The accompanying table shows six consumers' willingness to pay (his or her individual marginal benefit) for one MP3 file copy of a Jay-Z album. The marginal cost of making the file accessible to one additional consumer is constant, at zero. \begin{tabular}{l|c} Consumer & Individual marginal benefit \\\ Adriana & \(\$ 2\) \\\ Bhagesh & 15 \\\ Chizuko & 1 \\\ Denzel & 10 \\\ Emma & 5 \\\ Frank & 4 \end{tabular} a. What would be the efficient price to charge for a download of the file? b. All six consumers are able to download the file for free from a file- sharing service, Pantster. Which consumers will download the file? What will be the total consumer surplus to those consumers? c. Pantster is shut down for copyright law infringement. In order to download the file, consumers now have to pay \(\$ 4.99\) at a commercial music site. Which consumers will download the file? What will be the total consumer surplus to those consumers? How much producer surplus accrues to the commercial music site? What is the total surplus? What is the deadweight loss from the new pricing policy?

Short Answer

Expert verified
Answer: The deadweight loss from the new pricing policy is $2.97.

Step by step solution

01

Determine the efficient price for the MP3 file

As the marginal cost of making the file accessible to one additional consumer is zero, the efficient price would be to charge $0 for the file.
02

Analyze the case where the MP3 file is available for free

When Pantster offers the file for free, all six consumers will download the file because their individuals' marginal benefit is greater than the download price. The total consumer surplus can be calculated by summing their individual marginal benefits. Total consumer surplus = \(2 + 15 + 1 + 10 + 5 + 4 = \$37\) As the file is available for free, the producer surplus is $0.
03

Analyze the case where commercial music site charges \(\$ 4.99\) per download

When the file is available for \(\$ 4.99\), only consumers with a willingness to pay equal to or greater than \(\$ 4.99\) will buy the file. These consumers are Bhagesh, Denzel, Emma, and Frank. Total consumer surplus for these consumers can be calculated as follows: Total consumer surplus = \((15 - 4.99) + (10 - 4.99) + (5 - 4.99) + (4 - 4.99) = \$10.04 + \$5.01 + \$0.01 - \$0.99 = \$14.07\) The producer surplus accrues to the commercial music site, and it is the total revenue generated from the file downloads. Producer surplus = \(4.99 \times 4 = \$19.96\) Total surplus can be calculated as the sum of consumer and producer surpluses. Total surplus = \(14.07 + 19.96 = \$34.03\) Deadweight loss can be calculated as the difference between the total surplus from the free file-sharing scenario and the commercial music site scenario. Deadweight loss = \(37 - 34.03 = \$2.97\) So, in this case, the deadweight loss from the new pricing policy is \(\$ 2.97\).

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Most popular questions from this chapter

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