Q. A movie studio sells the latest movie on DVD to Blockbuster at $10 per DVD. The marginal production cost for the movie studio is $2 per DVD. Blockbuster prices each DVD at $25 to its customers. DVD s is kept on the regular rack for a one month period, after which they are discounted down to $3. Blockbuster places a single order for DVDs. Their current forecast is that sales will be normally distributed, with a mean of 50,000 and a standard deviation of 30,000.
a. Explain how many DVDs should Blockbuster order? Illustrate what is its expected profit?
b. Illustrate what is the profit that the studio makes given Blockbuster’s actions?
c. The studio is offering Blockbuster a deal: They will sell the DVD to blockbuster at $5 each in return for a 65-35 split of the income (65% to Blockbuster). Should Blockbuster agree to this deal?
