Fixed and Variable Costs

question 11

Essay

Fixed and Variable Costs
The university athletic department has been asked to host a professional basketball game at the campus sports center.The athletic director must estimate the opportunity cost of holding the event at the sports center.The only other event scheduled for the sports center that evening is a fencing match that would not have generated any additional costs or revenues.The fencing match can be held at the local high school,but the rental cost of the high school gym would be $200.The athletic director estimates that the professional basketball game will require 20 hours of labor to prepare the building.Clean-up depends on the number of spectators.The athletic director estimates the time of clean-up to be equal to 2 minutes per spectator.The labor would be hired especially for the basketball game and would cost $8 per hour.Utilities will be $500 greater if the basketball game is held at the sports center.All other costs would be covered by the professional basketball team.
Required:
a.What is the variable cost of having one more spectator?
b.What is the opportunity cost of allowing the professional basketball team to use the sports center if 10,000 spectators are expected?
c.What is the opportunity cost of allowing the professional basketball team to use the sports center if 12,000 spectators are expected?

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Definitions:

Economic Profits

The financial gain achieved when revenues exceed both explicit and implicit costs.

Oligopoly Model

A market structure characterized by a few firms dominating the market, leading to strategic interactions in pricing and production.

Cournot

Refers to a model of duopoly competition in which companies choose quantity to produce independently, influencing the market price.

Nash Equilibrium

An idea in game theory where a player cannot benefit by changing their own strategy alone, assuming the strategies of other players are constant.