Question:
Consider a baseball team that has a ticket price of $45 and sells 30,000 tickets at this price. The slope of the demand curve is - $0.002. The typical fan purchases $25 worth of merchandise that costs the owner $5 to provide.
a. The marginal revenue from ticket sales is _________.
b. Including both ticket sales and merchandise, the marginal fan contributes an additional _________ to the team’s total revenue.
Transcribed Image Text:
Application 1
MARGINAL REVENUE FROM A BASEBALL FAN
APPLYING THE CONCEPTS #1: How does a monopolist maximize profit?
We expect the owner of a major league baseball (MLB) team to
choose the quantity (the number of fans at the game) at which
marginal revenue equals marginal cost (MR = MC). The mar-
ginal cost of an additional fan is close to zero, so the profit-
maximization rule simplifies to MR = 0. And yet for the typical
team, it appears that MR is actually negative: adding fans by
selling more tickets actually decreases total revenue from tick-
ets. What explains this puzzling behavior?
We can illustrate the puzzle with a simple example. Sup-
pose that with a ticket price of $24, the team sells 20,000
tickets. If the slope of the demand curve is -0.002, marginal
revenue is $16:
MR = $24 – 0.002 × 20,000 = 16
In this case, cutting the price to sell one more ticket generates
good news ($24 collected from the new fan) that is less than
the bad news (the $40 lost on the 20,000 fans who would have
paid the higher price). The marginal revenue is negative, so the
team could increase its total revenue from tickets by increasing
the price and decreasing the quantity of tickets sold. Why don't
MLB teams increase their ticket prices?
The solution to this puzzle is concessions. Suppose the
average MLB fan spends $20 per game on merchandise that
costs the owner about $4 to provide. In this case, each ticket
sold generates an additional $16 in net concession revenue to the
owner, just enough to offset the $16 revenue loss on ticket sales.
Once we expand the definition of marginal revenue to include the
net revenue from concessions, the owner's choice is consistent
with profit maximization. What appears to be too low a price
could be just about right.