd = 40,000 − 1000p and the supply is Qs = 20,000.
(a) What is the equilibrium price of a ticket to the game?
(b) What would happen to the market for tickets if the university set a price ceiling on tickets of
$10 and if Tennessee had strict antiscalping laws?
(c) What would happen to your answer to (b) if the price ceiling were $30?
(a) Set Qd = Qs, so 40,000 − 1000p = 20,000. Solving for p, p = 20.
(b) Since the equilibrium price is above the price ceiling, the price ceiling will be binding and the new price will become p = 10. Qd = 40,000 - 1000p = 30,000
(c) Since the equilibrium price is below the price ceiling, the price ceiling will not be binding. Thus, the price will stay p = 20. Qd = Qs = 20,000.
The New York Jets football team raises ticket prices from $100 to $110 per seat and experience
a 5 percent decline in tickets sold. What is the elasticity of demand for tickets?
ε = %ΔQ/%Δp = −0.05/(10/100) = −0.50. Demand is inelastic since |ε| < 1. Alternatively, if a price increase of 10 percent leads to a 5 percent decline in ticket sales, the elasticity is −5/10 or −0.50. Since the law of demand states that an increase in price always leads to a decrease in the quantity demanded, it is common practice to drop the negative sign when discussing a good's own-price elasticity of demand.
Since the 1990s, many Major League Baseball teams have moved to new stadiums that are far smaller than the ones they have replaced. Use the appropriate curves to show what this has meant for ticket prices.
Starting with a regular supply and demand graph, a reduction in the number of seats shifts supply to the left. Equilibrium prices rise. (As an aside, newer stadiums also provide more amenities to the fans which should serve to shift demand to the right raising equilibrium prices even further.)
Suppose the Tampa Bay Rays baseball team charges $10 bleacher seats (poor seats in the outfield) and sells 250,000 of them over the course of the season. The next season, the Rays increase the price to $12 and sell 200,000 tickets.
(a) What is the elasticity of demand for bleacher seats at Rays games?
(b) Assuming the marginal cost of admitting one more fan is zero, is the price increase a good idea?
(a) ε = %ΔQ/%Δp = ((200,000 − 250,000)/250,000)/((12 − 10)/10) = −1.00. Demand is unit elastic since |ε| = 1.00. Alternatively, if a price increase of 20 percent leads to a 20 percent decline in ticket sales, the elasticity is −20/20 or −1.00.
(b) The price increase is not a good idea. Total revenues have fallen from $2,500,000 = (250,000)(10) to $2,400,000 = (200,000)(12). Anytime elasticity is greater than one, an increase in prices will result in a drop in total revenue.
Suppose that the demand curve for seats at a minor league baseball stadium in Trenton, N.J.,, is Qd = 6,000 − 10p.
(a) How many fans would attend if ticket were free?
(b) At what price would no fans attend the game?
(c) If the building capacity (supply) is fixed at 4000, what price would maximize revenue while ensuring a sellout?
a) If tickets were free, plug 0 in for price. Then the demand equation implies that
6000 − 10(0) = 6000 tickets would be sold.

(b) Plug in 0 for Qd. The demand equation then implies 6000 − 10p = 0. Solving for p, 6000 = 10p, so p = 600.

(c) If the capacity of the arena was 4000, then the supply curve is the vertical line in the diagram. The firm can sell out the stadium at any price below the price that ensures sales of 4000. Set demand = supply so 6000 − 10p = 4000. Solving, 10p = 6000 − 4000, so 10p = 2000, or p = $200.
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