This is for Economics of Sports

Under the luxury tax in major league baseball, a team with a total player salary above a set threshold pays a fine equal to some fraction of the difference between their total team salary and the threshold level (that is, the more a team's payroll exceeds the limit, the more they pay).Teams whose total player salary is below the threshold pay no fine.

On a sheet of paper, draw a diagram that shows two TOTAL revenue curves, one for a large market team and one for a small market team, and one TOTAL cost line that both teams face; you can assume that costs consist entirely of player salaries.The total cost line should be a straight line through the origin.Label the profit maximizing winning percentages for each team (HINT - the larger market team should have a higher winning percentage than the small market team.)

Now suppose there is a luxury tax with a thresholdbetweenthe equilibrium total cost of the small market team and the equilibrium total cost of the large market team.Modify your diagram to reflect this extra cost and explain how the profit maximizing choices of the two teams are affected.(Do not worry about what is done with the luxury tax revenue).