eMusic is a popular subscription MP3 Web site. For a monthly membership fee, you can download MP3s for a price that's about half of what MP3s cost at iTunes or Amazon.
Consider someone with $50 worth of income to spend on entertainment each month and who can choose to buy MP3s or "other stuff"-with a price equal to $1 per unit, so that other stuff is measured in dollars.
Create budget constraints for each of the different eMusic membership plans. Prices have been rounded to make things simpler.
(To simplify things, we'll assume that the consumer will use his entire eMusic balance each month, even though eMusic members don't have to do this. We'll also just think about MP3 singles, not albums.)
a. No membership: The consumer has to purchase MP3s from another Web site, at $1 each.
b. eMusic Basic: For $12/month, the consumer gets 24 MP3 downloads. After that, the consumer would have to buy MP3s at another Web site for $1 each.
c. eMusic Plus: For $16/month, the consumer gets 34 MP3 downloads. After that, the consumer would have to buy MP3s at another Web site for $1 each.
d. eMusic Premium: For $21/month, the consumer gets 46 MP3 downloads. After that, the consumer would have to buy MP3s at another Web site for $1 each.
e. eMusic Fan: For $32/month, the consumer gets 73 MP3 downloads. After that, the consumer would have to buy MP3s at another Web site for $1 each. Which plan do you think will be most popular?
Which will be the least popular? Although eMusic has hundreds of thousands of members, most people are not members of eMusic.
What must be true about their indifference curves? How many MP3s do these people download per month?