The University Athletic Department Has Been Asked to Host a Professional

question 32

Essay

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 2 minutes per spectator. The labor would be hired especially for the basketball game and would cost $16 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:

Common Resource

A resource like air or water that is non-excludable and rivalrous, meaning it's impossible to prevent anyone from using it, but one person's use diminishes another person's ability to use it.

Nonexcludable

A nonexcludable good is one where it is not possible to prevent people who have not paid for it from having access to it, typical in public goods.

Marginal Social Benefit

The additional benefit received by society as a whole from consuming one more unit of a good or service.

Public Good

A good or service offered to every member of a community free of charge, supplied either by the government or a non-profit private entity.