2. Consider the market for DVD movie rentals, which is perfectly competitive. Th

Question

2. Consider the market for DVD movie rentals, which is perfectly competitive. The market supply curve slopes upward, the market demand curve sloped downward, and the equilibrium rental price equals $3.50. Consider each of the following events, and discuss the effects they will have on the market clearing price and the demand curve faced by the individual rental store.

a. People’s tastes change in favor of going to see more movies at cinemas with their friends and family members.
b. National DVD-rental chains open a number of new stores in this market.
c. There is a significant increase in the price of downloading movies on the Internet

Explanation / Answer

a. People’s tastes change in favor of going to see more movies at cinemas with their friends and family members. The entire demand curve will shift to the left, decreasing both the equilibrium price and quantity b. National DVD-rental chains open a number of new stores in this market. The entire supply curve shifts to the right, decreasing the equilibrium price and increasing the quantity c. There is a significant increase in the price of downloading movies on the Internet Since the internet would be a substitute good, increasing the price causes demand for rentals to go up--the entire demand curve would shift to the right, increasing both the equilibrium price and

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