Question: Apple's $1.29-for-the-latest-songs model isn't perfect and isn't it too much to pay for music that appeals to just a few people? What we need is a system that will be profitable but fair to music lovers. The solution: Price song downloads according to demand. The more people who download a particular song, the higher will be the price of that song; the fewer people who buy a particular song, the lower will be the price of that song. That is a free market solution-the market would determine the price.
Assume that the marginal social cost of downloading a song from the iTunes Store is zero. (This assumption means that the cost of operating the iTunes Store doesn't change if people download more songs.)
a. If the pricing scheme described in the news clip were adopted, would the market be efficient or inefficient? Explain.
b. Is the pricing scheme described in the news clip a "free-market solution"? Explain.