Use the information below to answer the following questions.
Fact 6.5.1 Hollywood: Organized 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: Bloomberg, Businessweek, April 7, 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.
-Refer to Fact 6.5.1. With no penalty on buyers, if a penalty for breaking the law is imposed on sellers at more than $5 a disc, the equilibrium price of an illegal disc
A)rises and the quantity sold decreases.
B)rises and the quantity sold increases.
C)falls below $3 and the quantity sold decreases.
D)rises to a price between $3 and $8 and the equilibrium quantity does not change.
E)falls below $3 and the quantity sold increases.

Question

Quizplus · Accepted Answer

If a penalty for breaking the law is imposed on sellers at more than $5 a disc, it increases the cost of producing an illegal DVD, which leads to an increase in the equilibrium price of illegal discs. As a result, the quantity of illegal discs sold decreases, and the market equilibrium moves towards a lower quantity and higher price. Therefore, the correct choice is A, where the equilibrium price of an illegal disc rises, and the quantity sold decreases.

Use the Information Below to Answer the Following Questions