As described in the Mini-Case Available for a Song, Shiller and Waldfogel (2011) estimated that if iTunes used two-part pricing charging an annual access fee and a low price per song, it would raise its profit by about 30% relative to what it would earn using uniform pricing or variable pricing. Assume that iTunes uses two-part pricing and assume that the marginal cost of an additional download is zero. How should iTunes set its profit-maximizing price per song if all consumers are identical? Illustrate profit-maximizing two-part pricing in a diagram for the identical consumer case. Explain why the actual profit-maximizing price per song is positive.

1.) Using the point drawing

tool,

indicate the profit-maximizing price per download and the quantity of iTunes downloaded at that price. Label this point 'e.'

2.) Using the triangle drawing

tool,

shade in an area that equals the lump-sum fee. Label this area 'F.'

Carefully follow the instructions above, and only draw the required objects.

The actual profit-maximizing price per song is positive because

A.

fixed costs are zero.

B.

deadweight loss is zero.

C.

the lump-sum fee is positive.

D.

marginal costs are zero.

E.

consumers are not identical.