Question

What does it mean if AHC > AOC (M2)?

A) It indicates profitability
B) It suggests efficient inventory management
C) It implies higher storage costs than operating costs
D) It requires further analysis to determine the impact

Answer 1

AHC being greater than AOC (M2) suggests higher average holding costs than the average opportunity cost of inventory, possibly leading to inefficiencies. It is crucial to manage inventory levels to align costs with the value derived by society, ensuring costs do not exceed benefits.

Step-by-step explanation:

If AHC > AOC (M2), it implies that the Average Holding Cost (AHC) is greater than the Average Opportunity Cost (M2) of the money tied up in inventory. What this suggests is not directly related to profitability, efficient inventory management, or requiring further analysis to determine impact without additional context. Instead, we can refer to the economic principle that when producing a greater quantity than the allocatively efficient choice where Price (P) equals Marginal Cost (MC), it results in a situation where P < MC.

This situation means that the marginal costs of production are higher than what society values the product at, which is not ideal. For society as a whole, if costs outweigh benefits, it suggests that producing a lower quantity would be more economically sound. Thus, if AHC > AOC (M2) in an inventory context, one potential implication could be that holding costs are becoming excessively high and that inventory levels might need to be reduced to lower these costs and restore balance to production efficiency.