Lola must decide on a price for her homemade aromatherapy candles. The number of candles she...

Lola must decide on a price for her homemade aromatherapy candles. The number of candles she expects to sell depends on the price that is set by her competitor, Sunny’s Scents of Serenity. Lola must set her price before she knows what Sunny will do. Lola believes that Sunny’s price is a random variable C having the following probability mass function. P[C =$8]=0.4,P[C=$10]=0.3,P[C=$12]=0.2,P[C=$15]=0.1. IfLolachargesaprice p1 and Sunny charges a price p2, Lola sells 20 + 5(p2 – p1) candles. Lola is considering charging $6, $10, or $12 for her candles. It costs her $1 in time and materials to make each candle.

a. Under the Expected Monetary Value criterion, which price should Lola charge?

b. Lola can bribe Sunny’s boyfriend to tell her what price she (Sunny) plans to charge. At most how much should Lola be willing to pay for this information?

c. Lola is not comfortable with the payout she gets ($405) when she sets her price to $10 and Sunny sets hers to $15. She think it should be higher. How large must it become before the option of setting her price to $10 become optimal on expected monetary value (EMV) grounds?

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