The Praha Kitchen Appliance Company (The Praha) is about to place its last order for a certain model of a refrigerator. This model will phased out in a few months and will be replaced by a new model. The Praha company buys these refrigerators from its suppliers at $600 each and sells them for $1000 each. However, after the new model comes out, The Praha compnay plans to lower the price of any leftover refrigerators to $500 just to clear them out. The Praha company is confident that it will be able to sell all its leftover refrigerators at this reduced price. The demand at the full price of $1000 has a normal distribution with mean 1500 and standard deviation 200.
1) How many refrigerators shoud The Praha order?
2) The Praha is concerned about the loss of goodwill from not satisfying customer full price demand that occures before the new model comes out. Suppose The Praha gives $100 to each customer who requests one of these refrigerators when there are none in stock. How many refrigerators should The Praha order?
3) How will the order quantity in part (1) change if the standard deviation of the demand could be lowered? How would be expected profit change if the standard deviation of the demand could be lowered?