6 Pelican Point Financial Group\'s clientele consists of two types of investors.

Question

6

Pelican Point Financial Group's clientele consists of two types of investors. The first type of investor makes many transactions in a given year and has a net worth of over $2.5 million. These investors seek unlimited access to investment consultants and are willing to pay up to $35,000 annually for no-fee-based transactions, or alternatively, $50 per trade. The other type of investor also has a net worth of over $2.5 million but makes few transactions each year and therefore is willing to pay $100 per trade. As the manager of Pelican Point Financial Group, you are unable to Determine whether any given individual is a high- or low-volume transaction investor. To deal with this issue, you design a self-selection mechanism that permits you to identify each type of investor. You offer two types of plans for customers with more than $2.5 million in assets: one plan has an annual maintenance fee but offers a large number of "free" transactions (call this the "Free Trade" Account); the other plan has no annual maintenance fee but charges for each transaction (call this the "Free Service" Account). Determine the specifics for each plan as listed below: "Free Trade" Account: Annual maintenance fee Number of Price for each transaction in excess of the number of Price per transaction

Explanation / Answer

Free trade account:

Annual maintenance fee = $35,000. This is the amount that the first type of investors are willing to pay annualy for no fee based transactions.

Number of free transactions = amount of $35,000/amount paid per trade = $35,000/$50 = 700

Price for each transaction in excess of free transactions = $50. This is the amount that clients are willing to pay per trade.

Free service account:

They are willing to pay $100 per trade. Thus price per transaction can be $100.

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