This is a group assignment. All members of the group are expected to
contribute to your report. Reports are due at the beginning of class
on December 6. On that day, each group will make a 20 min presentation
of its results. All members of the group should be familiar enough with
the assignment so that any one can answer audience questions.
The assignment is designed to allow you to grapple with some of the
issues that surround applying the knowledge you learn in the class to real
world problems. As such, what I would value most in the presentations is
a creative solution to some of the questions in the assignment that are
not solvable merely from what I have provided. Since some of the questions
have more than one answer, I expect to see a range of opinions in the presentations.
The important point is to be able to justify your answers.
Some of the numbers in Exhibit B are available in an Excel file.
If you wish to download that file, click here.
If this does not work, try right clicking and selecting ``save link as
...'' Save the file in a place that you can find it and then use
excel/lotus/etc to open it.
If you are not sure which group you are in, click here
for a list of the groups.
Some Helpful Hints
Don't even think of trying to do this project
on a calculator: If you do not know how to use a spreadsheet
or some other computer program, now it the time to learn. Once you have
solved the single discount rate part, you can easily do the sensitivity
analysis (and the plots) by copying the formulae and varying the inputs.
How do I compute the tax revenue given a tax rate
and an elasticity?
Let t be the tax rate increase, A be the attendance before
the tax increase, p be the ticket price, e be the price elasticity
and R be the new tax revenue. First assume that there is no change
in attendance when prices increase. Well in that case,
R = ( totalgate receipts) x (tax rate) = A p
t
Now assume that there is a change in attendance when there is a price
change. This is given by the elasticity --- the % change in attendance
for a 1% change in price. Now the imposition of a tax t effectively
means that the new price paid by the public is p (1+t) and so the
price has effectively increased by pt. The % change is therefore
pt/p = t (where I have not bothered to multiply by 100). Well this
means that attendance will decrease by et %. So the new attendance
will be old attendance- (old attendance)(% change in attendance)
= A(1-et). At this new level of attendance total gate receipts will
be A(1-et)p. So now we can compute the tax revenue as before
R = ( totalgate receipts) x (tax rate) = A(1-
e t) p t = A p t (1- e t).
Start Early: Do not leave this to the
last minute. This assignment requires a lot of thinking, something that
is difficult to do when you are under time pressure. I have put a list
of all of your email
addresses on the main menu of my homepage so you can easily get in touch
with people who have been assigned to your group and who you do not know.
Have fun! I picked this particular
problem because I suspected that you would be interested in the solution.
So do not lose sight of this. This will become a big drag if all you are
interested in doing is finding the "right" answer rather than thinking
of it as a way of arriving at an informed opinion on the issue. Who knows,
you might even consider changing your opinion after this assignment! It
should make you feel good that with just one quarter of finance you are
able to analyze this problem in greater depth than any newspaper or TV
report that I know of.