In early days, the Xerox Corporation faced the following pricing problem for its copying machines (there was hardly any competition then). There were two segments of potential users, the large users --whose copying needs were 20,000 copies per year - and the small users -- whose copying needs were 2,000 copies per year. Xerox found that a large user would be willing to pay as much as $25,800 to buy a Xerox machine provided supplies from Xerox were free of charge over the life of the machine; similarly, a small user would be willing to buy a Xerox machine for $6,700 provided Xerox supplies free supplies. The expected life of a machine is 5 years. There are equal numbers of large and small users. The total number of users is 200.

Xerox's marginal cost of producing each of these machines was estimated to be $1,900. Its marginal cost of paper was $0.03 per sheet. Xerox used a 10% discount rate, i.e., if it generated an income of $1 each year for 5 years, then its present value of that income stream is 1/1.10+1/1.102+...+1/1.105)=$3.79

Xerox wonders if it can make more money leasing the machines instead of selling them. The leasing policy will involve a yearly rental charge (payable at the end of each year) and a charge per copy made (monitored via the copy meter on the machines) cumulated over each year and payable at the end of the year. Only one leasing plan -- i.e., a single rental charge and a single per-copy charge is being contemplated.

What should Xerox's leasing policy be? (Assume that each user also uses a 10% discount rate).

I have an additional query - is there a way I can ensure that the single leasing plan i.e rental charge and per-copy charge exploits 100% of user's willingness-to-pay?