The Unique Toy Company rents space by the square foot in a warehouse to store its inventory. The owner of the warehouse just doubled the rent he charges the Unique Toy Company. Everything else equal, the rent increase is likely to ________ Unique's optimal level of inventory.

Question

Quizplus · Accepted Answer

When rent increases, the cost of holding inventory also increases, making it more expensive to keep inventory in the warehouse. As a result, it is likely that Unique will reduce its optimal level of inventory to offset the increased costs associated with the rent increase. Therefore, the rent increase is likely to decrease Unique's optimal level of inventory.

The Unique Toy Company Rents Space by the Square Foot