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On the other hand, we make profits on the items that we sell. We will assume that we realize marginal profit MP on any unit that we sell and marginal loss ML on each unit that we do not sell.
Now we can try to determine the order quantity that will maximize our expected profits. This problem is amenable to solution through the classic economic approach of marginal analysis. The optimal order size Q occurs at the point where the expected benefits derived from ordering an additional unit are less than the expected costs. In other words, we keep increasing our order size as long as an additional unit is expected to increase our profits...
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