ASSIGNMENT #1

Business Simulations
2013-14, Sem. 2
Eric Eisenstat
Faculty of Business Administration
University of Bucharest
Due Date: 7 April 2014
Please complete the following exercises. In answering the questions, be sure to show all
steps and calculations involved. Also, please submit all working documents such as the Excel
spreadsheets. Note that the last exercise is extra credityou will not loose points if you do
not do it, but you can gain up to 10 extra points if you do. These points will applied to the
total points accumulated for the course, which means they may be used to oset points lost
on any assignment(s) and/or the nal exam. You may submit this assignment by email to:
eric.eisenstat@faa.ro
Exercise 1 (10 points) Implement Newtons Method in Excel to nd the roots of the fol-
lowing equation
f(x) = x
3
2x
2
x + 2, (1)
given
f

(x) = 3x
2
4x 1. (2)
Based on this, answer the following questions:
(a) How many roots did you nd?
(b) What stopping criteria did you use?
(c) For each root, please list what starting values (x
0
) that resulted in those roots and
how many iterations were needed to nd it.
Exercise 2 (5 points) Implement Newtons Method in Excel to nd the roots of the following
equation
f(x) = x
3
x 3, (3)
given
f

(x) = 3x
2
1. (4)
Run the algorithm with the following starting values: -100, 0, 1. For each starting value,
what root did the algorithm nd and how many iterations were needed?
1
Exercise 3 (10 points) Implement Newtons Method in Excel to nd the roots of the fol-
lowing equation
f(x) = xe
x
, (5)
given
f

(x) = (1 x)e
x
. (6)
Based on this, answer the following questions:
(a) Which roots does the algorithm nd for starting values x
0
< 1?
(b) Which roots does the algorithm nd for starting values x
0
1?
(c) If someone was planning to incorporate Newtons Algorithm to numerically solve (5)
as part of a more complex simulation algorithm, what warnings or advice would you
oer?
Extra Credit (10 points) After reading carefully the example in Section 4.4, consider the
following. As before, preferences for two types of consumers are described by the utility
functions
u(x
i
, z
i
;
i
) = x

i
i
z
1
i
i
, (7)
for i {1, 2}. Assume that for consumers of type I, the preference parameter is known to
initially be
1
= 0.5, while for type II consumers, it is
2
= 0.
Such a model might be applied to characterize a market where type II consumers represent
a segment that does not consume product x. Accordingly, suppose consumer behaviour
is consistent with maximizing utility subject the budget constraint px
i
+ z
i
= y
i
. This
maximization problem may be simplied as
max
x
i
x

i
i
(y
i
px
i
)
1
i
, (8)
which result in the rst order conditions (FOC)

1
1
x
1
(1
1
)
p
y
1
px
1

u(x
1
, z
1
;
1
) = 0, (9)

2
1
x
2
(1
2
)
p
y
2
px
2

u(x
2
, z
2
;
2
) = 0. (10)
In particular, solving the FOCs above for x
1
and x
2
, respectively, provides the optimal
consumption levels for the two consumer types, given the price (p), incomes (y
1
, y
2
), and
preferences (
1
,
2
). The total demand for the product is then
x(p, y
1
, y
2
,
1
,
2
) = n
1
x
1
(p, y
1
,
1
) + n
2
x
2
(p, y
2
,
2
). (11)
Suppose now that you operate the only producer of this good and follow a price rule that
equates the price to marginal production costs, such that
p =
e
x/10
5
5

x
. (12)
Notice that (9)-(12) form a system of equations that yields solutions for x
1
, x
2
, x, p given
y
1
, y
2
,
1
,
2
, n
1
, n
2
. If it is further known that incomes (in thousands of EUR) for the two
segments are given by y
1
= 25 and y
2
= 30, while the market sizes are n
1
= 1.5 10
5
and
2
n
2
= 10
5
, then a little algebra reveals that total revenues are R = 1.875 10
6
, and total
demand is x = R/p.
Now suppose that you are considering investing in a marketing campaign that would
attract type II consumers to your product. In particular, the marketing strategy would
target inuencing type II consumer preferences in such a way as to induce a new value of

2
> 0. Provided the above information, nd the market price (p) and total quantity (x)
(a) at the moment with
2
= 0
and those that would result if the marketing campaign succeeds to yield
(b)
2
= .10
(c)
2
= .25
In implementing the Newtons algorithm to approximate the prices and quantities for
various values
2
, keep in mind that R = px is constant and that total quantity produced
is in the range of one to two million units. After obtaining the solution,
(d) discuss how you might approach evaluating whether the various level of investments
in the marketing campaign are worthwhile (assume that achieving higher levels of
2
requires larger investments)
3