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Baum Ol 1952
Baum Ol 1952
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I. A SIMPLE MODEL
We are now interestedin analyzingthe transactionsdemand for
cash dictatedby rationalbehavior,whichforour purposesmeans the
holdingof those cash balances that can do the job at minimumcost.
To abstractfromprecautionaryand speculativedemandslet us con-
sider a state in which transactionsare perfectlyforeseenand occur
in a steadystream.
Suppose that in the course of a given period an individualwill
pay out T dollars in a steady stream. He obtains cash eitherby
borrowingit, or by withdrawingit froman investment,and in either
case his interestcost (or interestopportunitycost) is i dollars per
dollar per period. Suppose finallythat he withdrawscash in lots of
C dollars spaced evenlythroughoutthe year, and that each time he
makes such a withdrawalhe must pay a fixed "broker's fee" of b
1. T. M. Whitininformsme that the resultin questiongoes back to the
middleofthe1920'swhenit seemsto have beenarrivedat independently by some
halfdozenwriters.See,e.g.,GeorgeF. Mellen,"PracticalLot QuantityFormula,"
Management and Administration, impli-
Vol. 10, September1925. Its significant
cations for the economictheoryof inventory,particularlyfor businesscycle
theory,seemto have goneunrecognized untilrecentlywhenDr. Whitinanalyzed
them in his forthcomingInventoryControland Economic Theory (Princeton Uni-
versityPress) which,incidentally,firstsuggestedthe subjectof thisnoteto me.
See also, Dr. Whitin's"InventoryControlin Theoryand Practice" (elsewhere
inthisissue,supra,p. 502),andKennethJ.Arrow, TheodoreHarris,andJacobMar-
schak,"OptimalInventoryPolicy," Econometrica, Vol. 19, July1951,especially
pp. 252-255. In additionto Dr. Whitin,I am heavilyindebtedto Professors
Chandler, Coale, Gurley,Lutz, Mr.Turvey,and Professor Viner,and to themem-
bersofthe graduateseminarat Harvard University,wheremuch of this paper
was firstpresented.
545
+ TY + i
(i) -b C ++iC.