Question

In a particular setting where the newsvendor model applies, demand is Normally distributed and the critical ratio is 0.4. Then, if the profit maximizing quantity (i.e., the Newsvendor ordering quantity) were ordered:_________
a. the expected sales is less than expected demand;
b. the expected sales is greater than expected demand;
c. the expected sales is exactly equal to expected demand;
d. the expected sales could be less than, equal to or greater than expected demand.

Answer 1

Answer: C. the expected sales is exactly equal to expected demand;

Explanation:

The newsvendor model refers to the mathematical model that is used in the determination of optimal inventory levels. This model is characterized by uncertain demand and fixed prices for a good that's perishable e.g newspapers.

In this model, there can be a high profit only in a scenario whereby the demand and the supply is met. Therefore, if the profit maximizing quantity were ordered, the expected sales is exactly equal to expected demand.