A city with 4% unemployment and no inflation is considering building a new stadium for its professional

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Question:

A city with 4% unemployment and no inflation is considering building a new stadium for its professional football team. The team currently plays in an old stadium owned by the city. If a new stadium were to be built, it would cost city $400M (M for million) to demolish the old one and build the new one. The new stadium would be expected to last for 40 years and the city would finance the costs of the project by borrowing at 5% annual interest and paying $25M per year for 40 years to repay the debt and other expenses. About $200M of the demolition and construction cost would be spent on labor and materials supplied by the city residents (referred to as locals). The team owner, who is not a local, would pay for maintenance of the stadium and would pay the city $1M per year rent. The owner’s company would sell the tickets to games, parking, and concessions (food, drink, souvenirs, etc.) and keep the profits from those sales.

Analysts estimate that if the stadium is built, the locals’ demand curve for tickets to the games will be linear each year, with a choke price of $130, and that locals will buy 100,000 tickets per year from the team owner’s company at an average price of $70 per ticket. Analysts estimate the team owner will sell another 0.4M tickets per year to outsiders (not locals) who will spend an additional $40 on average, per game ticket, on restaurants, hotels and other goods and services provided by city residents. Assume that the average profit rate of local business and local labor is 0.2. Except in part g, below, assume that the analysts’ estimates are correct. Except in part i, assume that the football team will leave the city if the new stadium is not built.

a.[10] Assume that the locals’ marginal propensity to consume local value added is 0.3. Explain what this means. Use this information to estimate the net generated income for the locals from the construction of the stadium alone, making reasonable assumptions about any other missing information. Explain all your steps. Translate this net generated income into annualized income for the residents at 5% annual interest.

b.[7] An economic impact analysis of the stadium project estimates that the construction alone would give the locals generated income of $500M (estimated to be the $200M spent on local value added times a multiplier of 2.5). Give all the reasons why this estimate differs from the net generated income estimated in part a and why the $500M estimate is probably much higher than the net benefit the locals would get from the income generated by the construction alone (ignoring what they must pay to build the stadium and ignoring any benefit they would get from games played there after the construction is finished).