The Buy&Wear clothing store uses an interesting strategy to attract customers to return each?week. Each week any unsold dress is reduced by 25%. On each dress is a label with its?original price and the date hung on the rack. Customers know that a $50 dress placed out on?November 7th will be priced only $37.50 on November 14th if it is not sold before then. It will?be reduced by another $12.50 on November 21st if it is still unsold. After 3 weeks, any unsold?dress is sent to a local charity. Each week, there is a 0.5 probability that the dress will be sold.
Assume Laila has an exponential utility function
with a risk tolerance factor of 50.
a. She is trying to decide about the $50 dress and she knows she can get the almost identical
dress for $60 online. Based on the utility values, construct a decision tree to determine
the week that she should buy the dress.
b. Does risk aversion change the decision?
c. Calculate RP and CE of the decision?
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