Question

Which of the following changes in the in‐stock probability (or critical ratio) of the newsvendor model increases the order quantity most? You should provide an analytical explanation using the relationships we learned in class, providing only an answer without justification will result in no credit.

1. a) An increase in the in‐stock probability from 70 percent to 80 percent.

2. b) An increase in the in‐stock probability from 70 percent to 85 percent.

3. c) An increase in the in‐stock probability from 80 percent to 90 percent.

4. d) An increase in the in‐stock probability from 80 percent to 95 percent.

Answer 1

The answer is:

An increase in the in-stock probability from 80 percent to 95 percent.

Explanation:

The order quantity to achieve an in-stock probability increases in the desired in-stock probability at an increasing rate. Thus, a 15% increase in the in-stock has a larger change in the quantity than a 10% increase in the in-stock. And a 15% increase starting at 80% has a larger increase than a 15% increase starting at 70%.