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Monte Carlo Simulation: Assignment 1

The document discusses the Monte Carlo simulation technique which uses random numbers to simulate real-life experiments with uncertain outcomes. It explains the steps of the Monte Carlo method which include listing outcomes, determining probabilities, setting up a correspondence between outcomes and random numbers, selecting random numbers to conduct experiments, repeating experiments and tallying results. Examples provided include simulating coin tosses and spins of a spinner using random numbers.

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354 views13 pages

Monte Carlo Simulation: Assignment 1

The document discusses the Monte Carlo simulation technique which uses random numbers to simulate real-life experiments with uncertain outcomes. It explains the steps of the Monte Carlo method which include listing outcomes, determining probabilities, setting up a correspondence between outcomes and random numbers, selecting random numbers to conduct experiments, repeating experiments and tallying results. Examples provided include simulating coin tosses and spins of a spinner using random numbers.

Uploaded by

AmeerUlHaq
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Monte Carlo

Simulation
Assignment 1
Monte Carlo Simulation

The Monte Carlo method is a simulation technique using random


numbers. Monte Carlo simulation techniques are used in business and
industry to solve problems that are extremely difficult or involve a
large number of variables.
Monte Carlo Simulation

The steps for simulating real life experiments in the Monte Carlo
method are as follows:
1. List all possible outcomes of the experiment.
2. Determine the probability of each outcome.
3. Set up a correspondence between the outcomes of the experiment
and the random numbers.
4. Select random numbers from a table and conduct the experiment.
5. Repeat the experiment and tally the outcomes.
6. Compute any statistics and state the conclusions.
Setting up a correspondence between the outcomes
of the experiment and the random numbers

Tossing a coin, for instance, can be simulated by using random


numbers as follows: Since there are only two outcomes, heads and
tails, and since each outcome has a probability of , the odd digits (1, 3,
5, 7, and 9) can be used to represent a head, and the even digits (0, 2,
4, 6, and 8) can represent a tail.
Suppose a random number 8631 is selected. This number represents
four tosses of a single coin and the results T, T, H, H. Or this number
could represent one toss of four coins with the same results.
A spinner with four numbers can be simulated by letting the random
numbers 1 and 2 represent 1 on the spinner, 3 and 4 represent 2 on
the spinner, 5 and 6 represent 3 on the spinner, and 7 and 8 represent
4 on the spinner, since each number has a probability of being
selected. The random numbers 9 and 0 are ignored in this situation.
Monte Carlo Simulation
Select numbers randomly from a probability distribution
Use these values to observe how a model performs over time
Random numbers each have an equal likelihood of being selected at random
Probability Distribution of Demand

LAPTOPS DEMANDED FREQUENCY OF PROBABILITY OF


PER WEEK, x DEMAND DEMAND, P(x)

0 20 0.20
1 40 0.40
2 20 0.20
3 10 0.10
4 10 0.10
100 1.00
Roulette Wheel of Demand

0
90

x=4
x=0
80 x=3 20

x=2

x=1

60
Generating Demand from
Random Numbers
DEMAND, RANGES OF RANDOM NUMBERS,
x r
0 0-19
1 20-59 r = 39
2 60-79
3 80-89
4 90-99
Random Number Table
15 Weeks of Demand

WEEK r DEMAND (x) REVENUE (S)


1 39 1 4,300
2 73 2 8,600
3 72 2 8,600
4 75 2 8,600
5 37 1 4,300
6 02 0 0
7 87 3 12,900
8 98 4 17,200
9 10 0 0
10 47 1 4,300
11 93 4 17,200
12 21 1 4,300
13 95 4 17,200
14 97 4 17,200
15 69 2 8,600
 = 31 $133,300
Computing Expected Demand

Estimated average demand = 31/15 = 2.07 laptops/week

E(x) = (0.20)(0) + (0.40)(1) + (0.20)(2)


+ (0.10)(3) + (0.10)(4)
= 1.5 laptops per week

Difference between 1.5 and 2.07 is due to small number of


periods analyzed (only 15 weeks)

Steady-state result
average result which stays constant after enough trials
Random Numbers in Excel

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