Suppose we have two markets in Major League Baseball, Los Angeles (Dodgers) and Oakland (Athletics). In LA, the demand for wins is: P(w1) = 150 25w1 and in Oakland, it is: P(w2) = 130 25w2 Round all answers to two decimal places.

1. Free Market: suppose there are no policies in place to encourage balance.

(a) What is the equilibrium win percentage for the Dodgers(w 1 )?

(b) What is payroll for the Dodgers?

(c) What is payroll for the Athletics?

(d) What is profit (surplus) for the Dodgers?

(e) What is profit (surplus) for the Athletics?

2. Revenue Sharing: Suppose the league institutes a revenue sharing agreement where each team shares = 0.10 of their revenue with the other team. (i.e., they get to keep 0.90 of their own).

(a) What is the equilibrium win percentage for the Dodgers(w 1 )?

(b) What is payroll for the Dodgers?

(c) What is payroll for the Athletics?

(d) What is profit (surplus) for the Dodgers?

(e) What is profit (surplus) for the Athletics?

3. Salary Cap: suppose there is a salary cap of MC = CAP.

(a) What should the CAP be to get to w = .5?

(b) What is the equilibrium win percentage for the Dodgers(w 1 )?

(c) What is payroll for the Dodgers?

(d) What is payroll for the Athletics?

(e) What is profit (surplus) for the Dodgers?

(f) What is profit (surplus) for the Athletics?

4. Luxury Tax: suppose that the Dodgers pay a tax of = 0.16 on every dollar of revenue (i.e., they get to keep 0.84).

(a) What is the equilibrium win percentage for the Dodgers(w 1 )?

(b) What is payroll for the Dodgers?

(c) What is payroll for the Athletics?

(d) What is profit (surplus) for the Dodgers?

(e) What is profit (surplus) for the Athletics?