A small drugstore orders copies of a certain magazine for it magazine rack each week. Let X=demand for the magazine, with pmf x123456p(x)115215315415515615 Suppose the store owner actually pays $1.00 for each copy of the magazine and the price to customers is $2.00. If magazines left at the end of the week have no salvage value, is it better to order three or four copies of the magazine?

Question

A small drugstore orders copies of a certain magazine for it magazine rack each week. Let X=demand for the magazine, with pmf  x123456p(x)115215315415515615  Suppose the store owner actually pays $1.00 for each copy of the magazine and the price to customers is $2.00. If magazines left at the end of the week have no salvage value, is it better to order three or four copies of the magazine?

SchulzD · Accepted Answer

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Jeffrey Jordon · Accepted Answer

3 magazines  For this case the total spent is 2*3 = $ 6  And the net revenue for this case would be:  $4-$6 = -$2 , X=1 (demand 1)  $4*2-$6 = $2 , X=2 (demand 2)  $4*3-$6 = $6 , X=3 (demand 3)  For the values of X=4,5,6 the net revenue will be $6 since the number of magazines is 3  And the expected value for the net revenue would be:  E(R)=115⋅(−2)+215⋅(2)+315⋅(6)+415⋅(6)+315⋅(6)+215⋅(6)=7415=4.93  4 magazines  For this case the total spent is 2*4 = $ 8  And the net revenue for this case would be:  $4-$8 = -$4 , X=1 (demand 1)  $4*2-$8 = $0 , X=2 (demand 2)  $4*3-$8 = $4 , X=3 (demand 3)  $4*4-$8 = $8 , X=4 (demand 4)  For the values of X=5,6 the net revenue will be $8 since the number of magazines is 4  And the expected value for the net revenue would be:  E(R)=115⋅(−4)+215⋅(0)+315⋅(4)+415⋅(8)+315⋅(8)+215⋅(8)=8015=5.33  As as we can see we have a higher expected value for the case with 4 magazines.

A small drugstore orders copies of a certain magazine for it magazine rack each week. Let X=demand for the magazine,

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