What are the two main assumptions behind the Economic Order Quantity (EOQ) model?

The Economic Order Quantity (EOQ) model is grounded in several important assumptions, two of which highlight the relationship between inventory carrying costs and ordering costs. The correct answer involves the premise that as the quantity of inventory ordered increases, the total carrying costs will rise. This reflects the costs associated with storing larger amounts of inventory, such as warehousing expenses and insurance. Conversely, ordering costs—the costs incurred every time an order is placed—tend to decrease with larger order quantities, because ordering in bulk can often lead to economies of scale. Thus, the EOQ seeks to identify the optimal order size that minimizes the total inventory costs by balancing these two key components.

The other options don't align with the foundational assumptions of the EOQ model. The option referring to constant demand and zero lead times is partially relevant but doesn't encompass the primary focus on inventory costs. The notion of unlimited warehouse space and perishable items adds complexity that doesn't align with the simple EOQ assumptions. Lastly, an assumption mentioning constant production rates and negligible supply chain risks does not capture the essence of the EOQ model, which centers more on the cost dynamics of ordering and carrying inventory rather than on production variables or risks.