This paper considers the effect of learning from experience on the output decisions of a perfectly competitive firm faced with the demand uncertainty. Specifically, a Bayesian framework for expectations formation and demand forecasting by a perfectly competitive firm is presented. Focusing the analysis on the determination of optimal sequential output decisions, it is shown that through output experimentation, the experimenting firm will select a non-myopic sequential policy and will tend to overproduce. The exact magnitude of the overproduction and the economic value of experimentation are contingent upon model parameters and the length of the planning horizon.learning, experimentation, optimal output decisions
This paper considers the problems peculiar to the Value Line Index, because of its use of geometric averaging, as regards the pricing of options and futures on that index. The Value Line Composite Index (VLCI) is an equally weighted geometric average index of nearly 1700 stocks. The VLCI futures market has existed since 1982 while the VLCI options market was established in 1985. This paper provides valuation formulas and analyzes the economic properties of these contracts. Because of the geometric averaging in the VLCI, its contingent claims have special properties. For example, the futures price may fall short of the spot price and the value of a VLCI call option may decline when the volatility of the index is increased. VLCI futures are shown to provide a direct means for duplicating an equally weighted portfolio of the underlying stocks.
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