Learning by doing and optimal factor demand

In this paper the authors consider the problem of the firm’s optimal plans for factor usage under conditions of profit maximization. Two factors of capital and labor are considered in a dynamic choice system where labor is endowed with a capacity to learn on the job but capital is not. By specifying the problem as an optimal control process, two shadow prices of capital and labor services are derived. The authors then advance a theory of investment demand and labor employment as a joint process. The effects of learning by doing and labor turnover rate on the paths of optimal investment and employment plans are investigated. Using the method of sensitivity analysis the authors also derive testable hypotheses about the effects of variations in the market wage rate and the interest rate on the optimal investment and employment plans of the firm.