Two Production Function Model

The basic modeling framework presented in Chapter 3 was developed for a firm producing to an order which specifies a quantity and a delivery date for output. A neoclassical production function was augmented with a learning hypothesis, and the cost of production was minimized to yield optimal time paths of both production and cost. The model presented in this chapter adheres to the same general theoretical framework. However, in the previous Chapters learning was presumed to be an automatic consequence of production experience. In this chapter the firm is permitted to devote resources explicitly to the “knowledge” production. This knowledge in turn permits more efficient production of both knowledge and output. In this way the learning curve is transformed from an automatic result of production to a result of the rational allocation of resources.