After you have studied Economics in the News

(pp. 236–237), answer the following questions.

a. If after the pandemic the prices of streaming services doubled with an unchanged price of a movie ticket:

(i) How would Joe change the number of streaming services he buys?

(ii) How would he change the number of times he goes to the movies?

(iii) How would the quantities of other goods and services he buys change?

b. If after the pandemic Joe’s marginal utilities of streaming services doubled:
(i) How would Joe change the number of streaming services he buys?
(ii) How would he change the number of times he goes to the movies?
(iii) How would the quantities of other goods and services he buys change?

Transcribed Image Text:

Joe is an average American moviegoer and he streams videos. In a typical month in 2019, he went to the movies five times at $10 a ticket and spent $8.99 on Netflix, $12.99 on Amazon Prime, and $11.99 on YouTube Premium. So, his total expenditure on moviegoing and video streaming was $83.97. After March 2020, with stay-at-home orders in the Covid-19 pandemic, Joe was unable to go to the movies so he had $50 a month to spend on other items or more video streaming. To see how Joe spent the $50, we must look at his utility- maximizing choices, and we'll start with his choices in 2019. Table 1 shows seven video-streaming services that Joe considers along with their monthly prices, his marginal utility, and his marginal utility per dollar (MU/$). Figure 1 shows Joe's marginal utility per dollar from moviegoing. Joe's choice of a streaming service is an all-or-nothing choice. He will subscribe to a service if its MU/$ exceeds or equals his MU/$ on other items. And Joe's choice of moviegoing is a marginal choice: He will go to the movies the number of times that makes the MU/$ on movies equal his MU/$ on other items. We'll assume that Joe has a budget of $200 a month to spend on moviegoing, streaming services, and other items. When Joe spends $83.97 on moviegoing and stream- ing and $116.03 on other items, his MU/$ on other items is 1.2, shown in the figure. Joe maximizes utility by making the MU/$ on movie- going equal 1.2 and subscribing to streaming services for which MU/$ is greater than or equal to 1.2. This outcome occurred in 2019 when Joe went to the movies five times a month and had Netflix, YouTube Premium, and Amazon Prime subscriptions. The pandemic stopped Joe's moviegoing. If he spends more on other items, the MU/$ on these other items would fall below 1.2. If Joe adds HBO Max for $14.99 to his streaming ser- vices and spends $48.96 ($33.97 + $14.99 = $48.96) on streaming and $151.04 on other items, his MU/$ on streaming falls to 1.0. If when Joe increases what he spends on other items to $151.04, his MU/$ on these things is also 1.0, Joe maximizes his utility. When restrictions are lifted, unless his preferences as measured by his marginal utility have changed, Joe will end his HBO Max subscription and again go to the movies five times a month.