Problem 2: Stadium Subsidies. Suppose that Oakland currently has an NFL team (the

Raiders), but the Raiders are seeking subsidies to build a new stadium. Demand for football

in Oakland is given by:

P(Q_O) = 80 3Q_O

Las Vegas is a city without an NFL team, but they want one. Demand for a football in Las

Vegas is given by:

P(Q_L) = 100 4Q_L

The marginal cost in both cities is constant at MC = 20.

1. Suppose first that all subsidies are banned.

a) What are the Raider's profits in Oakland?

b) What are the Raider's profits if they move to Las Vegas?

c) Is the team going to move to Las Vegas?

2. Suppose now that cities can offer subsidies (i.e., bids) to attract the team.

a) What is the highest subsidy that Las Vegas would offer the owners of the Raiders

to move?

b) What is the highest subsidy that Oakland would offer the owners to stay?

c) Would the team move to Las Vegas?

d) How much is the winning subsidy?

e) What is the profit+subsidy for the team?

f) What is consumer surplus minus the subsidy?

3. Suppose that the Raider's profits in Oakland are actually 425.

a) If subsidies are banned, where would the team locate?

b) If subsidies are allowed, would the team move to Las Vegas?

c) If subsidies are allowed, how much is the winning subsidy?

d) If subsidies are allowed, what is the profit+subsidy for the team?

e) If subsidies are allowed, what is consumer surplus minus the subsidy?

4. Now, go back to the original values of profits for the Raiders in each city. Suppose that

each city makes an error in their own valuation of the team. In particular, Oakland

overestimates the consumer surplus from the team by 100 and Las Vegas underesti-

mates the consumers surplus from the team by 100.

a) If each city is willing to offer a subsidy up to their valuation, where would the

team locate?

b) If each city offers a subsidy equal to their valuation, how much is the winning

subsidy?

c) What is the profit+subsidy for the team?

d) What is the consumer surplus minus the subsidy?