Production, Investment and Idle Capacity

Abstract

A production decision is one in which the firm is concerned with how much of an already existing stock of capital inputs should be utilized in combination with other substitutable inputs to produce a profit maximizing level of output. An investment decision is one in which the firm is concerned with how large a stock of capital should be held in order to maximize the discounted stream of profits over investment cost. The Neoclassical approach to this problem implicitly eliminates the distinction between these two decisions. This approach is characterized in investment decision literature by the reversible investment models of Arrow [1] and Jorgenson [3]. The reversible investment decision is one in which the firm can either