Warner Bros. Studios sold DVD copies of its films to Blockbuster, and the studio had revenue-sharing arrangements with the rental chain for VCR tapes of its films (Bruce Orwall, Martin Peers, and Ann Zimmerman, "DVD Gains on Tape, but Economics Have Hollywood in a Tizzy," Wall Street Journal, February 5, 2002, A1.) Suppose that Blockbuster was the only place where Perkasie, PA, residents could rent movies and that the Saturday night demand function to rent L.A. Confidential on either DVD or VHS was
a. Suppose that the Perkasie Blockbuster purchased ten copies of L.A. Confidential under the studio sales arrangement. What was the Blockbuster outlet's optimal rental price?
b. Suppose that the Blockbuster outlet paid the studio $2 per copy rented under the revenue-sharing arrangement, and the outlet had ten copies in stock. What was the Blockbuster outlet's optimal rental price?
c. Compare your answers to parts a and b.