uppose there are two teams in a league: Team A exists in a big market, and Team

ID: 1151132 • Letter: U

Question

uppose there are two teams in a league: Team A exists in a big market, and Team B exists in a small market.

Team A receives $450 mln in revenue and pays $280 mln in costs.

Team B receives $300 mln in revenue, and pays $330 mln in costs.

If the teams share revenue as a 60 - 40 split, what is the revenue of Team A? million dollars

If the teams share revenue as a 60 - 40 split, what is the revenue of Team B? million dollars

What is the profit (loss) of Team B without revenue sharing? million dollars

What is the profit (loss) of Team B with revenue sharing? million dollars

Note: Profit must be a positive value, loss must be a negative value.

Refer to the previous question. Does revenue sharing guarantee that Team B (the small-market team) will improve their roster?

Yes, as it considerably increases the share Team B will receive from winning

Yes, as Team B now has more revenue to spend on their roster

No, Team B's incentive to improve its roster is smaller with revenue sharing; it must share gains from winning with Team A and gets a share of Team A's revenue if it loses.

No, Team B cannot invest any of the shared revenue into its new roster.

Yes, as it considerably increases the share Team B will receive from winning

Yes, as Team B now has more revenue to spend on their roster

No, Team B's incentive to improve its roster is smaller with revenue sharing; it must share gains from winning with Team A and gets a share of Team A's revenue if it loses.

No, Team B cannot invest any of the shared revenue into its new roster.

Explanation / Answer

Revenue

Costs

Profit

Team A

450

280

170

Team B

300

330

-30

Total

750

610

Team A 60 % share

450

280

Team B 40 % share

300

330

-30

The revenue of team A by sharing is $450 million

The revenue of team B by sharing is $300 million

Profit of Team B without sharing is -$30 million

Profit of Team B with sharing is -$30 million as costs are not shared

Option 3. as the costs are not shared and only revenue would lead to same earlier situation of team B. If costs are shared then team B would be in profit.