Question

A small market orders copies of a certain magazine for its magazine rack each week. Let X demand for the magazine, with the following pmf.

$$ \begin{array}{l|cccccc} x & 1 & 2 & 3 & 4 & 5 & 6 \\ \hline p(x) & \frac{1}{16} & \frac{2}{16} & \frac{4}{16} & \frac{3}{16} & \frac{3}{16} & \frac{3}{16} \end{array} $$

Suppose the store owner actually pays $2.00 for each copy of the magazine and the price to customers is $4.00. It magazines left at the end of the week have no salvage value, is it better to order three or four copies of the magazine? [Hint: For both three and four copies ordered, express net revenue as a function of demand X, and then compute the expected revenue.] 

What is the expected profit if three magazines are ordered? 

What is the expected profit if four magazines are ordered? 

How many magazines should the store owner order? 

Answer 1