Q2 Z2,(Q2) Z2(Q2) - Institute for Water Resources - U.S. Army

Case 3. (f-T) - (1 + i)(13 1 -T) > q
(f-T) - (1 + i)(P 2 -T) 7, q
Inventory holding is profitable for the discounted
market prices?). and 112 . To maximize expected profits the
firm should produce and ship the quantity dictated by the
following:
P
^
(16) . =[..----01-14/C0 443%3 feKd 141.)
1-rr -
(17) . (% 1 4244+ fe3 7C3 0
t+).
f. •
(18) La( X.,41ct ‘41 3)(3 f0
0 •
ii %4 Islts = CO)
It;••
As an example of how the analysis complicates as the
number of inventory days allowed increases, suppose the goods
can be sold on the o. th, o4+1 st, and 4X+2 nd days after
production. (The latter two sales the result of inventory
holding for one or two days). Suppose the price (1) 13
probability distribution is , k=1,3.
Firstly, if. the market price is P 3 or P 2 on the a th
.day, the goods will •be sold on delivery.
Three things may happen. Inventory costs may be so
high that the most profitable decision for the firm to make
. is to sell all goods on the a th day, regardless of the
P
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