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Pelican Point Financial Group’s clientele consists of two types of investors. The first type of investor...

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 $20,000 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 $110 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 "free" transactions:_________

Price for each transaction in excess of the number of "free" transactions:$__________

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Answer #1

Free Trade Account

  Annual maintenance fee

$20,000

Number of "free" transactions

400 ($20,000/50)

  Price for each transaction in excess of the number of "free" transactions

$50

Free Service account:

  Price per transaction: $110

Given these two options, investors will sort themselves into the plans based on their individual characteristics.

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