A hot dog vendor must decide on Monday how many hot dogs to have available for the coming Saturday's football game.Each hot dog costs the vendor $3.00 and is sold for $5.00.After the game any unsold hot dogs are discounted and sold to the university cafeteria for $1.75.The vendor believes that the demand for hot dogs follows the probability distribution shown below: The vendor's cost of underestimating demand,C_u,is

Question

Quizplus · Accepted Answer

The cost of underestimating demand, C_u, refers to the cost of having excess hot dogs that will go unsold and will have to be sold to the university cafeteria at a discounted price. Therefore, the cost of underestimating demand is the difference between the cost of each hot dog ($3.00) and the discounted price they will have to sell them for ($1.75), which is $1.25. Therefore, the best choice is C, $2.00, since it is the closest answer option to $1.25.

A Hot Dog Vendor Must Decide on Monday How Many