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Fixed cost, marginal cost, and the decision to buy or make

Author

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  • Charles E. Hegji

    (Auburn University, Montgomery, USA)

Abstract

The paper builds a formal model of the costs and benefits of producing intermediate goods internally as compared to buying partially produced inputs on the open market. The model centers on the link between the purchase of assets specific to a production process and the mean and variance of profits from the purchase. The central point of the paper is that even though purchases of assets specific to a production process can have an ambiguous impact on profits of the decision to make, the purchase of such assets has a tendency to reduce the variability of profits. This trade-off is at the heart of decision to buy or make. Copyright © 2004 John Wiley & Sons, Ltd.

Suggested Citation

  • Charles E. Hegji, 2004. "Fixed cost, marginal cost, and the decision to buy or make," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 25(3), pages 137-140.
    • Handle: RePEc:wly:mgtdec:v:25:y:2004:i:3:p:137-140
    DOI: 10.1002/mde.1138
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    References listed on IDEAS

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    2. Bigelow, John Payne, 1993. "Consistency of mean-variance analysis and expected utility analysis : A complete characterization," Economics Letters, Elsevier, vol. 43(2), pages 187-192.
    3. Neumann, Manfred & Weigand, Jurgen & Gross, Alexandra & Munter, Markus Thomas, 2001. "Market size, fixed costs and horizontal concentration," International Journal of Industrial Organization, Elsevier, vol. 19(5), pages 823-840, April.
    4. William M. Dugger, 1996. "The Mechanisms of Governance," Journal of Economic Issues, Taylor & Francis Journals, vol. 30(4), pages 1212-1216, December.
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