Optimal switching in an economic activity under uncertainty

This paper considers the problem of finding the optimal sequence of opening (starting) and closing (stopping) times of a multi-activity production process, given the costs of opening, running, and closing the activities and assuming that the state of the economic system is a stochastic process. The...

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Bibliographic Details
Published in:SIAM journal on control and optimization 1994-07, Vol.32 (4), p.1021-1036
Main Authors: BREKKE, K. A, ØKSENDAL, B
Format: Article
Language:English
Subjects:
Applied mathematics
Applied sciences
Costs
Economic activity
Exact sciences and technology
Expected values
Miscellaneous
Operational research and scientific management
Operational research. Management science
Prices
Profits
Stochastic models
Values
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Summary:This paper considers the problem of finding the optimal sequence of opening (starting) and closing (stopping) times of a multi-activity production process, given the costs of opening, running, and closing the activities and assuming that the state of the economic system is a stochastic process. The problem is formulated as an extended impulse control problem and solved using stochastic calculus. As an application, the optimal starting and stopping strategy are explicitly found for a resource extraction when the price of the resource is following a geometric Brownian motion.
ISSN:0363-0129
1095-7138
DOI:10.1137/s0363012992229835