Sep 26, 2017 term paper 2

IN THE CHARACTERIZATION OF THE NEWS VENDOR DEMAND MODEL, IT IS STATED THAT THE PROFIT MAXIMIZATION PR

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In the characterization of the News vendor demand model, it is stated that the profit maximization problem is equivalent to the minimizing of the following cost function:

C(Q) = E [Cu x (D-Q)+ Co x (Q-D)+] or C(Q) = Cu x E[Short] + Co x E[Left]

Assuming that the demand is normally distributed with mean u and standard deviation sigma. By using the expression for the optimal order quantity, Q*, show that the optimal cost can be expressed as C(Q*) = A (Cu, Co) x sigma, where A(Cu, Co) is a constant which is a function of the cost parameters Cu and Co but not of the parameters (u, sigma) of the demand distribution D. What can you infer for the maximum profit that the newsvendor can gain by ordering the optimal quantity?


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