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Published September 19, 2017 | Submitted
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The Economic Value of Resource Flexibility

Li, Lode

Abstract

The economic value of resource flexibility is discussed in the context of a model of a two-stage production process with stochastic variability. A unique optimal barrier policy is characterized with any level of capacity flexibility. The more flexible the capacities, the lower the optimal inventory limit and the higher the profit of the producer. A diffusion approximation of the model is also discussed.

Additional Information

I gratefully acknowledge the insightful suggestions of Erhan Cinlar and Michael J. Harrison.

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