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Real-Life Decision Making -- Solution

You don't lower the price.

You have good reason not to lower the price. If she had not given you the material, you would have had to buy it and charge her for it. So she would have had to pay for the material regardless of who bought it.

Plus, had you bought it, you could have made a greater profit from your work. So by asking you to lower the price, she is asking you to subsidize her costs and forgo some profit. But this option may be more expensive in the long run.

First of all, there is a remote chance she may use your reaction as an excuse not to pay for the hat. More likely, she will pay for the hat but not do business with you again. Worse, she may undermine your reputation, rightly or wrongly.

"You sort of have to protect your reputation," says Wichern.