Business Simulation Exam

ADM 3305 – Practice Problems Solution Problem 8

A store that stocks a particular laptop model uses the following (s, S) ordering policy; if the number of laptops in inventory at the beginning of a day is x, then it orders:

• 0 if x ≥ s, • S - x if x < s. The order is immediately filled. The daily demands are independent and equal j with probability aj. All demands that cannot be immediately met are lost.

Let Xn denote the inventory level at the end of the n-th day. Model {Xn, n ≥ 1} as a Markov chain by providing its corresponding graphical representation (i.e., states and transition probabilities). Assume that the store set the policy with s = 1 and S = 3.