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http://ssrn.com/abstract=227102
 
 

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The Learning Curve and Optimal Production Under Uncertainty


Saman Majd


University of Pennsylvania Wharton School

Robert S. Pindyck


Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

October 1987

NBER Working Paper No. w2423

Abstract:     
This 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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Date posted: April 27, 2000  

Suggested Citation

Majd, Saman and Pindyck, Robert S., The Learning Curve and Optimal Production Under Uncertainty (October 1987). NBER Working Paper No. w2423. Available at SSRN: http://ssrn.com/abstract=227102

Contact Information

Saman Majd (Contact Author)
University of Pennsylvania Wharton School
3641 Locust Walk
Philadelphia, PA 19104-6365
United States
Robert S. Pindyck
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
50 Memorial Drive, E52-450
Cambridge, MA 02142
United States
617-253-6641 (Phone)
617-258-6855 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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