Question

A city with 4% unemployment and no inflation is considering building a new stadium for its professional football team. The team currently plays in an old stadium owned by the city. It would cost city $500M (M for million) to demolish the old stadium and build a new one at the same location, which the city owns. The new stadium would be expected to last for 40 years and the city would finance the costs of the project by borrowing at 6% annual interest and paying $35M per year for 40 years for all expenses, including maintenance and debt repayment. About $300M of the demolition and construction cost would be spent on labor and materials supplied by city residents (referred to as locals). The team owner, who is not a local, would pay the city $3M per year rent. The owner’s company would sell tickets to games, parking, and concessions (food, drink, souvenirs, etc.) and keep the profits from those sales. Analysts estimate that if the stadium is built, the locals’ demand curve for tickets to the games will be linear each year, with a choke price of $240, and that locals will buy 100,000 tickets per year from the team owner’s company at an average price of $80 per ticket. Analysts estimate that outsiders who attend games will spend $20M per year on restaurants, hotels and other goods and services provided by city residents. Assume that the average profit rate of local businesses and local labor is 0.2 and that locals’ marginal propensity to consume local value added is 0.3. Except in part h, below, assume that the analysts’ estimates are correct. Except in part i, assume that the football team will leave the city if the new stadium is not built.

a.[10] Estimate the net generated income for the locals from the demolition of the old and construction of the new stadium alone, making reasonable assumptions about any other missing information. Explain all your steps. Translate this net generated income into annualized income for the residents at 6% annual interest.

b.[7] An economic impact analysis of the stadium project estimates that the demolition and construction alone would give the locals generated income of $600M (estimated to be the $300M spent on local value added times a multiplier of 2). List and explain the reasons why this “generated income” estimate is probably much higher than a reasonable estimate of the net generated income from the demolition and construction.

c.[6] Estimate the annual user benefit the locals would get from the project. Explain all your steps.

Answer 1

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