Ch. 3 Quiz

Question 1

Correlation

Answer 1

When two things relate that show a relationship

Question 2

Causation

Answer 2

A causes B

Question 3

Positive correlation

Answer 3

Both A and B go up

Question 4

Negative correlation

Answer 4

Both A and B go down

Question 5

The closer the correlation to zero the more or less related?

Answer 5

Less related

Question 6

Why is there a small correlation between payroll spending and winning percent in MLB? NFL?

Answer 6

a. Because of the minor leagues where they do not pay players much, but still get training
b. Arbitration – the contracts are decided by the arbitrator in the MLB, so a player can be paid more than they are performing
c. You cannot buy wins in the NFL; almost no correlation between player spending and winning
d. There are too many players involved in the game to attribute winning to any group of players. It’s a true team sport
e. Injuries in the NFL are very random
f. NFL has the lowest marginal product

Question 7

Why is there a higher correlation between payroll spending and winning percent in the NBA?

Answer 7

a. The one league that you can effectively buy wins
b. One player can affect the game more significantly
c. NBA has the highest marginal product

Question 8

Elastic demand

Answer 8

i. Price has a strong effect on demand (price sensitive)

ii. Ed = % change in Q > % change in price
Price goes up by 5%, quantity decreases by 10%
Prices go up, revenue goes down
Coefficient is greater than one

Question 9

Inelastic demand

Answer 9

i. Price has little effect on demand (price insensitive)

ii. Ed = % change in Q < % change in price
Price goes up by 5%, Quantity will increase by 2%
Prices go up, revenue goes up
Coefficient is less than one

Question 10

Unitary point / revenue maximization point (Pt)

Answer 10

i. If prices go up by 5%, then sales will go down by 5%

ii. % change in Q = % change in price

Question 11

Be able to interpret the elasticity coefficient.

Answer 11

This includes understanding how elasticity impacts total revenue

Question 12

Be able to calculate elasticity

Answer 12

a. Ed = % change in quantity / % change in price

b. Percent change = ((Q2-Q1) / Q1)) x 100

Question 13

Know the four determents of elasticity

Answer 13

a. Substitutability
b. Proportion of income
c. Luxuries vs necessities
Time

Question 14

Substitutability

Answer 14

i. Lots of substitutes = Elastic

ii. Few substitutes = Inelastic

Question 15

Proportion of income

Answer 15

i. Large proportion of income = Elastic

ii. Small proportion of income = Inelastic

Question 16

Luxuries vs necessities

Answer 16

i. Luxuries = Elastic

ii. Necessities = Inelastic

Question 17

Time

Answer 17

i. Takes up a lot of time = Elastic

ii. Takes up small amount of time = Inelastic

Question 18

Why don’t profit-maximizing firms price in the inelastic range of the demand curve?

Answer 18

Because they have nothing to gain by charging more, they are already maximizing profit

Question 19

Five reasons teams may price in the inelastic range:

Answer 19

a. Sportsman hypothesis
b. Public choice hypothesis
c. Habitual consumption hypothesis
d. Pricing variables
e. Complementary revenue sources (TV, concession, etc.)

Question 20

Sportsman hypothesis

Answer 20

They will price tickets in the inelastic range of demand in order to pack the stadium

Question 21

Public choice hypothesis

Answer 21

i. We will price tickets low for political consideration

Ultimately new stadiums are paid for by taxpayers so they need to please them

Question 22

Habitual consumption hypothesis

Answer 22

You are lowering ticket prices in order to build a fan base

Question 23

Pricing variables

Answer 23

Sports teams are privately owned so teams don’t have to share how much tickets actually cost

Question 24

Complementary revenue sources (TV, concession, etc.)

Answer 24

The TV revenue by most leagues is extremely high

Question 25

Be able to define the Fan Cost Index

Answer 25

Use for concession revenue
– Cost of a typical family to attend sports event
– Cost is broken into: tickets, snacks, souvenirs, parking, etc. – We can use this to calculate MR of concession

Question 26

Calculate g^

Answer 26

(FCI – (4 * P*) / 4

Question 27

Calculate P*

Answer 27

P* = Avg ticket price

Question 28

Calculate P T

Answer 28

P* + (g^/2)

Question 29

Calculate effective ticket price

Answer 29

g^ + PT

Question 30

Calculate Elasticity Ratio

Answer 30

P T /P*