Introduction of a new process with learning about installation and operation

Abstract

A model is formulated and solved to investigate the optimal introduction of a new production process when the unit cost of the old process increases with cumulative output and the new process is subject to two learning curves. Capital costs of the new process come down with cumulative experience of installation of new capacity, and operating costs are reduced as operating experience accumulates. Demand is assumed to be constant. Because of an upper limit on the rate of expansion of capacity, conversion to the new process takes place gradually over an interval. It is shown that an equivalent, constant capital cost of the new process may be calculated before solving the model; the same may be done for the operating cost in some cases. An example with oil from the Canadian tar sands as the new process is solved, and extensions to the model are discussed.