Question

Suppose 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

Question 2:

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

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

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

C. 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.

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

Answer 1

Total revenue that is earned by A is 270 Million dollars

Total revenue is of about 180 miilion dollars for team B

Team B has to bear a loss of about 30 million dollars if revenue is not shared while team A will have a profit of almost 170 million dollars.

The answer to the Q2 is

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.