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Abstract A functional equation is described for the inventory problem in which the demand distribution contains an unknown parameter with a known a priori distribution. If the demand distribution is a member of the exponential family, then the minimum cost is a function of two variables: current stock and past mean demand. Some properties of the optimum policies are described, and some conditions are given which imply that the functional equation can be reduced to one involving functions of one variable only. Under these conditions, the computation of optimal policies becomes no more difficult than the corresponding computation with a known demand distribution.
Herbert E. Scarf (Thu,) studied this question.