You work in the front office of the Spokane Indians, a minor league baseball team that plays in the Northwest League of Minor League Baseball. Your boss wants to know the different costs associated with different levels of advertising, including the average and the marginal costs. Each ticket to the game is $10. One of the junior economists in your office has run some regressions and found that demand for the Indians is:
Q = 200 + 120A - 10A^2
Where Q is the nightly attendance and A is the amount of advertising units they can purchase. The boss says he will never budge on price, so you have to make use of advertising. Luckily, the advertising agency you contacted will work with you on the price, if you buy enough ad spots. They gave you the following equation to estimate the cost of the ads based on the number you bought:
CA = 500 + 220A - 2A^2
1. Fill in the table on the next page, it might help you answer the questions that follow.
2. If the ads didn't cost anything, how much would be the optimal selection? What's the optimal number of ads now that you consider the cost structure above?
3. What if the ads really cost MORE whenever you purchased more ads? (Imagine the costs of switching from billboards to tv commercials). How does your answer change when the total costs of ads are CA = 500 + 220A + 2A^2 ? Compare your answer with the previous one. Is the original experiencing diminishing returns or is this new one?
4. Would you consider advertising a short-run or long-run input? Is it variable or fixed? Why?
5. Give an example of a short-run variable cost, a short-run fixed cost, a long-run variable cost, and a long-run fixed cost.
6. Describe the two types of different contract options that leagues as a whole can decide from. Give examples of current leagues that use each type of tv contracts.
|
Ads Bought
|
Attendance
|
TC of Ads
|
Mc of ads
|
AC of ads
|
Marg-product
|
MRP
|
|
|
1
|
310
|
718
|
-
|
718
|
-
|
-
|
|
|
2
|
400
|
932
|
214
|
466
|
90
|
900
|
|
|
3
|
470
|
1142
|
210
|
380.67
|
70
|
700
|
|
|
4
|
520
|
1348
|
206
|
337
|
50
|
500
|
|
|
5
|
550
|
1550
|
202
|
310
|
30
|
300
|
|
|
6
|
560
|
1748
|
198
|
291.33
|
10
|
291.33
|
|
|
7
|
550
|
1942
|
194
|
277.43
|
-10
|
277.43
|
|
|
8
|
520
|
2132
|
190
|
266.5
|
-30
|
266.5
|
|