Suppose Acme Corp is a cosmetics producer. Each year, it uses 100,000 kilograms of lanolin in its production process. (Lanolin is a key input in the production of lipstick). If the cost of lanolin rises, it can pass along 60% of the cost increase to its customers. To hedge its profits from increases in the cost of lanolin, how many kilograms of lanolin should be locked in using supply contracts?

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Acme Corp wants to hedge against the risk of rising lanolin costs but not the enti... View the full answer