Drive with Us is an automobile retailer and pays floor plan financing to finance the cars they hold in inventory. If the interest rate on their floor plan financing decreases from 5 to 3 percent, Drive with Us's expected marginal cost from holding additional cars in inventory will shift _______and the profit- maximizing number of cars to hold in inventory will _______.

Question

Quizplus · Accepted Answer

When the interest rate on floor plan financing decreases, the cost of holding inventory decreases, leading to a downward shift in the marginal cost of holding additional cars. Consequently, it becomes more profitable to hold a larger inventory, increasing the profit-maximizing number of cars.

Drive with Us Is an Automobile Retailer and Pays Floor