Question

Explain - using supply and demand principles - the differences between player salaries across different professional sports. Use the concept of marginal revenue product of labor to explain how a "superstar" can get a higher salary than his or her teammates. What economic incentives do professional athletes have to use performance-enhancing drugs, even though they are illegal?

Answer 1

The wage rate in the competitive market is equal to the marginal revenue product of the labor. That is the extra value of output the worker can add to the firm's total revenue. Therefore, each worker including the athletes gets paid according to their productivity. In this case, the athletes get paid according to their talent. The higher their winning rate will be the better will be the chance to fill out the stadium and ad campaigns revenues. Hence, in the same team, the superstars are paid a higher salary because they have higher productivity and higher demands.

The same logic applies in the case of performance-enhancing drugs. These drugs help athletes to increase their productivity artificially. Thus, increasing their earnings in terms of productivity. Hence, even these drugs are illegal, the athlete has the incentive to use them.