In a nutshell, the newsboy can buy papers for 33 cents and sell them for a dollar. He averages selling 100 papers a day. So how many papers should he buy?
Life is easy if every day he can sell exactly 100 papers, no more, no less. But life is rarely easy. 1/3 of the time he sold exactly 100 papers. 1/3 of the time he sold 80 papers. 1/3 of the time he could have sold 120 papers.
If he is cautions and buys 80, he will never have any waste. If he buys 100, he will sell them for a nice profit 2/3 of the time and occasionally lose some inventory. If he buys 120, he will have maximum profit on the good days and maximum losses on the slow days. What's a newsboy to do?
As a former newsboy and current State Rep, I'm again facing the same problem. Our challenge in Ways and Means is to forecast Revenue for the next two fiscal years starting July 1, 2011. Revenue comes from multiple sources and we have data going back 10 years. But driving full speed ahead and just looking out the rear view mirror is not always safe. So we also had three days of testimony from various experts to try to polish our crystal ball.
The dilemma for me is moral, not mathematical. Do we vote the number that is most likely, 50/50 chance of up or down? Do we take a cautious approach to make sure that we don't overspend during uncertain times? Do we take an aggressive approach and say the recession is over and the economy will improve more than it did last year?
- 50/50 means a 50/50 chance of new tax increases after the budget is passed
- Cautions means cutting back important programs that nobody wants to cut
- Aggressive means risking more overspending, the problem we were elected to solve
As for the newsboy, the long answer is at:
http://en.wikipedia.org/wiki/Newsvendor
The short answer is 107
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