Movies in Theaters vs. Movies at Home: Substitutes or Complements?

Which of the following statements is TRUE? I. Movies in a theater and movies at home could be substitute goods if the falling price of home entertainment equipment causes people to watch more movies at home and fewer in the theater. II. Movies in a theater and movies at home could be complement goods if watching a lot of movies at home causes people to become more interested in movies, increasing their demand for movies in a theater. III. If the cross-price elasticity of demand between movies in a theater and movies at home is 0.33, the two goods are complements. The correct option is I and II.

Explanation: The two goods are substitutes when the price of one good increases the demand for other good increases. Movies at theaters and movies at homes are substitutes in (I) since the higher price of theater movies causes an increase in demand for home movies. However, movies at theaters and homes are complements in (II) as an increase in demand for one also causes an increases demand for the other. Cross price elasticity of complementary goods, however is negative, so (III) is wrong.

Final answer: Statement I is true as movies at home and theaters can be substitutes with changing prices affecting demand. Statement II can be true since increased interest in movies at home may increase theater attendance, illustrating a complement relationship. However, Statement III is false because a positive cross-price elasticity (0.33) indicates they are substitutes, not complements.

Explanation: The question you have asked is related to the economic concepts of substitute goods and complement goods, and how price changes and cross-price elasticity affect the demand for these goods. Here's the truth about the statements you've provided: Movies in a theater and movies at home could indeed be substitute goods if the falling price of home entertainment equipment leads people to watch more movies at home and fewer in the theater. This scenario aligns with the understanding that substitute goods have positive cross-price elasticity of demand, meaning that an increase in price for one leads to increased consumption of the other. Movies in a theater and movies at home could also be complement goods if increased watching at home boosts interest in theater movies, thus increasing demand. However, this is generally true if the goods are used together, like the example of golf balls and golf clubs. As for the third statement, if the cross-price elasticity of demand between movies in a theater and movies at home is 0.33, this indicates that they are indeed substitutes, not complements, as complements would have a negative cross-price elasticity. Hence, statement III is false.

← Bimetallic strip heat detector switch how does it work Wavelengths of visible light 430 500 nm →