Tony: A new kind of videocassette has just been developed. It lasts for only half as many viewings as the old kin...

Kweb1016 on December 18, 2020


Can someone please explain this one for me?

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shunhe on December 21, 2020

Hi @Kweb1016,

Thanks for the question! So let’s take a look at this stimulus first. We have Tony and Anna here. Tony says that there’s this new kind of videocassette, that lasts only half as long but is a third as expensive, so it’d be worth it to use the new videocassette.

Anna then says actually, no, because the videocassette itself is only 5% of the price the video rental store pays, since most of it is royalties. And so the price would decrease by considerably less than 5%, but they’d still have to be paying royalties.

So now we need something that’ll help Tony out. Take a look at (C), which tells us that the royalty fee is is going to be halved on the new videocassette. Well, since the royalty fees are a big part of the costs of production, and they get halved on the new videocassettes, this would really help Tony in his argument that it’d be worth it to get the new videocassettes.

Hope this helps! Feel free to ask any other questions that you might have.