P4: Argue for or against For each statement below, argue for or against it. (a)
ID: 344741 • Letter: P
Question
P4: Argue for or against For each statement below, argue for or against it.
(a) A firm facing stable demand and costs (i.e., an EOQ-type setting) operates with order quantity Q for a year. Due to an increase in the opportunity cost of capital, the per-unit annual holding cost doubles in the next year from H to 2H, and as a result the firm cuts its order size in half, i.e., now orders Q/2 units in each order. Then it must be that the firm either did not order optimally when annual per-unit holding cost was H, or when the same cost became 2H.
(b) In a newsvendor-type setting (i.e., one-shot ordering problem in the presence of demand uncertainty), an increased order quantity leads to (weakly) increased expected sales.
(c) In a newsvendor-type setting, the expected fraction of demand met (i.e., fraction of expected sales over expected demand) equals one minus stock-out probability.
Explanation / Answer
P-4A- I am against the statement.The formula of EOQ= 2DS/H, so when value of H will be double the Q will be half because denominator H will halve the optimal order quantity. The firm is ordering optimally when ordering cost is H and 2H also.
B- I do support the statement because in uncertainty demand case the firm will order more when it expext that sales will also going to order. In industry like newsvendor there is no sense of keeping inventory so what a firm order should be soldout immediately.
C-True, as argued in B, newsvendor do not maintain inventory because life period of news is less and typically one day.In such situation demand will be one minus stockout probability.
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