Expandability, Reversibility, and Optimal Capacity Choice

Download or read book Expandability, Reversibility, and Optimal Capacity Choice written by Avinash K. Dixit and published by . This book was released on 1998 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt: We develop continuous-time models of capacity choice when demand fluctuates stochastically, and the firm's opportunities to expand or contract are limited. Specifically consider costs of investing or disinvesting that vary with time, or with the amount of capacity already installed. The firm's limited opportunities to expand or contract create call and put options on incremental units of capital; we show how the values of these options affect the firm's investment decisions.