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Assume there are two teams in the league: Austin and Boston. Because it is a much larger metropolitan area, the revenue generated at any given winning percentage is higher for the Boston franchise than for the Austin franchise.
1. Draw a graph that shows the marginal revenue product curves of the two franchises. Make sure your axes are properly labeled. Show the equilibrium level of competitive balance and the equilibrium level of player salaries.
2. Re-draw the graph from question #1. Austin is currently building a new arena that will add 75 luxury suites that will be priced at $250,000 per box. This should increase the revenue associated with any given winning percentage. Show the impact of the new arena on competitive balance and salary levels.
3. Re-draw the graph from question #2. Suppose Boston builds its own arena that has three times as many luxury boxes as the arena in Austin. As a result, the increase in revenue associated with any winning percentage is larger than what existed after Austin built its new arena. Show the impact of the of the new Boston arena on competitive balance and player salaries.
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