Question

2. Suppose that there are 4 NBA teams in the market for a starting power forward. The teams are the Nuggets (who would have a maximum willingness to pay of $20M per year), the Kings (who would have a maximum willingness to pay of $17M per year), the Thunder (who would have a maximum willingness to pay of $15M per year), and the Bucks (who would have a maximum willingness to pay of $12M). There are also three power forwards who are willing to sell their services: player A is willing to play for a season for a minimum of $2M, player B is willing to play for a season for a minimum of $5M, and player C is willing to player a season for a minimum of $10M. a. Separately draw the demand curve and the supply curve in this market. b. Put there curves together to determine the market equilibrium price and quantity predicted by this supply and demand framework. Which teams will hire power forwards? C. Why might teams have different willingness to pay for the same type of player?

Answer 1

Part (a):

Graphs: See the attached image

Explanation:

At the price of $ 20 M, only one team is willing to buy a player. Hence the quantity demanded is 1 unit (or player)

Between $ 17 M and $ 20 M, the quantity demanded stays at 1, since the Kings would not demand a player until $ 17 M is reached

At the price of $ 17 M, two teams are willing to buy a player. Hence the quantity demanded is 2 units (or players)

Again, until the price falls to $ 15 M, The Thunders do not want to buy a player. Hence quantity demanded stays at 2. Only at $ 15 M or below, the quantity demanded rises to 3.

Finally, at $ 12 M, all four teams are willing to buy a player. Hence, quantity demanded is 4 units (or players)

Bottom-line is that the demand curve is going to be stepped and downward slopping, instead of a smooth continuous curve.

Again, the supply curve will be a stepped upward rising curve. At 2 M$, only one player is willing to play, so quantity supplied is one unit.

Between 2 and 5 M $, supply stays at 1. After which the supply rises to 2. Again, the supply stays at 2 players, until the price reaches $ 10 M, following which all three players supply their services in the market.

Part (b)

poort (9) ] D d price ($M) & Curve in 15 T 3.4 nanded - a ty demanded supply clone pouce ($M) s wt aty supplied

Graph: See attached image

Explanation:

Equilibrium occurs at the price where quantity supplied equals the quantity demanded. Now, as we can recall, the maximum amount, any of the players were willing to accept was $ 10 M (Player C). This also means, that at any price above $ 10 M as well, all the three players will want to play.

At the price of $ 15 M, the quantity demanded is 3, by the Nuggets, Kings and Thunder. And obviously, the quantity supplied will also be 3. This is consistent with our definition of equilibrium price. Hence, $15 M, is the equilibrium price, and 3 is the equilibrium quantity.

Finally, The Nuggets, Kings and Thunder are the teams which can acquire a player.

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Part (c)

There might be many possible reasons, for different teams willing to pay different amounts for the same type of player:

1. The teams, might vary in terms of their budget. Higher the budget, higher is the willingness to pay for the player.

2. The purpose because of which the team is buying the player. Is the player gonna be a regular starter, or perhaps, the coach is looking to improve his bench strength. In the second case the willingness to pay is definitely going to be less. This is the case of availability of similar (or substitute) players in the team.

3. It might even be an emergency situation, so that there is an exogenous rise in requirement for the player type, Say, the primary power forward got injured. In such a situation, the concerned club will obviously be willing to pay more than other clubs.