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 Kittens operates at its optimal level of production at 30 scratching posts per week, it would not make sense for them to permanently expand production to 40 scratching posts per week based on a temporary demand shock. Additionally, raising prices may result in lost customers and decreased demand. Therefore, the best option for Kara's would be to sell the additional scratching posts out of its inventory and rebuild the inventory later when demand returns to normal.

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