3. Suppose the price of a Netflix subscription increases while the price of Redb

Question

3. Suppose the price of a Netflix subscription increases while the price of Redbox rentals stays the same. If Redbox is an inferior good, what happens to the number of Redbox DVDs rented?

(A) Redbox rentals will go down.

(B) Redbox rentals go up.

(C) Redbox rentals will stay the same.

(D) Redbox rentals could go up or down, depending on if the income effect or the substitution effect domi- nates.

(E) Redbox rentals will go down in the short run but the price will increase in the long run due to DVD firms leaving the market.

Explanation / Answer

The correct answer is option (E). Redbox rentals will go down in the short run but the price will increase in the long run due to DVD firms leaving the market.

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