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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.DVDs are kept on the regular rack for a one-month period, afterwhich they are discounted down to $3. Blockbuster places a singleorder for DVDs. Their current forecast is that sales will benormally distributed, with a mean of 50,000 and a standarddeviation of 30,000.

a) How many DVDs should Blockbuster order? What is its expectedprofit?

b) What is the profit that the studio makes given Blockbuster'sactions?

c) The studio is offering Blockbuster a deal : they will sellthe DVD to Blockbuster at $5 each in return for a 65/35 split ofthe revenue (65% to Blockbuster). Should Blockbuster agree to thisdeal?

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