Happy Bagels sells its bagels for $6 each and the firm has a constant marginal cost of $4 per bagel, which is equal to its (constant)average total cost. If Happy Bagels does not sell a bagel the day it is produced, the bagel is sold as day- old for $2. If Happy Bagels is currently holding 50 bagels in inventory and the probability that Happy Bagels will sell 50 bagels or more is 0.50, which of the following statements is true?

Question

Quizplus · Accepted Answer

Given the information, Happy Bagels is likely at or near its profit-maximizing inventory level. The probability of selling 50 or more bagels is 0.50, indicating a balanced risk between having too many unsold fresh bagels (which would then be sold at a lower price the next day) and not having enough bagels to meet demand. Since the marginal cost equals the average total cost, and the firm can still sell unsold bagels (albeit at a lower price), maintaining the current inventory level seems to be a rational strategy for maximizing profits without clear evidence that adjusting the inventory level up or down would increase profits.

Happy Bagels Sells Its Bagels for $6 Each and the Firm