7.3 The following table shows a bakery’s probabilities of selling different quantities of bread.

a. The price of a loaf of bread is $5, the marginal cost is $2.50, and the price received on the secondary market is $0. What is the profit-maximizing quantity of loaves to hold in inventory?

b. The price of a loaf of bread rises to $12.5, while the marginal cost remains $2.50 and the price received on the secondary market remains $0.
What is now the profit-maximizing quantity of loaves to hold in inventory? Explain why your answer differs from that in part a.

c. The price of a loaf of bread returns to $5, while the marginal cost increases to $3 and the price received on the secondary market remains $0. What is now the profitmaximizing quantity of loaves to hold in inventory? Explain why your answer differs from that in part a.

Transcribed Image Text:

Quantity of Loaves Demanded 50 0.10 1.00 Probability This Quantity Is Demanded Probability of Selling This Quantity or More, Prob(QDQ) Probability of Selling Less Than This Quantity, Prob(QDQ) 0.00 51 0.10 0.90 0.10 52 0.10 0.80 0.20 53 0.10 0.70 0.30 54 0.10 0.60 0.40 55 0.10 0.50 0.50 56 0.10 0.40 0.60 57 0.10 0.30 0.70 58 0.10 0.20 0.80 59 0.10 0.10 0.90 60 0.10 0.00 1.00