The Learning Curve and Optimal Production Under Uncertainty
AbstractThis paper examines the implications of the learning curve in a world of uncertainty. We consider a competitive firm whose costs decline with cumulative output. Because the price of the firm's output evolves stochastically, future production and cumulative output are unknown, and are contingent on future prices and costs. We derive an optimal decision rule that maximizes the firm's market value: produce when price exceeds a critical level, which is a declining function of cumulative output. We show how the shadow value of cumulative production, as well as the total value of the firm, depend on the volatility of price and other parameters. Over the relevant range of prices, uncertainty reduces the shadow value of cumulative production, and therefore increases the critical price required for the firm to begin producing.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2423.
Date of creation: Oct 1987
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Other versions of this item:
- Saman Majd & Robert S. Pindyck, 1989. "The Learning Curve and Optimal Production under Uncertainty," RAND Journal of Economics, The RAND Corporation, vol. 20(3), pages 331-343, Autumn.
- Majd, Saman. & Pindyck, Robert S., 1987. "The learning curve and optimal production under uncertainty," Working papers 1948-87., Massachusetts Institute of Technology (MIT), Sloan School of Management.
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