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The perfectly competitive videotape copying industry is composed of many ?rms that can copy ?ve tapes per day at an average cost of $10 per tape. Each ?rm must also pay a royalty to ?lm studios,and the per ?lm royalty rate (r) is an increasing function of total industry output (Q):
r = 0:002Q.
Demand is given by
Q = 1,050 - 50P
a) Suppose that the government institutes a $5.50 per-?lm tax on the?lm copying industry. Assuming that the demand for copied ?lms is that given above, how will this tax affect the market equilibrium?
b) How will the burden of this tax be allocated between consumers and producers? What will be the loss of consumer and producer surplus?
c) Show that the loss of producer surplus as a result of this tax is borne completely by the ?lm studios. Explain your result intuitively.
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