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Notes on Calculating the Experience Curve
To Calculate the Experience Effect:
The experience effect is defined as (1- 'k'). This is the amount by which the cost drops each time production doubles.
You need to start by calculating the % change between the unit cost for x units and the unit cost for 2x units.
The formula for this is:
= (Original Price-New Price)
= (Difference in Price/Original Price)
The answer to this is (1-'k').
By the time 5,000 had been produced the unit cost would have dropped to PS871
BY the time 10,000 had been produced the unit cost would have dropped to PS803
Therefore (1- 'k') = 0.078.
You then need to calculate 'k'.
= 0.078 = (1-'k')
= 'k' = 1-0.078
Therefore 'k' is 0.922. The experience effect is 7.8%. I.e. costs drop by 7.8% each time the production doubles.
To Calculate 'z':
To compute the 'z' component of the experience curve you need to use the following formula:
z = - log(k) / log(2)
Log k is replaced with the log on the answer you calculated for 'k' in the above section.
z = - log(k)/ log(2)
z = -log(0.922)/log(2)
z = -0.11727
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