Learning is often perceived as a cost-reducing endogenous by-product o
f production processes. In many applications this by-product is modele
d as a learning curve; that is, a simple function of time or of cumula
tive production experience. In an earlier paper we presented an altern
ative explanation where managers decide what resources to devote to kn
owledge acquisition. In this paper we expand those results to a situat
ion using a more flexible production technology and emphasizing discou
nted cost. Our model explains resource and output behavior for a firm
that is producing specialized units to contractual order. However, the
results are quite general and have implications for investment in res
earch, engineering, science and technology, software development, and
worker training. We provide examples where the cost-minimizing produce
r will choose to invest in knowledge creation early in the production
program and then have the rate of investment decline over time. Other
interesting results are noted by examining the optimal time paths of t
he control and state variables in a comparative dynamics analysis.