Suppose you are the financial controller of Newfundlend company Ltd. Your company has a demand deposit account at the Memorial Bank. Further, suppose the interest rate on bonds is 10%p.a. and there is a brokerage fee of $2 per transfer between demand deposits and bonds. The revenue of your company is $10 million per year.

Suppose, as a result of financial innovations, the Memorial Bank is able to offer a new demand deposit account that pays interest at 2% p.a. but allows you to write checks at the same time. What would be the optimal holding of demand deposits according to Baumol's square-root rule? What would the optimal holding of demand deposits be if the revenue increased by 50%?