If cable TV subscriptions and movie rentals are substitutes for each other, what is the effect in each of these markets of an increase in wages for people who work for the cable TV company? Use your analysis to determine the sign of the cross
elasticity of demand between the quantity of movie rentals and the price of cable TV.
The supply curve of cable TV shifts leftward because wages are a cost of production, so the price of cable TV rises. Cable TV subscribers decrease the quantity of cable TV they demand (they move leftward along their demand curve for cable TV). Cable TV subscribers increase their demand for movie rentals (the demand curve for movie rentals shifts rightward) so that the equilibrium price and quantity of movie rentals both increase. Hence, when the price of cable TV goes up then the quantity of movie rentals increases, so their cross elasticity of demand is positive.
You might also like to view...
The demand curve for pizza is downward sloping and the supply curve is upward sloping. If the government imposes a $2 tax on a pizza, ________ the tax
A) only consumers pay B) only producers pay C) both producers and consumers pay part of D) neither producers nor consumers pay part of E) the government pays
Explain how the Harrod-Domar growth model, while extremely limited, provides important insights into the growth process
What will be an ideal response?