Question

11\. 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. a. When the new writers' agreement comes into effect, what will happen in the market for video rentals-that is, will supply or demand shift, and how? As a result, how will consumer surplus in the market for video rentals change? Illustrate with a diagram. Do you think the writers' agreement will be popular with consumers who rent videos? b. Consumers consider video rentals and on-demand movies substitutable to some extent. When the new writers' agreement comes into effect, what will happen in the market for on-demand movies-that is, will supply or demand shift, and how? As a result, how will producer surplus in the market for on-demand movies change? Illustrate with a diagram. Do you think the writers' agreement will be popular with cable television companies that show on-demand movies?

Short answer

Answer: The new agreement causes an increase in video rental costs, leading to a decrease in demand for video rentals and a decrease in consumer surplus, making it unpopular among consumers who rent videos. Conversely, the demand for on-demand movies increases, leading to an increase in producer surplus, making the agreement popular among cable television companies that show on-demand movies.

Step-by-step solution

An increase in the cost of video rentals

Since screenwriters will receive 10% of the revenue from every video rental, the cost of renting videos will increase. This is because video rental companies will have to compensate for the additional expenditure on writer royalties.

Decrease in the demand for video rentals

As the cost of renting videos increases, consumers might find it less attractive to rent videos, leading to a decline in the demand for video rentals. In other words, there will be a downward shift in the demand curve for video rentals.

The change in consumer surplus

Consumer surplus is the difference between the amount a consumer is willing to pay and the actual price they pay. When the demand for video rentals decreases, the price consumers are willing to pay also decreases, leading to a decrease in consumer surplus.

The impact on the writers' agreement's popularity

The new agreement may not be popular among consumers who rent videos, as it will lead to increased rental costs and a decrease in their consumer surplus. b. The impact of the new agreement on the market for on-demand movies:

The shift in the demand for on-demand movies

Since video rentals and on-demand movies are substitute goods, it's expected that if the demand for video rentals decreases, the demand for on-demand movies will increase. This means there will be an upward shift in the demand curve for on-demand movies.

The change in producer surplus

Producer surplus is the difference between the amount a producer is willing to accept and the actual price they receive. When the demand for on-demand movies increases, the price consumers are willing to pay also increases, leading to an increase in producer surplus.

The impact on the popularity of the writers' agreement among cable television companies

The new writers' agreement is likely to be popular among cable television companies that show on-demand movies, as it would lead to increased demand for their on-demand movie services and an increase in their producer surplus.