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Chapter 2

Q. 2.SS.1

Identifying Opportunity Costs
In the United States, athletics play a major role on many university campuses. At Western University (WU), athletic scholarships are a key mechanism in WU’s strategy to attract star athletes. These scholarships average $25,000 per student annually. Due to budget cutbacks, the university administration believes that it can no longer afford them. The athletics department is arguing that the cost of dropping athletic scholarships will be high. Competitive teams are known to generate donor revenues and publicity. Without the scholarships, the athletic teams will not be competitive and WU might be dropped from the Big-17 Conference. This conference includes major university teams that attract the most interest as the premier teams in the country. Ticket revenues will drop by 10 to 20 percent. Alumni will not provide as many donations. Currently, alumni give several million dollars per year to WU, and these funds help the university to offset cutbacks in government funding. Since many of the athletes are on partial scholarships, WU also might lose the remaining tuition. The average tuition fees are $35,000 per year. WU will get less media attention, especially in the sports pages of newspapers, on television, and the
Internet. What are the benefits and opportunity costs of providing athletic scholarships?


Verified Solution

The arguments of the athletics department reveal benefits of having athletic scholarships, especially as part of WU’s strategy to attract star players. Competitive teams are one way to attract donors and publicity. These benefits, however, are difficult to measure. For example, donations and ticket revenues are likely to be higher with more competitive teams. Publicity will probably be higher, but the value of this publicity is difficult to measure. The value of being in an athletic conference depends on the quality of the other institutions in the league. Being in the premier league, for example, gives those institutions a certain amount of prestige, which is difficult to value. Athletes on partial scholarships also pay some tuition. These benefits should be offset against the opportunity costs of having athletic scholarships. What are the forgone opportunities of providing scholarships? The opportunity cost of any cash payments to athletes for books, housing, and food can be measured directly. However, most of the scholarship is the waiving of tuition and providing free education to the athletes. The opportunity cost depends on whether providing free education to athletes prevents a tuition-paying student from attending
WU. If the university is at capacity and the athlete takes the place of a tuition-paying student, the forgone opportunity is the lost tuition. In the case of WU, this amount is $35,000 per student. If WU is not at capacity, the forgone opportunity is the marginal cost (approximated by the variable cost) of educating an additional student. The variable cost of educating a student (additional materials, grading, etc.) might not be very high, as most costs at a university are fixed (such as faculty and staff salaries).