Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question

Transcribed Image Text:Economics
Consider a supplier that manufactures a product at
$2 per unit and sells them to retailers at $7 per
unit. The retailer sells each product to the end
consumer at $10. At this retail price, market
demand is normally distributed, with a mean of
1,000 and a standard deviation of 300. The
supplier agrees to buy back unsold products for $b
even though any leftover product at the end of
sale period are worthless.
a) What is the retailer's order quantity under local
optimization when b=0?
b) What is the optimal order quantity under global
optimization? Round up to the nearest integer.
Derive the optimal value of b.
c) With the optimized value of b in the buyback
clause, how many discs should an independent
retailer order? Round up your solution to the
nearest integer.
d) What is the expected overstocking given the
optimized value of $b? What is the expected
understocking given the optimized value of $b?
What is retailers' expected profit? What is the
manufacturer's expected profit?
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Step 1: Define Local Optimization
VIEWStep 2: Explain the the retailer's order quantity under local optimization when b=0
VIEWStep 3: Explain the optimal order quantity under global optimization.
VIEWStep 4: Explain the optimized value of b in the buyback clause
VIEWStep 5: Explain the manufacturer's expected profit
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