Let $D$ be Binomially distributed with mean $25$ and variance $20$. This means that $D\sim\text{Bin}(125,\frac{1}{5})$. I need to determine the optimal order quantity $Q$ which maximizes profit. For the profit I have two equations, $$profit=\begin{cases}pD-cQ-(Q-D)r, \;\text{ if }D\leq Q \\ pQ-cQ, \; \text{ if }D>Q\end{cases}$$ Combining these and taking the expectation gives me, $$\mathbb{E}[profit]=p\mathbb{E}[\min(D,Q)]-cQ-r\mathbb{E}[\max(Q-D,0)].$$ So I now compute the two epectations, $$\mathbb{E}[\min(D,Q)]=\mathbb{E}[D|D\leq Q]\cdot P(D\leq Q)+\mathbb{E}[Q|D>Q]\cdot P(D>Q),$$ $$\mathbb{E}[\min(D,Q)]=\sum_{i=0}^{Q}i\binom{125}{i}\left(\frac{1}{5}\right)^{i}\cdot\left(\frac{4}{5}\right)^{125-i}+Q\left(1-\sum_{i=0}^{Q}\binom{125}{i}\left(\frac{1}{5}\right)^{i}\cdot\left(\frac{4}{5}\right)^{125-i}\right).$$ Similairly, $$\mathbb{E}[\max(Q-D,0)]=\mathbb{E}[Q-D|D\leq Q]\cdot P(D\leq Q)=Q\cdot P(D\leq Q)-\mathbb{E}[D|D\leq Q]\cdot P(D\leq Q),$$ $$\mathbb{E}[\max(Q-D,0)]=Q\sum_{i=0}^{Q}\binom{125}{i}\left(\frac{1}{5}\right)^{i}\cdot\left(\frac{4}{5}\right)^{125-i}-\sum_{i=0}^{Q}i\binom{125}{i}\left(\frac{1}{5}\right)^{i}\cdot\left(\frac{4}{5}\right)^{125-i}.$$ So now I have determined both $\mathbb{E}[\min(D,Q)]$ and $\mathbb{E}[\max(Q-D,0)]$, I have my equation for $\mathbb{E}[profit]$. I now need to find the value for $Q$ which maximizes profit. I can find my desired $Q$ by taking the derivative of $\mathbb{E}[profit]$ with respect to $Q$ and setting the equation equal to 0. This is where I get stuck. I am unsure how to take the derivative with the binomial coefficients in the formula. Is my reasoning so far correct, and if so what would be the best way to proceed?
2026-03-30 10:34:55.1774866895
Finding maximum value using expected profit with Binomially distributed demand
33 Views Asked by Bumbble Comm https://math.techqa.club/user/bumbble-comm/detail AtRelated Questions in OPTIMIZATION
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