A12.5 The Scarf Stop is an online retailer of premium wool scarves. The company purchases premium scarves directly from an Italian producer, holds these scarves in inventory, and then ships them to its final customers when they place an order. The Scarf Shop sells 1,250 scarves per month, and it must maintain inventories in order to fill orders for its scarves. The cost of holding a scarf in inventory for a month is $1.

The Scarf Shop can make regular orders from its wholesale provider, but it must pay a fixed fee of $100 per order and a per-scarf cost of $2.50.

a. What is the marginal benefit from increasing the order size for the Scarf Shop?

b. What is the marginal cost of increasing the order size for the Scarf Shop?

c. What is the profit-maximizing order size?