Question

4. According to former President Barack Obama (and he was far from alone in making this argument), what is the relationship between player salaries and ticket prices?

5. What has determined the price of Honus Wagner’s baseball card over time? Be able to illustrate this story (i.e., draw a supply and demand graph).

6. How does the NBA’s salary cap impact quantity demand and quantity supplied of labor in the NBA’s player market? What is the intent of this cap?, what is the actual impact of this cap? Illustrate.

7. How does the NBA’s salary cap impact quantity demand and quantity supplied of labor in the NBA’s player market? What is the intent of this cap? According to the text, what is the actual impact of this cap?

Answer 1

4.

A usual misconception is that higher the salaries of the player, higher are the ticket prices (since they must be quite popular and more people will be willing to watch their match). However this is quite not the truth. Player salaries represent a fixed cost to pro sports teams. Thus, no matter how many tickets a team sells, a player's salary will not change. What matters in the setting of prices for tickets are the marginal costs of selling one more ticket. Although, it's reasonable to believe that such costs are quite small in the great scheme of things. The more important factor in determining ticket prices is the demand for tickets. When a team hires a pro superstar , one would expect the demand for tickets to surge among fans, thus putting upward pressure on ticket prices. The surge in demand, though, is likely to be seen only in cities/franchises that sign a "new" superstar. When a team simply re-signs its current superstar, it's unlikely that there will be a new surge in demand for a player who has already been playing with the team for four years.

Thus, it should be clear that rising ticket prices are not caused by rising player salaries. Rather, it is just the opposite: rising salaries are generated from rising ticket revenues (due to rising ticket demand).