A competitive firm produces output y. Some of its output is defective and cannot be sold. That is, only a fraction θ E (0, 1) ca
n be sold in the market at unit price p. Let the cost function be c(y), with (y) 0 and c"() >0. Suppose that with experience, the share of good output θ increases. Does the firm compensate for the increased yield by reducing production, or will it instead increase production?
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