Question

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 $15,000 annually for no-fee-based transactions, or alternatively, $30 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 $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 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: $

Answer 1

Answer:

The investor has to annual maintenance fee and many free transactions under Free trade account plan.

Under Free service account investment plan, the investor has no annual maintenance fee and the investor will pay for every transaction which is made.

Items                                                                             Amount

Annual Maintenance Fees                                             $15,000

Number of Free Transactions    ($15,000 / $30) =             500

Amount Charged for each excess free transactions           $30

Free Service Account:-

.

Items                                                   Amount

Amount Charged per transactions           $110

Hence, given two investment options the financial group can divide the investors based on their individual characteristics.

.

Step-by-step explanation:

Free trade account:

Annual maintenance fee = $15,000. This is the amount that the first type of investors are willing to pay annually for no fee based transactions.

Number of free transactions = amount of $15,000/amount paid per trade = $15,000/$30 = 500

Price for each transaction in excess of free transactions = $30.

This is the amount that clients are willing to pay per trade.

.

Free service account:

They are willing to pay $110 per trade.

Hence price per transaction can be $110.