Each of the following events tends to change the demand orthe supply of DVD movi

Question

Each of the following events tends to change the demand orthe supply of DVD movie

rentals, and as a result, increases or decreases the price of arental. In each case, indicate

(i) whether supply or demand is affected; (ii) the determinant ofsupply or demand that is

affected; and (iii) the change in equilibrium price and quantitythat is predicted. (1 mark

each)

a.      The federal government imposes atax of $0.25 on each DVD movie rental.

b.      The average price of going to amovie in a theatre increases by $2.00.

c.      A TV station that airs recentmovies drops its extra charge of $20.00 per month, and now includesthis service with the regular cable TV package.

d.      Reality television programs becomeso popular that a large proportion of those seeking entertainmentare enticed to spend much more time watching these programs.

Explanation / Answer

a.The federal government imposes a tax of $0.25 on each DVD movierental. Ans: This shifts the supply curve parallely to the left because thesupply will now be related to the tax inclusuve prices meaning thatif supply was x at a price p earlier, now the same supply will beforthcoming at the tax inclusive price of $ (p+ 0.25). The newintersection of the demand supply curve will now occur to the leftand above the earlier equilibrium point. Thus the new equilibriumprice will be higher and equlibrium quantity will be lower ascompared with the earlier equilibrium. In this case, the marginalcost of supply is increased as the the seller as to charge the taxto the buyers for each unit sold @ $0.25. b.The average price of going to a movie in a theatre increases by$2.00. Ans: This will in the short-run shift the supply curve to the leftas the suppliers are going to charge a higher price for the samelevel of supply of the movie tickets. Given a rise im price themoview goers will move upwards to the left along the demand curve(demand for movie tickets falls as the r as the price of going tomovie has increased relative to the prices of other entertainmentproducts/ services). The number of seats to see movies in thetheatre remains the same, but as we go from lower priced seats tohigher priced seats, the supply rises. With the higher averageprice, the supply schedule moves left. The new equilibrium would beat a higher price and lower movie seats sold in the theater. c.A TV station that airs recent movies drops its extra charge of$20.00 per month, and now includes this service with the regularcable TV package. Ans: This would mean that earlier demand abnd supply curves for newmovies from TV will no more be relevant. These would be subsumed inthe demand and supply of regular cable TV package. This would meanthat the supply of cable TV package inclusive of airing new movieswould be cheaper by $20. A flat supply curve of the new package isnow below the earlier supply curve of the package plus the newmovie transmission together. Demand schedule remains the same. Newconsumersare attracted by a new product available at lower pricefor the earler Cable TV product. Consumers move down the demandschdule and new equlibrium price for the product (TV new moviesplus Cable TV will be lower and with new subscribers enticed by abetter product with the same price, the demand (no. of subscribersto Cable TV) will be lower and the sales volume in terms ofincreased base of consumer, will be higher. d.Reality television programs become so popular that a largeproportion of those seeking entertainment are enticed to spend muchmore time watching these programs. Ans: Consumers find a new product, their taste and prference changeand thus we now have a new demand curve for Realty televisionprogrammes. The demand for Realty programsd may rise and this mayincrease the tarrif rates for advertisement during these programmebecause of the change in tastes and preference in favour of Realtyshows on the part of the TV viewers. For the existing subscribersof cable TV, there is no change in terms of a new equilrium, butthere will be growth of fresh subscribers will increase. Demand forsubstitue entertainment product like movies in theater may nowfall. . Source:http://office.net2fortune.com/get-answers.php?file=answers.yahoo.com/question/?qid=20080129074014AAsP7bO

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