Question

Suppose that a grocery store buys milk for $2.10 and sells it for $2.60. If the milk gets old then the grocery store can sell their unsold milk back to their wholesaler for $0.60 (so the grocery store loses $1.50 on each gallon that it has to sell back to the wholesaler). Suppose that the demand for milk is normally distributed with a mean of 2,055 gallons per week and a standard deviation of 481 gallons per week. The grocery store needs to decide how much milk to order. Suppose that instead of trying to maximize their expected profits, the store wanted to be 80% sure that they have enough milk to satisfy demand. How much milk should they order?

Answer 1