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4.Consider the markets for DVD movies, TV Screens, and tickets at movie theaters.
a. For each pair, identify,whether they are complements or substitutes:
DVDs and TV screens
DVDs and movie tickets
TV screens and movie tickets
b. Suppose a technological advance reduces the cost of manufacturing TV screens. Draw a diagram to show what happens in the market for TV screens.
c.Draw two more diagrams to show how the change in the market for TV screens affects the markets for DVDs and movie tickets
Ans :
a)
DVDs and TV screens - Complements
DVDs and movie tickets – substitutes
TV screens and movie tickets – substitutes
b) Let us say that the market for TV screens is in equilibrium at the market price P1 and quantity demanded Q1. The technological advance reduces the cost of manufacturing TV screens. So, the producers will supply more TV screens at each price. This will result in an outward shift of the supply curve. The new equilibrium point is now at Price P2 and quantity Q2. This results in a fall in price and increase in quantity demanded.
c) When the price of TV screens, complement of DVDs, decreases, the demand for DVDs will increase at each price resulting in an outward shift in the demand for DVDs. This will move the new equilibrium to P2 and Q2 increasing the price as well as the quantity demanded.
When the price of TV screens, substitute of movie tickets, decreases, the demand for movie tickets will fall at each price resulting in a leftward shift of the demand for movie tickets. The new equilibrium will now be at P2 and Q2 decreasing the price as well as the quantity demanded of the movie tickets.
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