The Learning Curve and Optimal Production Under Uncertainty

23 Pages Posted: 27 Apr 2000  

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)

Date Written: October 1987

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.

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: https://ssrn.com/abstract=227102

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 )

100 Main Street
Cambridge, MA 02139
United States
617-253-6641 (Phone)
617-258-6855 (Fax)

HOME PAGE: http://web.mit.edu/rpindyck/www/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Paper statistics

Downloads
51
Rank
319,564
Abstract Views
940