The production-smoothing motive for holding inventories suggests that:
A) firms hold inventories in order to produce more output.
B) when sales are low, firms produce more than they sell and put the extra goods in inventories.
C) firms hold inventories to avoid losing sales.
D) when a product is only partly completed, its components are counted as part of the firm's inventory.

Question

Quizplus · Accepted Answer

The production-smoothing motive for holding inventories suggests that firms produce more than they sell during periods of low sales and put the extra goods in inventories. This is done to avoid sharp fluctuations in production levels and to maintain a steady output over time. By smoothing out production, firms can better respond to changes in demand and reduce the risk of stockouts or overproduction. Therefore, the correct answer is B.

The Production-Smoothing Motive for Holding Inventories Suggests That