Question

In: Economics

Many movie consumers who used to rent DVDs are now patronising online video rentals, especially, streaming...

Many movie consumers who used to rent DVDs are now patronising online video rentals, especially, streaming services. a. What impact did the advent of online video rentals and streaming have on the in-store movie industry? Use the demand and supply diagram to illustrate your answer. Pay attention to how the equilibrium quantity and price adjust. Make state all your assumptions. b. Which would be more price elastic, the demand for Netflix online streaming or the demand for online movie rentals in general? Explain. c. Would the cross-price elasticity of demand for online movie rentals and in-store movie rentals be positive or negative? What does your answer imply for the equilibrium price and quantity of online movie rentals? Use the demand and supply diagram to illustrate your answer. d. Because of COVID-19 most people are staying indoors, yet they cannot afford online streaming movies, like Netflix. Should the government regulate the price of online streaming? In your answer, critically discuss the pros and cons of price regulation.plz answer with full answers question number number too

Expert Solution

Answer (a) : Popularity of online video rental surpassed DVD rental stores. There is huge demand of online video rental and very less demand of DVD rental. Online video rental is hassle free to purchase and one need not to visit any store physically like in case of DVD rental. Online video rental is economic as compare to DVD as there is no manufacturing cost in online video rental. Customers also have wide choice to watching movies as in case of DVD people need to purchase different DVD's for different movies.

Assumptions :

1) There are only two modes of movie rental.

2) No other substitute is available.

3) Income of consumer is constant.

Due to merits of online video rental for both buyer and seller, demand of DVD rental is low then it's supply hence it's equilibrium price and quantity both dropped. Whereas demand for online video rental increased.

As prices of online video rental is low then it's demand increases and its price rises. As price are at high then also people use to rent online video store like Netfix. But it bear some decrease in demand.

Answer (b): Demand for online movie rental in general will be having more price elasticity. As Netflix is brand that is established and people are ready to purchase it's streaming services at any cost hence it is inelastic. But generally online movie rental rise in price will having huge impact on quantity demanded.

Hence demand for online movie rental in general will have more price elasticity as compare to Netflix.

Answer (c): As with increase in price of online movie rental do not cause much increase in demand for in store movie rentals. Hence it is concluded that these are weak substitutes as there are many streaming services other then Netflix to which people can shift. So cross price elasticity of demand between online movie rental and in store movie rental is positive but less. Due to low increase in demand of in store movie rental.

Hence concluded that cross elasticity of demand is positive but less than 1. This means both are weak substitutes.

Answer (d): Government should not regulate price of online streaming services as this will reduce profits for movie industries. There is DTH services which are still available for people to enjoy movies who cannot afford to avail online streaming services.

Pros of regulating prices :

1) Affordable to large part of Population.

2) Source of entertainment which will induce people to remain at home that could help in low spread of COVID-19.

Cons of price regulations :

1) Low profits to movie industries.

2) Demotivation for investment in movie industries. Due to zero revenue from cinemas which are not resumed due to COVID-19. In order to earn profits regulations of prices will be not good.

3) Revenue Expenditure of government which is not necessity but only entertainment so there will be huge wastage of capital which will be paid to compensate movie industries for regulation for prices.

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Rahul Sunny answered 1 year ago

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