Chapter11 Economic Applications.pptVIP

Chapter11 Economic Applications Optimal control theory has been extensively applied to the solution of economic problems since the early papers that appeared in Shell(1967) and the works of Arrow(1968) and Shell(1969). In Section 11.1, two capital accumulation or economic growth models are presented. In Section 11.2 , we formulate and solve an epidemic control model. Section 11.3 presents a pollution control model. 11.1 Models of Optimal Economic Growth The first model is a finite horizon fixed-end-point model with stationary population. The problem is that of maximizing the present value of utility of consumption for society, and also accumulate a specified capital stock by the end of the horizon. The second model incorporates an exogenously and exponentially growing population in the infinite horizon setting. The method of phase diagrams is used to analyze the model. 11.1.1 An Optimal Capital Accumulation Model The stock of capital K(t) is the only factor of production. Let F(K) be the output rate. Assume F(0)=0, F(K)0, F’(K)0, and F”(K)0, for K 0. The latter implies the diminishing marginal productivity of capital. Let C(t) be the amount of output allocated to consumption, and let be the amount invested. Let ? be the constant rate of depreciation of capital. Then, the capital stock equation is Let U(c) be society’s utility of consumption, we assume Let ? denote the social discount rate and T denote the finite horizon. subject to (11.1) and the fixed-end-point condition 11.1.2 Solution by the Maximum Principle Form the current-value Hamiltonian as The adjoint equation is The optimal control is Since U’(0)= ?, the solution of this condition always gives C(t) 0 . The Hamiltonian consists of two terms, the first one gives the utility of current consumption. The second term gives the net investment evaluated by price ? , which, from (11.6), refle