Problem # 2: “Market for Prostitution” (9 points) Refer to Figures 7-1, 7-2, 7-3

Question

Problem # 2: “Market for Prostitution” (9 points)

Refer to Figures 7-1, 7-2, 7-3, 7-4, and 7-5 on pages 175-179 (Hellman Textbook).

a.) Assume that pornographic literature and prostitution are complementary goods and the price of pornographic literature decreases. Please analyze the impact of pornographic literature on the market of prostitution.

b.) Assume that pornographic literature and prostitution are substitutes and the price of pornographic literature decreases. Please analyze the impact of pornographic literature on the market of prostitution.

Explanation / Answer

Relationship with Substitutes and complimentary goods:
The quantity of a good that the consumer chooses can increase or decrease with the rise in the price of a related good depending on whether the two goods are substitutes or complementary to each other. Goods which are consumed together are called complementary goods. Examples of goods which are complement to each other include tea and sugar, shoes and socks, pen and ink, etc. Since tea and sugar are used together, an increase in the price of sugar is likely to decrease the demand for tea and a decrease in the price of sugar is likely to increase the demand for tea. Similar is the case with other complements. In general, the demand for a good moves in the opposite direction of the price of its complementary goods. In contrast to complements, goods like tea and coffee are not consumed together. In fact, they are substitutes for each other. Since tea is a substitute for coffee, if the price of coffee increases, the consumers can shift to tea, and hence, the consumption of tea is likely to go up. On the other hand, if the price of coffee decreases, the consumption of tea is likely to go down. The demand for a good usually moves in the direction of the price of its substitutes.

Relationship with substitute and complementary goods:

The quantity of a good that the consumer chooses can increase or decrease with the rise in the price of a related good depending on whether the two goods are substitutes or complementary to each other. Goods which are consumed together are called complementary goods. Examples of goods which are complement to each other include tea and sugar, shoes and socks, pen and ink, etc. Since tea and sugar are used together, an increase in the price of sugar is likely to decrease the demand for tea and a decrease in the price of sugar is likely to increase the demand for tea. Similar is the case with other complements. In general, the demand for a good moves in the opposite direction of the price of its complementary goods. In contrast to complements, goods like tea and coffee are not consumed together. In fact, they are substitutes for each other. Since tea is a substitute for coffee, if the price of coffee increases, the consumers can shift to tea, and hence, the consumption of tea is likely to go up. On the other hand, if the price of coffee decreases, the consumption of tea is likely to go down. The demand for a good usually moves in the direction of the price of its substitutes.

Figure 7.1 is a typical market for prostitution with linear demand and supply curves with Q1 as the equilibrium quantity trading at the equilibrium price of P1.

a. here we assume that pornographic literature and prostitution are complementary goods and there is a decrease in the price of pornographic literature.

Figure 7.3 explains this scenario. Since both are complementary goods, they are consumed together, therefore, in the pornographic literature market, with a decrease in price more quantity is available for consumption. With every unit increase in its quantity, more of the complementary good (prostitution) is needed. Therefore there is a rightward shift in the demand curve for prostitution.

With the shift in demand curve, same amount is available at a lower price, vice versa, more quantity of prostitution is available at the same old price. Therefore the new demand curve intersects the supply curve at the new equilibrium trading quantity Q2 at price of P2

b. here we assume that pornographic literature and prostitution are substitutes and there is a decrease in the price of pornographic literature.

Figure 7.2 explains this scenario. Since both are substitutes, when one is consumed, it can be easily substituted for the other when needed. In the pornographic literature market, with a decrease in price more quantity is available for consumption at same price. Therefore it is cheaper when compared to prostitution. Therefore people will switch from prostitution to literature thereby decreasing the demand for prostitution. Therefore there is a leftward shift in the demand curve for prostitution.

Less amount is prostitution is demanded at the same price, therefore the market trades at a lower price with lower quantity.

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