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Firms have an incentive to reduce production if: demand is stronger than expected. planned inventory investment...

Firms have an incentive to reduce production if:

  • demand is stronger than expected.

  • planned inventory investment is positive.

  • unplanned inventory investment is positive.

  • unplanned inventory investment is negative.

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Answer #1

UNPLANNED INVENTORY INVESTMENT IS POSITIVE.

The firm have an incentive to reduce production when unplanned inventory investment is positive.

Unplanned inventory can be of two types namely Positive unplanned inventory and Negative unplanned inventory.

Positive unplanned inventory means when you have more inventory than you need, this may happen because of a Sluggish business conditions or may be due to overproduction at this time you need to reduce production.

On the other hand Negative unplanned inventory means you have too little inventory than you need. This may be due to unreproduction or sales went faster than you have expected to be.

From the above discussion you can easily conclude that firm has an inventive to reduce production when they have Positive unplanned inventory investment.

(Unplanned inventory = Total inventory investment-Planned inventory)

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