Data Storage & Management, Pricing & Switching Costs: The government of Ivarrona faces the problem of data storage and management to make the Telemedicine Services work. Ivarrona is a country with many far-flung regions and remote islands. The data needs to be stored in regional clusters of server farms. A study commissioned by the government shows that at first, the government will need two server farms, and as Telemedicine gains acceptance in the country, more server farms will be needed. Starting with two server farms, each year, the capacity will need to grow by two server farms till it reaches a maximum of 8 server farms in four years (2 server farms in the first year, 4 in the second year, 6 in the third and 8 in the 4th year). The government does not have the capability to run server farms. It wants to give this project to a reputed data storage and management company, Dark Cloud Systems Inc. (DCS from hereon). The company offers three pricing schemes. Scheme A: Constant price of 24 dollars a year, and the government can have a maximum of 8 regional server farms. Whether the government runs 2 server farms or 8, or gradually expands to 8 regional server farms starting with 2 server farms, the company will charge a constant price of 24 dollars a year. Scheme B: A price of 4N dollars a year, where N is the number of server farms run each year for the government. Under this scheme, in the first year, the firm will charge a price of $8 (for 2 server farms), in the second year a price of 16$ (for 4 server farms), and so on till it charges a price of $32 in the fourth year for 8 server farms. Scheme C: A price of N2 (square of N) dollars a year, where N is the number of server farms run each year for the government. Under this scheme, in the first year, the firm will charge a price of $4 (for 2 server farms), in the second year a price of 16$ (for 4 server farms), and so on till it charges a price of $64 in the fourth year for 8 server farms. In addition, the company also imposes a switching cost for changing between pricing schemes. Switching Cost: Every time the government switches between pricing schemes, the government should pay DCS a switching fee of $ 7.00. In answering the questions below, assume that server farms are added at the start of each year and not in the middle of the year. Ignore the cost of adding farms; only consider the prices shown above in the three schemes. Consider only the four-year period and ignore events beyond the fourth year (answer the questions by considering only years 1 through four). Finally, ignore the time value of money and do not apply discounts for time. 

Answer the following questions: 

(1) What combination of pricing schemes (or a pricing scheme) should the government choose in each of the years 1 through 4? Why? Note that in answering this question, you are going to find the combination of schemes that will result in minimal costs for the government. Discount: Suppose now that DCS offers the government an additional incentive: if the government chooses one pricing scheme for all four years and does not switch, at the end of the fourth year, DCS will give the government a discount of 10% of the total amount that is spent in the four years. If the government does not switch between pricing schemes, whatever scheme the government picks will result in a discount of 10% of the total spent by the government in four years. The discount will be given to the government at the end of the fourth year (say, a day before the fourth year ends). 

(2) In light of the above discount, what pricing schemes (or a single scheme) should the government choose in each of the years 1 through 4? Why? Note that in answering this question, you are going to find the combination of schemes (or a single scheme) that will result in minimal costs for the government (including the discount). As before, solve the problem for only the four-year period and ignore the time value of money.