Question

1. When a league expands, each new team usually gets to select players from the rosters of existing teams. Existing teams, however, get to “protect” a certain number of players on their rosters from such a draft. Assuming players differ in “quality,” explain why such an expansion draft virtually guarantees that the new team(s) will be of inferior average quality than existing teams. What will happen to the overall league average in terms of quality?

2. An expansion team in a professional sports league is considering locating in one of two cities, A or B. The team estimates that its profits in the two cities will be as follows:

                        Profit in A = $100 million

                        Profit in B = $110 million

      This profit, however, is exclusive of the cost of building a new stadium, which is estimated to be $50 million in either city. However, the team expects whichever city it chooses to subsidize some of this cost. Suppose that city A expects the team to generate $40 million in economic activity for the region (over and above the team’s profit), while city B expects the team to generate $25 million in economic activity for the region.

a. Accounting for all benefits and costs, in which city is it efficient for the team to locate?

b. What is the least amount of a subsidy that the city from part (a) would have to bid to attract the team?

c. What is the least amount that that city would have to bid to outbid the other city?  

d. Given your answer to (c), does the winning city end up receiving a net gain? If so, how much?

Answer 1