Work It Out Chapter 4

Question 1 of 4

Work It Out

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Hollywood screenwriters negotiate a new agreement with movie producers stipulating that they will receive 10% of the revenue from every video rental of a movie they authored. They have no such agreement for movies shown on on-demand television.

When the new writers’ agreement comes into effect, what will happen in the market for video rentals?

The supply curve will shift left and the demand curve will shift right. Price of movie rentals will rise but the effect on quantity of movie rentals is ambiguous.

The supply curve will shift to the right while the demand curve remains constant. Price of movie rental will fall and quantity of movie rentals will rise.

The supply curve will shift to the left while the demand curve remains constant. Price of movie rentals will rise and quantity of movie rentals will fall.

The demand curve will shift right and the supply curve remains constant. Price and quantity of movie rentals will rise.

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WIO_Krugman_Chapter04_01

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As we’ve just seen the supply curve will shift to the left while the demand curve remains constant. Price of movie rentals will rise and quantity of movie rentals will fall. Keeping this in mind, how will consumer surplus in the market for video rentals change? Referring to the following graph, identify the change in consumer surplus:

The graph is entitled ‘Market for Video Rentals’ and shows two supply curves S1 and S2, with a single demand curve D1. The horizontal axis is labeled ‘Quantity’, and the vertical axis is labeled ‘Price’. S1 and S2 have positive slopes, and S2 is positioned parallel to and left of S1. The demand curve D1 is a downward sloping line. The point of intersection of the supply curve S1 with D1 corresponds to Q1 on the horizontal axis and P1 on the vertical axis. The point of intersection of the supply curve S2 with D1 corresponds to Q2 on the horizontal axis and P2 on the vertical axis. The areas under the intersecting lines are labeled A through G. Area A is the triangle over the dotted line extending from P2 on the vertical axis and point of intersection of S2 and D1 at Q2. The combined areas of B, C, and D correspond to the lines extending from points P1 and P2 to the intersection points on the demand curve D1 with supply curves S1 and S2. Areas E, F, and G form a triangle below the dotted line extending from P1 to the point of intersection of D1 and S1 at Q1.

The change in consumer surplus is equal to area B + C + D

The change in consumer surplus is equal to area A

The change in consumer surplus is equal to area A + B + C + D

The change in consumer surplus is equal to area D + F

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WIO_Krugman_Chapter04_02

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Consumers consider video rentals and on-demand movies substitutable to some extent. When the new writers’ agreement comes into effect, what will happen to the supply and demand curves and to price and quantity in the market for on-demand movies?

The supply curve will shift right while the demand curve remains constant. Price will decrease and quantity will rise.

The demand curve will shift rightward and the supply curve remains constant. Price and quantity will rise.

The demand curve will shift left while the supply curve remains constant. Price and quantity will fall.

The supply curve will shift left and the demand curve will shift right. Price will rise but the net effect on quantity is ambiguous.

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WIO_Krugman_Chapter04_03

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How will producer surplus in the market for on-demand movies change when the new writers' agreement is finalized? Using the following graph, identify the change in producer surplus:

The graph is entitled ‘Market for On-Demand Movies’ and shows two demand curves D1 and D2, with a single supply curve S1. The horizontal axis is labeled ‘Quantity’, and the vertical axis is labeled ‘Price’. D1 and D2 have negative slopes, and D2 is positioned parallel to and right of D1. The supply curve S1 is an upward sloping line. The point of intersection of the supply curve S1 with D1 corresponds to Q1 on the horizontal axis and P1 on the vertical axis. The point of intersection of the supply curve S1 with D2 corresponds to Q2 on the horizontal axis and P2 on the vertical axis. The areas under the intersecting lines are labeled A to D. The combined areas of A and B is the triangle over the dotted line extending from P2 on the vertical axis to the point of intersection of S1 and D2 at Q2. The combined areas of C, D and E is the triangle below the dotted line extending from P2 on the vertical axis to the point of intersection of S1 and D2 at Q2. Areas C and D correspond to the area enclosed by dotted lines extending from P1 and P2 on the vertical axis to the points of intersection on the supply curve S1 at Q1 and Q2. Area E is the triangle enclosed by the dotted line extending from P1 to the point of intersection of the supply curve S1 and D1 at Q1.

Areas C + D

Area C

Areas C + D + E

Area D

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Work It OutChapter 4

Question 1 of 4

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Step 4