Question

Mme. Giselle’s boutique in Cleveland, Ohio, is planning to sell Parisian frocks. If the public views them as the “latest fashion trend,” the frocks are worth $10,000 each. However, if the public views them as something nice but not a major fashion trend, the smocks sell for $2,000 each. If the probability that they’re viewed as a major fashion trend is 20%, what is the expected value of the frocks? What if uncertainty is nearly 80%? Now, let’s take this further. Is this a risky situation, and what can Mme. Giselle do to reduce risk? Please be specific. Show your work.

Please answer and explain! Thanks

Answer 1

Answer:-

Expected Value of Frocks=0.2(10000)+0.8(2000)=3600

Now if uncertaintiy is 0.8 then

Expected Value of frock=0.8(10000)+0.2(2000)=8400

if in case we have uncertainty of 80% then it is not riskier then former case

Mme.Giselle can enter into a contract to hedge this risk by engaging a contract with other traders have different views

IF YOU WANT ANY EXPLANATIONS ASK ME IN THE COMMENT BOX,I AM HERE TO HELPS YOU PLEASE DO NOT GIVE DIRECT THUMBS DOWN,IF YOU SATISFIED MY WORK GIVE ME THUMBS UP RATING

****************THANK YOU*****************