How do interest rates affect the optimal order quantity Q*?
A) As interest rates increase, Q* decreases.
B) As interest rates decrease, Q* decreases.
C) As interest rates increase, Q* increases until it reaches a maximum, after which any further increase in interest causes a decline in Q*.
D) None of the above

Question

Quizplus · Accepted Answer

Interest rates affect the cost of financing for businesses. Higher interest rates increase the cost of borrowing, resulting in a higher cost of carrying inventory. This, in turn, reduces the optimal order quantity Q* because carrying more inventory will increase the financial costs associated with holding excess inventory. Therefore, as interest rates increase, Q* decreases.

How Do Interest Rates Affect the Optimal Order Quantity Q