Scribd
Upload
51 views2 pages

Decision Models: Assignment 1: Dynamic Programming

1. The problem is to allocate $4 million across 3 marketing phases (introductory offer, advertising, follow-up) to maximize market share for a new product. Dynamic programming is used to determine the optimal allocation. 2. The problem is to develop an optimal 10-year replacement policy for company equipment considering purchase price, maintenance costs over 3 years of use, and salvage value. Dynamic programming is used to suggest the policy that maximizes total value over 10 years. 3. Both problems involve sequential decision making over multiple time periods. Dynamic programming is applied to break down the problems into subproblems and use the principle of optimality to determine the globally optimal solution through backwards recursion.

Uploaded by

Maritza Ruiz
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
51 views2 pages

Decision Models: Assignment 1: Dynamic Programming

1. The problem is to allocate $4 million across 3 marketing phases (introductory offer, advertising, follow-up) to maximize market share for a new product. Dynamic programming is used to determine the optimal allocation. 2. The problem is to develop an optimal 10-year replacement policy for company equipment considering purchase price, maintenance costs over 3 years of use, and salvage value. Dynamic programming is used to suggest the policy that maximizes total value over 10 years. 3. Both problems involve sequential decision making over multiple time periods. Dynamic programming is applied to break down the problems into subproblems and use the principle of optimality to determine the globally optimal solution through backwards recursion.

Uploaded by

Maritza Ruiz
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 2

Decision Models: Assignment 1

Dynamic Programming

• Read carefully and answer only what is asked.


For each of the problems below:
- State the problem as a Dynamic Programming Problem.
a. Define variables, states, and performance measures, and
b. find a solution to the problem using backwards recursion.

1. A company will soon be introducing a new product into a very competitive market and is currently
planning its marketing strategy. The decision has been made to introduce the product in three
phases. Phase 1 will feature making a special introductory offer of the product to the public at a
greatly reduced price to attract first-time buyers. Phase 2 will involve an intensive advertising
campaign to persuade these first-time buyers to continue purchasing the product at a regular price. It
is known that another company will be introducing a new competitive product at about the time that
phase 2 will end. Therefore, phase 3 will involve a follow-up advertising and promotion campaign
to try to keep the regular purchasers from switching to the competitive product. A total of $4
million has been budgeted for this marketing campaign. The problem now is to determine how to
allocate this money most effectively to the three phases. Let m denote the initial share of the market
(expressed as a percentage) attained in phase 1, f2 the fraction of this market share that is retained in
phase 2, and f3 the fraction of the remaining market share that is retained in phase 3. Use dynamic
programming to determine how to allocate the $4 million to maximize the final share of the market
for the new product, i.e., to maximize mf2 f3.
(a) Assume that the money must be spent in integer multiples of $1 million in each phase, where the
minimum permissible multiple is 1 for phase 1 and 0 for phases 2 and 3. The following table gives
the estimated effect of expenditures in each phase:

Effect on market
M$ m f2 f3
0 – 0.2 0.3
1 20 0.4 0.5
2 30 0.5 0.6
3 40 0.6 0.7
4 50 – –

(b) Now assume that any amount within the total budget can be spent in each phase, where the
estimated effect of spending an amount xi (in units of millions of dollars) in phase i = 1, 2, 3 is
m = 10x1 − x2
1

f 2 = 0.40 + 0.10x2
f 3 = 0.60 + 0.07x3

1
2. At the end of each year, a company reviews the state of its equipment and decides to keep it or
replace it . However, all equipment must be replaced after 3 years of operation. The company wants
to develop a replacement policy for its equipment for the next 10 years. With the information of the
table below, and considering the equipment is new at the beginning of year 1, use Dynamic
programming to suggest an optimal policy for the company.

Maintenance cost ($) Salvage cost ($)


Year Price ($) 0 1 2 1 2 3
1 200 9,000
2 12,000 250 600 11,000 9,500
3 13,000 280 550 600 12,000 11,000 10,000
4 13,500 320 650 700 12,000 11,500 11,000
5 13,800 350 590 630 12,000 11,800 11,200
6 14,200 390 620 700 12,500 12,000 11,200
7 14,800 410 600 620 13,500 12,900 11,900
8 15,200 430 670 700 14,000 13,200 12,000
9 15,500 450 700 730 15,500 14,500 13,800
10 16,000 500 710 720 15,800 15,000 14,500

Consider that a machine that is new at the beginning of year 1 will incur in a maintenance cost of a
new machine (0 years of operation) and can be sold for a salvage cost of a 1 year old machine at the
end of year 1 (when a decision to replace or keep the machine is made)

You might also like