4. Brandon and his family often rent movies from the new Internet movie streamin
ID: 1140772 • Letter: 4
Question
4. Brandon and his family often rent movies from the new Internet movie streaming service, Xanadu®. The table below shows Brandon’s demand schedule for eight movie rentals that Brandon’s family is interested in watching.
Number of internet video rentals
Willingness to pay each rental
1st movie rental
$7
2nd movie rental
$6
3rd movie rental
$5
4th movie rental
$4
5th movie rental
$3
6th movie rental
$2
7th movie rental
$1
8th movie rental
$0
a. If the price of each movie rental from Xanadu is $3, how many movie rentals will Brandon buy and how much consumer surplus does Brandon receive? Explain your answer.
b. If the price of each movie rental from Xanadu is $5, how many movie rentals will Brandon buy and how much consumer surplus does Brandon receive? Explain your answer.
c. If the Xanadu online service offers as many movie rentals as the customer wants to download, all for a one-time yearly subscription fee of $25.00, how many movie rentals will Brandon download and how much consumer surplus will Brandon receive? Explain your answer.
d. If the Xanadu online service offers as many movie rentals as the customer wants to download, all for a one-time yearly subscription fee of $35.00, how many movie rentals will Brandon download and how much consumer surplus will Brandon receive? Explain your answer.
e. If the Xanadu’s market research showed that Brandon’s demand represented what most of Xanadu’s customers wanted, what would be the most that Xanadu could charge as a one-time annual fee for all the downloads that the customer wanted?
Number of internet video rentals
Willingness to pay each rental
1st movie rental
$7
2nd movie rental
$6
3rd movie rental
$5
4th movie rental
$4
5th movie rental
$3
6th movie rental
$2
7th movie rental
$1
8th movie rental
$0
Explanation / Answer
A). Brandon will be able to rent 5 movies. The surplus he gets will be the amount he will get by forking out for the five rentals which is (5*3=15), minus the amounts that he would be willing to fork out for the same rentals which will be 7+6+5+4+3= 25 therefore the surplus will be 25-15=10.
b.If the movies were rented out at $5 he would only be able to rent only 3 movies. The surpluswould be (5*3=15) minus (7+6+5=18). therefore, the surplus would be 3.
c. Brandon will only be able to rent 7 movies, because at the 8thmovie he is willing to pay nothing for it meaning at the 8th rental he has no interest in watching those movies. The surplus would be 28-25=3.
d. Brandon will still download 7 movies and he will not have a consumer surplus but a consumer deficit of 7. Which is 28-35=-7
E) Based on Brandon’s demand, the most that Xanadu could charge as a one-time annual fee for all the downloads that the customer wanted would be $28 ($7 + $6 + $5 + $4 + $3 + $2 + $1).
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