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.

I think the answer is that inventory will decrease due to risk pooling. help?

*edited: this is the FULL question provided from my prof*

Answer 1

If we consider two products whose demands are independent from each other then one of the two products will complement another good or substitute another.

Complementary good is a good whose demand increases with its Great Complement popularity. Technically we can claim it shows demand elastic and negative crossover. Consider X to be a complimentary good to Y, if the price of product X is increased then the price of product Y will decrease. For instance:

• Toothbrush is a gratuitous toothpaste nice. Since the cost of making a brush can be much hirder than toothpaste, its demand depends entirely on the selling of toothpaste. We have seen several times that with one packet of toothpaste, we get 1 toothbrush free.
• Shoe brush is a natural compliment to shoe polish. The cost of making shoe brush is much hirer than the cost of making shoe polish and individually Brush's price is much higher than the price of shoe polish, but they're complementary to each other's items. We have seen several times shoe brush with shoe polish is safe.

Substitute goods have a positive cross-market elasticity, as the market of one good decreases the price of another good at the same time. For example,

• Pepsi and Coca-Cola
• Coffee and tea.
• Windows operating system and LINUX operating system.

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