Lectur18 - Lecture XVIII A Reintroduction to the Control...

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Lecture XVIII A Reintroduction to the Control Problem and Derivation of the Euler Conditions I. Another Overview of Dynamic Optimization A. The basic calculus problem is to choose the levels of variable x in a way that max ( ) x Fx B. We are interested in expanding this problem into the time dimension. 1. One way of incorporating the time dimension is simply max ( , ( )) () xt T Ftxt d t st x t 0 0 However, this problem is separable in that it can be broken down into several separate problems. Remember x t in the discrete optimization problem. 2. Another specification that is truly dynamic is max ( , ( ), ( )) ’( ) ( , ( ), ( )) , () xt ut T Ftxt ut d t xt gtx tu t 0 = In this approach we are trying to derive the path or a function u(t) that describes the control process which adjusts x(t) in a way so as to maximize “profit”. The resulting conditions are: (29 λ λλ λ ∂λ H u fg H x tt f g H t uu xx =⇒ += -= = - + =⇒= 00 (, () ) 3. To arrive at this rule, we will first examine the calculus of variations formulation: max ( , ( ), ’( )) T Ftxt x t d t st x t x x 0 0 ≥= II. Example Solved A. A firm has received an order for B units of product to be delivered by time T. It seeks a production function schedule for filling this order at the specified delivery data at minimum cost, bearing in mind that unit production cost rises linearly with the production rate and that the unit cost of holding inventory per unit time is constant.
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1. Let x(t) denote the inventory accumulated by time t. Then we have x(0)=0 and must achieve x(T)=B. 2. The inventory level, at any moment, is the cummulated past production; the rate of change of inventory is the production rate dx/dt=x’(t). 3. Thus, the firm’s total cost at any moment, t, is [] cx t x t c xt c x t cxt 12 1 2 2 () ’ () += + a. If the cost of producing rises linearly, the pc=c 1 x’(t). Thus, the total cost of production is pc x’(t)=c 1 [x’(t)] 2 pc x b. The second term is the unit cost of holding inventory. 4. The firm’s objective is to determine the production plan x’(t) that minimizes the total cost to the firm. Thus, (29 m in () , ( ) ,’ cx td t st x x T B x t T 1 2 2 0 00 0 + ==≥ 5. One possible plan is to produce at a uniform rate x’(t)=B/T. Then, xt B T dt Bt T T == 0 and the cost incurred will be c B T c Bt T dt c B T c BT T 1 2 2 0 1 2 2 2 + =+ while this plan is feasible, it may not minimize costs.
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Lectur18 - Lecture XVIII A Reintroduction to the Control...

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