Question
Problem The newsvendor problem is one of the most basic problems of decision making under uncertainty in a business environment. You are expected to
Problem The newsvendor problem is one of the most basic problems of decision making under uncertainty in a business environment. You are expected to simulate the newsvendor's daily decision making to help him making the best decision that maximizes his expected profit. The problem is as follows. Early in the morning, the newsvendor needs to order newspapers of that day from the supplier. The ordered newspapers are delivered just before the kiosk opens. At the moment of ordering the quantity (Q) of newspapers, the newsvendor, of course, does not know how many newspapers he will sell that day, i.e. how much the customer demand (D) will be. If demand of newspapers exceeds the number of available newspapers (which means that D-Q>0), a shortage will happen and will result in lost sales and lost profit. If the number of available newspapers exceeds the demand (which means that D-Q <0), there will be an excess of inventory at the end of the day and will lead to losses because the excess of inventory must be sold at a very low price (salvage value). The objective of the newsvendor problem simulation is to determine the best order quantity (Q) that maximizes the average daily profit.
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