Question

Wolfgang Puck runs a restaurant next to the movie theatres in Evanston, a suburb of Chicago. He has approximated its daily demand forecast by a normal distribution with mean 100.12 and standard deviation 8.50. Assume that when demand exceeds capacity, we must turn away customers resulting in lost sales. To account for loss of goodwill, we will simply assume that turning away a customer costs Wolfgang Puck a penalty of $6. Assume the restaurant operates 250 days per year and that capacity lives on forever. What should the optimal restaurant capacity be if a marginal unit of restaurant capacity costs $12,500?

Answer 1