The existence of uncertainty influences the investment, production and pricing decision of firms. Therefore, capacity expansion models need to take into account uncertainty. This uncertainty, may arise because of errors in the specification, statistical estimation of relationships and in the assumptions of exogenous variables. One such example is demand uncertainty. In this paper, a cautious capacity planning approach is described for solving problems in which robustness to likely errors is needed. The aim is to cast the problem in a deterministic framework and thereby avoid the complexities inherent in nonlinear stochastic formulations. We adopt a robust approach and minimize an augmented objective function that penalises the sensitivity of the objective function to various types of uncertainty. The robust or sensitivity approach is compared with Friedenfelds' equivalent deterministic demand method. Using numerical results from a large nonlinear programming capacity planning model, it is shown that as caution against demand uncertainty increases, the variance of the total objective function (profit) decreases. The cost of such robustness is a deterioration in the deterministic risky performance. This method is also applied to an industry simulation model in order to assess the effect of uncertainty in market demand on optimal capacity expansion and capacity utilisation.capacity planning, demand uncertainty, robust decisions, optimization, mean-variance minimization, PVC industry

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This contribution demonstrates that the August 2007 financial crisis was the result of three forces: financial liberalization, financial innovation and easy monetary policy in a number of countries around the globe. The financial liberalization era allowed financial institutions to initiate a new financial activity, which was based on the discretion of the banks to dispose of their loan portfolio in accordance with risk management. That financial innovation relied heavily on interlinked securities and derivatives, all related to asset backed-securities and subprime mortgages in particular. Subprime mortgages was a financial innovation designed to enable home ownership to risky borrowers. It is, therefore, the contention of this contribution that the origins of the current financial crisis can be explained by these three interrelated features that have been going on since the 1970s. But the root of the current financial crisis is the creation and subsequent developments in the subprime mortgage market, the focus of this contribution. JEL Classification: E13, E32, E43