The Optimal Investment in Current Assets for an Operating Firm

question 47

Multiple Choice

The optimal investment in current assets for an operating firm occurs at the point where:

• A)both shortage costs and carrying costs equal zero.
• B)shortage costs are equal to zero.
• C)carrying costs are equal to zero.
• D)carrying costs exceed shortage costs.
• E)the total costs of holding current assets is minimized.

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Definitions:

Utils

A hypothetical unit of measurement used in economics to quantify utility or the satisfaction gained from consuming goods and services.

Indifference Curve

A contour line showing all consumption bundles that yield the same amount of total utility for an individual.

Total Utility

The overall satisfaction or benefit that a consumer derives from consuming a particular quantity of goods or services.

Indifference Curve

An indifference curve represents a series of combinations of two goods or services that give an individual equal satisfaction and utility, illustrating consumer preferences.