Haliç Üniversitesi Sosyal Bilimler Dergisi, vol.4, no.1, pp.1-15, 2021 (Peer-Reviewed Journal)
Optimal investment behavior of a price-regulated service firm which faces a fluctuating
demand curve, and whose price is determined by governments and municipalities,
is studied through the use of the Optimal Control Theory. The aim of our study is
to analyze the behavior of the firm when faced with the expected dynamic demand
curve, and also to explain the inefficiencies of the firm in terms of machinery and
labor. The firm is required to meet the demand at all times. Cobb-Douglas type of
demand function is utilized in the analyses where both labor and capital are assumed
to be quasi-fixed factors of production. Constant Elasticity of Substitution type of
production function is also used in this analysis resulting in similar results. The rates
of change of demand, the attrition rate of labor, and the depreciation rate of capital
are the primary factors determining the optimal behavior. In other words, as long as
the effect of the loss of capacity on capital and labor is greater than the decrease in
demand, the investor will continue to invest in factors of production. The switching
times between periods when investment in both factors is zero, when investment in
capital is zero, and when investment in labor is zero are determined allowing better
planning of maintenance periods of machinery and vacation planning.