Dynamic certainty equivalents in production smoothing theory

Abstract

A best linear policy is derived for a production smoothing problem having a non-quadratic criterion. Explicit results are obtained for the ease of an uncorrected and an exponentially correlated sequence of demand. For the uncorrelated case it is shown that in the absence of fixed sot-up costs the optimal linear policy leads almost to the same costs as the exact non-linear policy ; i.e. one can use a linear theory and hence dynamic certainty equivalents.

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