For seasonal products, the service level should be set to equal:

• A. the equilibrium price in the market
• B. the ratio of the cost of understocking to the sum of the costs of understocking and overstocking
• C. the average willingness to pay of all consumers
• D. the marginal cost of production

Answer: (B)

Verified step by step guidance

1. Understand the concept of service level in inventory management, especially for seasonal products. The service level represents the probability that demand will be met without a stockout.
2. Identify the costs involved: the cost of understocking (when demand exceeds supply, leading to lost sales) and the cost of overstocking (when supply exceeds demand, leading to excess inventory).
3. Recall the critical ratio formula used to determine the optimal service level, which balances these two costs to minimize expected total cost.
4. Write down the critical ratio formula for service level as: \(\text{Service Level} = \frac{\text{Cost of Understocking}}{\text{Cost of Understocking} + \text{Cost of Overstocking}}\).
5. Interpret this formula as the optimal probability of meeting demand, ensuring that the expected marginal cost of stocking one more unit equals the expected marginal benefit.