BREAKING DOWN A LONG-RUN MARGINAL COST OF AN LP INVESTMENT MODEL INTO A MARGINAL OPERATING COST AND A MARGINAL EQUIVALENT INVESTMENT COST

1 January 2004

journal article
research article
Published by Taylor & Francis in The Engineering Economist

Vol. 49 (4) , 307-326
https://doi.org/10.1080/00137910490888066

Abstract

In linear programming, a simple observation on duality allows us to break down a long-run marginal cost into a marginal operating cost and a marginal equivalent investment cost. This marginal equivalent investment cost is an acceptable means of allocating the equivalent investment cost to the different finished products (and similarly for the marginal operating cost). It is useful for determining the products on which a sales campaign should focus and for analyzing short-run marginal costs once an investment decision has been taken. As an example, we will examine a simplified investment model in the oil refining industry.

Keywords

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