Market For Live Rock Concerts

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5A. The graph below assumes the data in chart 3 “Ticket sales revenue is climbing steadily” by Pollstar was quoted in 2008 dollars and includes only the 100 highest-grossing tours. Supply/Demand Diagram for Changes in Market for Live Rock Concerts (1998-2008):

5B. Economists use cross elasticity of demand to determine whether two products are substitutes or complements. The cross elasticity of demand measures how quantity demanded of one good (albums) responds to a change in the price for another good (live concert tickets). For example, between 1998 and 2008, sales of albums were down 45%, but over the same period, concert ticket sales revenues more than doubled to $4.2 billion, despite rising rises. During this same time period,
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Free albums also encourage consumers to sample an artist’s music. In contrast, there are few, if any, alternatives to a live performance – listening to an album is not considered a substitute for a live concert. Additionally, most artists are unique and cannot be easily substituted by a different artist. Another factor to consider is resources (cash) – people who buy less albums have more cash to purchase a contract ticket.

6A. Economic profit equals net earnings, in the accountant’s sense, minus the opportunity costs of capital and any other inputs supplied by the firm’s owners. Bob and Jane’s economic profit is different from their accounting profit. Accounting Profit = Total Revenues – Total Costs = $8.0 mil - $7.4 mil = $.6 mil ($600,000). However, Economic profit = Accounting Profit ($600,000) - Opportunity Costs ($360,000) = $240,000. As also discussed in 6B, opportunity costs here include the wages they forfeit to run this business ($300,000),
PLUS a normal rate of return on the $600,000 paid up front for advertising (600,000*(.10)) or $60,000.

6B. A fixed cost is the cost of an input whose quantity does not rise when output goes up, one that the firm requires to produce any output at all. The total cost of such indivisible inputs does not change when the output changes. Any other cost of the firm’s operation is called a variable cost.

Fixed costs for Bob and Jane during their first year of operation is
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