has instituted a cap on team salaries, a system of revenue sharing, and more
favorable player draft positions and schedules for weaker teams.^6
How can a sports franchise construct a winning team with a strictly limited
player budget ($120 million per team in 2011)? Coach Bill Belichick of the
New England Patriots (once an economics major at Wesleyan University)
assembled teams that won the Super Bowl in 2002, 2004, and 2005, before los-
ing the Super Bowl in 2008, by carefully considering not only player perform-
ance, but also price. The Patriots deliberately avoided superstars (considered
to be overpriced) and relied instead on a mix of moderate-priced veterans and
undervalued free agents and draft choices. The team traded marquee quar-
terback Drew Bledsoe and installed young Tom Brady in his place. Lawyer
Milloy, an outstanding defensive player, was replaced with free-agent veteran
Rodney Harrison, trading a $5.8 million salary for $3.2 million. Though
Milloy’s marginal product (i.e., ability and winning impact) was likely higher
than Harrison’s, this gain was not worth the salary price. Harrison was retained
because MPH/PHMPM/PM.
By contrast, major league baseball, lacking a salary cap and having limited
revenue sharing, suffers from severe competitive inequalities. The richest large-
market teams are able to sign the established top players at gargantuan salaries
and, thus, assemble the best teams. Championship teams bring extra revenues,
and strong players help bring championships. During the fall of 2007, the
Yankees re-signed free-agent superstar Alex Rodriguez for $175 million (plus
incentive bonuses) for 10 years. With no salary cap, the signing makes eco-
nomic sense as long as the player’s marginal revenue product is greater than
his salary: MRPLPL. And since championships produce greater marginal
revenues for large-market teams than for small-market teams, the marginal rev-
enue product is much greater for the Yankees than for other teams. Thus the
Yankees were probably one of a few teams in baseball willing to pay A-Rod this
much money.
In sum, under their respective ground rules, baseball’s rich tend to get richer,
while football’s middle-class teams operate on the same level playing field.A GRAPHICAL APPROACH Consider once again the production function of
Example 3: Q 40L L^2 54K 1.5K^2. We saw that the firm could pro-
duce Q 636 units of output using L 10 and K 8 units of inputs. The
same output, Q 636, can be produced using different combinations of
labor and capital: 6 units of labor and 12 units of capital, for instance.
(Check this.)
An isoquantis a curve that shows all possible combinations of inputs that
can produce a given level of output. The isoquant corresponding to Q 636
is drawn in Figure 5.2a. The amounts of the inputs are listed on the axes. Three202 Chapter 5 Production(^6) This account is based in part on L. Zinser, “Path to Super Bowl No Longer Paved with Stars,” The
New York Times(February 4, 2004), p. A1.
c05Production.qxd 9/5/11 5:49 PM Page 202