The Mexican army seized 1,180 disc burners and 3.14 million copies of movies and TV shows from 23 warehouses in a move to fight piracy that costs Hollywood about $590 million a year. Assume that the marginal cost of producing a DVD (legal or illegal) is a constant $3 and that legal DVDs bear an additional marginal cost of $5 each in royalty payments to film studios.
a. Draw a graph of the market for counterfeit DVDs, assuming that there are no effective penalties on either buyers or sellers for breaking the law.
b. How do the events reported in the news clip change the market outcome? Show the effects in your graph.
c. With no penalty on buyers, if a penalty for breaking the law is imposed on sellers at more than $5 a disc, how does the market work and what is the equilibrium price?
d. With no penalty on sellers, if a penalty for breaking the law is imposed on buyers at more than $5 a disc, how does the market work and what is the equilibrium price?
e. What is the marginal benefit of an illegal DVD in the situations described in parts (c) and (d)?
f. In light of your answer to part (e), why does law enforcement usually focus on sellers rather than buyers?