Which of the following best describes the relationship between a firm's response to customer demand and its inventory investment in the context of consumer surplus and willingness to pay?

• A. Increasing inventory investment always decreases consumer surplus regardless of demand response.
• B. Inventory investment is unrelated to a firm's response to customer demand.
• C. A quicker response to customer demand typically requires higher inventory investment to ensure products are available when needed.
• D. A quicker response to customer demand allows firms to reduce inventory investment because products are produced only after demand is realized.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the key concepts involved: consumer surplus, willingness to pay, inventory investment, and a firm's response to customer demand. Consumer surplus is the difference between what consumers are willing to pay and what they actually pay, reflecting the benefit consumers receive from a product.
2. Step 2: Analyze how a firm's response time to customer demand affects inventory investment. A quicker response means the firm can replenish stock faster, potentially reducing the need to hold large inventories.
3. Step 3: Consider the trade-off between inventory investment and availability. Higher inventory investment ensures products are available immediately, which can increase consumer surplus by meeting demand promptly and avoiding stockouts.
4. Step 4: Evaluate the statement that a quicker response requires higher inventory investment. Typically, a quicker response allows firms to hold less inventory because they can restock rapidly, reducing holding costs and risk of excess inventory.
5. Step 5: Conclude that the best description is that a quicker response to customer demand generally allows firms to reduce inventory investment, as products can be produced or ordered after demand is realized, aligning supply closely with actual demand and potentially increasing consumer surplus.