Consider the market for DVD movie rentals, which is perfectly competitive. The m
ID: 1108674 • Letter: C
Question
Consider the market for DVD movie rentals, which is perfectly competitive. The market supply curve slopes upward, the market demand curve slopes downward, and the equilibrium rental price equals $3.50. Indicate how each of the following events will have an effect on the market clearing price and on the demand curve faced by the individual rental store.
People's tastes change in favor of going to see more movies at cinemas with their friends and family members.
Market Clearing Price Firm's Demand Curve
decreases or increases shifts up or shifts down
Explanation / Answer
The market is in equilibrium and is competitive in nature. DVD movie rentals and movies at cinema are substitutes so that when people start moving to cinemas for watching movies with their friends the demand for DVD rentals would fall.
Hence the demand curve shifts down and with this the market price as well as the market quantity both will decrease.