*** Using the Newsvendor model/formula of calculation ***

A small retailer is considering various monthly plans for purchasing electricity. They can pre-purchase kWhs at the cost of 4.5 cents per kWh. If they don't use all of the kWhs they purchase, then there is no refund for the unused electricity. If they need more kWhs than they purchase, the extra kWhs are purchased at the rate of 6 cents per kWh. Their forecast for kWh usage per month is normally distributed with a mean of 6000 and a standard deviation of 2500.

Using the Newsvendor model/formula of calculation, answer the following questions:

1. What is the cost of over-estimation?

2. Consider the small retailer example above. What is the cost of under-estimation?

3. Consider the small retailer example above. What is the critical ratio?