sports_econ_handout_02.12.24 (1)

IN-CLASS HANDOUT – 02.12.24 Sports Economics, ECON 315 Please submit a file upload of the handout to Canvas within 15 minutes of the scheduled class end time. You must be present in Allen 1002 during class hours to receive credit for the in-class handout. 1) Explain in 2-3 sentences how sports franchises use stadium subsidies as bargaining power over cities and fans. 2) Do you think sports franchises have more bargaining leverage (by threatening to move) over cities/fans with higher willingness to pay? 3) Which city made a profit on hosting the Olympics in 1984? 4) How have the costs of hosting the Olympics changed over the last fifty years? 5) What is the framework that is used to analyze long-term investments? 6) Consider the following two options: Option 1: An investment plan requires you to invest $20,000 today, and you will receive $13,000 in exactly one year and $8,000 in exactly two years. Option 2: An investment plan requires you to invest $20,000 today, and you will receive $8,000 in exactly one year and $13,000 in exactly two years. a) Which of the options above would you prefer and why? 7) (The following problems are taken from Question 18 in the Homework 1 document posted in Canvas. That question is ungraded. The following questions resemble questions found in Chapters 14.1 of the Goolsebee Microeconomics textbook. You are encouraged to review the Goolsebee textbook for additional practice/review. a. Jamie invests $100 today in an account that pays 4% compounded annually. i. How much money will Jamie have one year from today? ii. How much money will Jamie have two years from today? iii. How much money will Jamie have five years from today? b. Jamie wants to spend $1,000 in exactly one year in order to buy a scooter. i. If interest rates are 6%, how much does Jamie need to be able to invest today in order to spend $1,000 one year from now?

ii. If interest rates are 9%, how much does Jamie need to be able to invest today in order to spend $1,000 one year from now? iii. Does the amount Jamie needs to invest today change when the interest rate changes? Why? For the purposes of saving time, I am including the solution for Question b below:

To save time, I am posting the solution below: First, note that the cost occurs immediately (no need to discount; although t=0 accomplishes this). The benefits, however, are delayed and must be discounted. Using summation notation, the generic net present value (NPV) formula: NPV = ∑ t = 0 T B t − C t ( 1 + r ) t Question a : Applying a 6% discount rate: NPV = 0 − 10000 ( 1 + 0.06 ) 0 + 4000 − 0 ( 1 + 0.06 ) 1 + 3500 − 0 ( 1 + 0.06 ) 2 + 3500 − 0 ( 1 + 0.06 ) 3 ≈ − 172.76 Question b: With a 5% discount rate: NPV = 0 − 10000 ( 1 + 0.05 ) 0 + 4000 − 0 ( 1 + 0.05 ) 1 + 3500 − 0 ( 1 + 0.05 ) 2 + 3500 − 0 ( 1 + 0.05 ) 3 ≈ 7.56 Question c: With a 4% discount rate: NPV = 0 − 10000 ( 1 + 0.04 ) 0 + 4000 − 0 ( 1 + 0.04 ) 1 + 3500 − 0 ( 1 + 0.04 ) 2 + 3500 − 0 ( 1 + 0.04 ) 3 ≈ 193.59 Question d : The decision rule is to fund the project when the NPV is greater than zero (discounted benefits outweigh discounted costs). So, fund the project when at 5% and 4%. 10) While governments or firms will want to invest in projects with positive NPV, they must often make choices among competing projects with positive NPV. That is, they must consider the opportunity costs of various projects. Name a process that firms/governments can use to decide between competing projects.