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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. That is, retailers who rent out videos must pay 10% of their revenues from video rentals to screenwriters. They have no such agreement for movies shown in pay-per-view television.
(a) Explain, both verbally and graphically, how the new writers' agreement a?ects the market for video rentals. 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 pay-per-view movies substitutable to some extent. Explain, both verbally and graphically, how the new writers' agreement affects the market for pay-per-view movies. How will producer surplus in the market for pay-per-view movies change? Illustrate with a diagram. Do you think the writers' agreement will be popular with cable television companies that show pay-per-view movies?
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