Kara's Kittens typically produces and sells at its optimal (lowest per-unit cost)level of 30 scratching posts per week.Kara's also maintains an inventory of 20 scratching posts.If prices are sticky and there is a positive demand shock this week resulting in demand for 40 scratching posts,we would expect Kara's to:
A) sell the additional scratching posts out of its inventory and rebuild the inventory later when a negative demand shock occurs.
B) permanently expand production to 40 scratching posts per week.
C) raise prices on scratching posts.
D) introduce a new line of scratching posts.

Question

Quizplus · Accepted Answer

Since Kara's already produces and sells at its optimal level, it may not be feasible to permanently expand production to 40 scratching posts per week. Therefore, the best option is to sell the additional scratching posts out of its inventory and rebuild the inventory later when a negative demand shock occurs. This will help the company to maintain its optimal level of production and avoid overproduction. Raising prices or introducing a new line of scratching posts may not be necessary in this situation.

Kara's Kittens Typically Produces and Sells at Its Optimal (Lowest