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.

Q = 1,050 – 50P

a) Suppose that the government institutes a $5.50 per-film tax on thefilm copying industry.

Assuming that the demand for copied films 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 film

studios. Explain your result intuitively.

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