(Class is sports economics)

Assume, as we have for pretty much the entire class, that:

• professional sports team owners make decisions about the quality of players they hire and the winning percentages they expect to achieve with the goal of maximizing the profits that result from operating their teams,
• team total revenue increases as a team's winning percentage increases, but at a diminishing rate (i.e., each team's total revenue curve is upward sloping but flattening out), and
• talent (measured in units that will achieve a point of winning percentage) is available at a competitive market-determined wage.

These are basically the assumptions that lie behind the two-team league model that we covered extensively in the first half of the course.

Under these conditions, what is the effect of fixed stadium subsidies on

(a) owners' profits,

(b) team quality and

(c) players' salaries?

Explain your answers.(HINT: What, if anything, happens on the margin?)