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 million. These investors seek unlimited access to investment consultants and are willing to pay up to $30,000 annually for no-fee-based transactions, or alternatively, $40 per trade. The other type of investor also has a net worth of over $2 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 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:$
"Free Service" Account: Price per transaction: $
Givern,
Annual maintenance fee $30,000
Price in excess of free transaction=$40
Formula used
Calculation of no of free transaction = Annual maintenance fee/Price in excess of transaction
=$30,000/$40
=$750
| Annual maintenance fee | $30,000 |
| Number of fee transaction | (30,000/40)=$750 |
| Price for each transaction in excess of the number of free transactions | $40 |
Price per Transaction = $100
Given these two options, investors will sort themselves into plans based on their individual characteristics.
Get Answers For Free
Most questions answered within 1 hours.