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. Draw a graph of the market for downloadable music with a price of $1.29 for all the latest songs. On your graph, show consumer surplus and producer surplus.
b. With a price of $1.29 for all the latest songs, is the market efficient or inefficient? If it is inefficient, show the deadweight loss on your graph.