Final answer:
As prediction error increases, safety stock costs rise because companies hold more inventory to avoid stockouts. If costs, including safety stock, increase, it generally leads to higher product prices to maintain desired profits. When an input becomes more expensive, firms may alter production methods to control costs.
Step-by-step explanation:
As the prediction error increases, safety stock costs generally increase as well. Companies maintain safety stock to safeguard against variability in demand or supply. When errors in demand forecasting are greater, the risk of stockouts rises, leading companies to hold more safety stock as a buffer, which consequently drives up inventory holding costs. This is because the cost of production and the desired profit equals the price a firm will set for a product, meaning if the production costs, such as safety stock costs, increase, so will the product price.
Furthermore, if one input becomes relatively more expensive, firms will likely adjust their production technology or input mix in response. By doing so, they aim to minimize costs and maintain profitability, which may include finding alternative inputs or technologies that are more cost-effective. This is evident as firms increase production volume, prompting a rise in input costs and necessitating greater expenditure to produce additional outputs.