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4 - The Maximum Principle and Economic Interpretations

Published online by Cambridge University Press:  05 June 2012

Michael R. Caputo
Affiliation:
University of Central Florida
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Summary

Until this juncture, our development of the necessary and sufficient conditions of optimal control theory was essentially a reformulation of those from the classical calculus of variations. As a result, the power and reach of optimal control theory have not been fully exposed or exploited. The goal of this chapter, therefore, is to state and prove some necessary and sufficient conditions for a class of control problems that permit the full capability of optimal control theory to be realized. The theorems are not the most general we will encounter, but they do highlight the motivation for the name Maximum Principle. Moreover, our proof of the necessary conditions will employ some continuity assumptions that are, strictly speaking, not needed for a rigorous proof, but will nonetheless be employed so as to ease the technical burden and bring in some connections with the principle of optimality and dynamic programming. We will then use the necessary conditions to explicitly solve for the optimal paths of some examples, some of which will be devoid of any economic content so as to emphasize how to arrive at a solution in practice. The reader is encouraged to work through the proof of the necessary and sufficient conditions, as it provides the reader with a better understanding of how they differ from those presented earlier. Note that the theorems are stated and proven for a class of control problems with many state and control variables.

Type
Chapter
Information
Foundations of Dynamic Economic Analysis
Optimal Control Theory and Applications
, pp. 77 - 121
Publisher: Cambridge University Press
Print publication year: 2005

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References

Bellman, R. (1957), Dynamic Programming (Princeton, N. J.: Princeton University Press)
Bellman, R. and Dreyfus, S. (1962), Applied Dynamic Programming (Princeton, N. J.: Princeton University Press)
Chiang, A. C. (1992), Elements of Dynamic Optimization (New York: McGraw-Hill, Inc.)
Kamien, M. I. and Schwartz, N. L. (1991, 2nd Ed.), Dynamic Optimization: The Calculus of Variations and Optimal Control in Economics and Management (New York: Elsevier Science Publishing Co., Inc.)
Léonard, D. and Van Long, N. (1992), Optimal Control Theory and Static Optimization in Economics (New York: Cambridge University Press)
Seierstad, A. and Sydsæter, K. (1987), Optimal Control Theory with Economic Applications (New York: Elsevier Science Publishing Co., Inc.)
Simon, C. P. and Blume, L. (1994), Mathematics for Economists (New York: W. W. Norton & Company, Inc.)

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