A prominent online movie rental service mails rental DVDs to consumers. The service offers two pricing plans. Under the first plan, consumers face a flat $10 fee each month and can rent as many DVDs as they wish for free. Under the second plan, consumers can rent DVDs for an à la carte price of $2. Assume that a consumer has an income of $20 and uses it to purchase DVD rentals and a “composite good” that costs $1 per unit. a. Draw a set of indifference curves for a representative consumer, putting DVD rentals on the horizontal axis. b. Draw the budget constraint for the à la carte movie rental plan, making sure to indicate the horizontal and vertical intercepts. Find the consumer’s optimum quantity of movie rentals. Label this point A. c. Draw the budget constraint for the flat‐fee plan, making sure to indicate the horizontal and vertical intercepts. Find the consumer’s optimum quantity of movie rentals. Label this point B.
A prominent online movie rental service mails rental DVDs to consumers. The service offers two pricing plans. Under the first plan, consumers face a flat $10 fee each month and can rent as many DVDs as they wish for free. Under the second plan, consumers can rent DVDs for an à la carte price of $2. Assume that a consumer has an income of $20 and uses it to purchase DVD rentals and a “composite good” that costs $1 per unit.
a. Draw a set of indifference
b. Draw the budget constraint for the à la carte movie rental plan, making sure to indicate the horizontal and vertical intercepts. Find the consumer’s optimum quantity of movie rentals. Label this point A.
c. Draw the budget constraint for the flat‐fee plan, making sure to indicate the horizontal and vertical intercepts. Find the consumer’s optimum quantity of movie rentals. Label this point B.
d. Under which plan does the consumer rent more movies?
e. Under which plan does the consumer end up with a lower marginal rate of substitution between movies and the composite good?
f. Under which plan is the consumer more likely to end up viewing The Perils of Gwendoline in the Land of the Yik Yak, widely acknowledged to be one of the worst movies of all time?
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