For this we decompose the cost of such a system into four components: inventory holding
costs, fixed setup costs, manufacturing costs and salvage costs. We can express the four
parts of the total cost as a non-convex and non-smooth function of Q.
The first experiment demonstrates
the advantage of our proposed model over a standard model, which runs two separate systems
to meet the regular market demand and the minimum inventory requirement respectively,
and a constant production model. In the second experiment, we perform sensitivity analysis
on those government controlled system parameters to provide some insights for both parties
(the firm and the government) in how to negotiate contract terms.