21 Hollywood: Organised Crime Hits the Movies 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.

Source: Businessweek, 7 April 2011 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? What is the market 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? What is the market price?

e What is the marginal benefit of an illegal DVD in the situations described in parts

(c) and (d)?

f Given your answer to part (e), why does law enforcement usually focus on sellers rather than on buyers?