Suppose owners in the NFL are considering a lockout. It will last one year. Owne

Question

Suppose owners in the NFL are considering a lockout. It will last one year. Owners usually make $300 million, net, in a given year. If the lockout is successful, owners will make $900 million the year after the lockout but only $100 million during the lockout year. If the lockout is not successful, owners will make $100 million during the lockout plus the usual $300 million the next year. If the changes of winning are 30 percent, what is the expected value of the lockout? Should they do it? (hint: be careful to consider the possible costs of fan ire in the year after the lockout.)

Explanation / Answer

If the lockout is successful, owners will make $900 million the year after the lockout but only $100 million during the lockout year. If the lockout is not successful, owners will make $100 million during the lockout plus the usual $300 million the next year. Find the expected value of lockout

E(L) = 30%*(900 + 100) + 70%*(100 + 300) = $580 million

If the changes of winning are 30 percent, the expected value of the lockout is $580 million

Since the owners usually make $300 million, net, in a given year, the expected value is $580 million and so the expected value is higher than what they usually make. They must go for lockout if cost of fanfire is under $280 million

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