Profit Maximization Models for Exponential Decay Processes.
Management sciences research rept.,
CARNEGIE-MELLON UNIV PITTSBURGH PA MANAGEMENT SCIENCES RESEARCH GROUP
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A number of real world processes can be modelled as exponential decay processes. Examples are machine replacement, oil well extraction, advertising goodwill, repair and cleaning activities, etc. In this paper we analyze a series of discounted or undiscounted, deterministic or stochastic exponential decay model. We characterize finite and infinite horizon optimal solutions for each model. We show that the solution can be characterized for the oil drillers problem in the following way Once a well of sufficient capacity is drilled, oil is pumped from it until the oil remaining deceases to a fixed cut-off level then the well is abandoned, and a new well is drilled. The resulting process when repeated over time appears to be the same as an oil source which produces oil revenue continuously at teh fixed cut-off level. In other words, the excess revenue received from an oil well when its capacity is greater than the cutoff level is just sufficient to pay for drilling costs for a new well. Author
- Statistics and Probability