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Output Decision To Maximize Profit Under Monopoly

This document describes using a genetic algorithm to find the profit-maximizing output level for a monopoly firm. It presents the problem statement of finding the quantity that sets marginal revenue equal to marginal cost. The methodology section explains that the genetic algorithm encodes parameter values and uses a fitness function to evaluate solutions based on profit. The results show the algorithm converges on the optimal output level of 11 units that maximizes profit. Limitations and potential improvements are also discussed.

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Dipesh Karki
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170 views15 pages

Output Decision To Maximize Profit Under Monopoly

This document describes using a genetic algorithm to find the profit-maximizing output level for a monopoly firm. It presents the problem statement of finding the quantity that sets marginal revenue equal to marginal cost. The methodology section explains that the genetic algorithm encodes parameter values and uses a fitness function to evaluate solutions based on profit. The results show the algorithm converges on the optimal output level of 11 units that maximizes profit. Limitations and potential improvements are also discussed.

Uploaded by

Dipesh Karki
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Output Decision to Maximize Profit under Monopoly: Genetic Algorithm Approach

Dipesh Karki MA (Economics) Patan Campus

Agenda
Introduction Problem Statement Methodology Result Economic Interpretation Limitation and Improvement

Introduction

Prelude to Computational Economics


Use of Genetic Algorithm in Monopoly Market

Finding solution to common profit maximization problem

Problem Statement (monopoly market)

Economics is science of optimization Profit maximization class of constrained optimization problem Cost function is polynomial of degree n
C(Q) = B0 +B1Q+ B2Q2+ B3 Q3++BN QN

Downward sloping demand function


Q=a-bP

Decision? Fix output or price


Marginal Revenue= Marginal Cost

Problem Statement (demonstration)


Cost Function: C(Q) = (1/3) Q3 7Q2 + 111Q +50 Price : P =100 Q Revenue: R(Q) = PQ=100Q- Q2 Marginal Revenue: R(Q)= 100 -2Q Marginal Cost: C(Q)= Q2 -14Q+111 From calculus: Minimum Q= 1 and Maximum Q= 11

Methodology

Genetic Algorithm: class of

stochastic beam search computational models that mimic natural evolution

Why GA? GA works with the coding of


set, not parameter themselves

a parameter

Fundamental Steps:
Search space contains encoded parameter. Fitness Function

Methodology (mechanism)

Random Number Generation: Subtractive


Random Number Generator Algorithm

Encoding
Binary Gray code Hamming distance: Number of bits to be flipped while converting from one digit to another. Gray code more preferred

Methodology (fitness function design)

Fitness Function:
If (MC'(Q) > MR' (Q)) f(z)= 1- 2* 0.5 sigmoid(z) Else f(z)= 2* 0.5 sigmoid(z) Where, sigmoid(z)= 1/(1+exp(-z)) z= MR(Q) MC(Q) * 0.001; 0.001 being the normalizing factor

Sigmoid function: has the property that can transform the Domain
[-,+] to Range of [-1, 1] where 0.5 is midpoint

Methodology (Implementation)

Results
Case I) Q=11 MR=MC=11; z=0; f(z)=1 . Fitness=100%
Case II) Q=12 MR=76; MC=87; z=0.011; f(z)=0.9945 . Fitness=99.45% Case III) Q =100 MR= -100; MC= 8711; z=8.611; f(z)=0.003 . Fitness= 0.036% Case IV) Q=1 (Minima) MR=98; MC=98; z=0; f(z)=0 . Fitness=0% (Chromosome is dropped from evolution)

Result ( Output Snapshot)

Economic Interpretation

Beginning monopolist unaware about quantity that yields maximum profit Later change in production based on previous decision which is evolution Profit maximizing decision are adopted those which are not are dropped

Limitation and Improvement

Simplified demand function


Non-encoding matrix approach ANOVA analysis

Thank You

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