Consider the same supply chain setting as in Practice Problem 2 in the Newsvendor lecture.

You are a wholesaler of newspapers. You buy newspapers from the publisher and distribute them to local newsstands. You sell the newspaper to the local newsvendors at 80 cents per newspaper, and the local newsvendors sell the newspaper to the final customer at 1 dollar each.

Q1: You want to induce the newsvendor to purchase more newspapers, so you agree to buy back unsold newspapers at a price of $0.60/newspaper. What is the optimal service level for the local newsvendor now?

Please identify Cu (under-stocking cost) and Co (over-stocking cost) to calculate the critical ratio, i.e., the optimal service level. Please briefly explain your calculation logic to show the work.

Hint: The buy-back price represents the salvage value of the unsold newspapers. In other words, the buy-back contract reduces Co (over-stocking cost) by $0.60.

Q2: What is the optimal service level for the local newsvendor now if you agree to buy back unsold newspapers at a price of $0.75/newspaper.?

Q3: We have figured out in class that the optimal service level of the entire supply chain is 0.80. This is the service level that maximizes the total profit of the chain.

Based on the service level, between the two candidate buy-back prices, $0.60/newspaper and $0.75/newspaper, which one would you choose as the wholesaler to induce a higher total profit?

Q4: Compared to a buy-back contract, a revenue-sharing contract is generally better to incentivize local newsvendors to sell more newspapers. TRUE/FALSE

Please answer the four questions, thank you!