Question

Consider two products whose demands are independent of each other. Assume that their demands are Normally distributed and they have identical cost structures. Assume we use the newsvendor model covered in the class, which gives you a framework for how one makes inventory decisions under demand uncertainty. If we combine the demands of the two products (i.e. Pool the demands) will the total inventory decrease or increase as compared to making decisions separately for the two products. Show your arguments carefully. USE EQUATIONS to make your argument.

Answer 1

Answer:

In the event that we consider two items whose requests are autonomous of one another, at that point one of the two items can be corresponding acceptable of another great or substitute of another great.

Correlative great is a decent whose request increments with the fame of its Complement great. In fact, we can say that it shows and negative cross versatile of interest. Consider X is a correlative decent to Y, in the event that there is an increment in the cost of item X, at that point, there will be a decline in the cost of item Y. For instance:

The toothbrush is a complimentary decent of the toothpaste. As the expense of delivering a brush might be substantially more hirer than toothpaste yet its interest thoroughly relies upon the offer of toothpaste. We have seen huge numbers of times that we get 1 toothbrush free with one parcel of toothpaste.

Shoe brush is a correlative decent of shoe clean. The expense of making shoe brush is much for hirer than the expense of making shoe clean and separately the cost of Brush is much for higher than the cost of shoe clean, however, they are corresponding results of one another. A significant number of times we have seen that shoe brush is free with shoe clean.

Substitute products are having a positive cross cost flexibility as the cost of one great increment all the while is the cost of another great increment for instance:

Pepsi and Coca Cola.

Tea and espresso.

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