CB2203 Data-Driven Business Modeling

Nonlinear Programming Examples

Question 1: Cost Modeling

General Widget Factory has collected 10 days’ paired data of its daily output
(DO) of widgets and the corresponding daily production cost (PC), as
displayed in the below table. The factory believes that DO and PC should be
linearly related in the form of equation (1), where a and b are constants (often
called parameters).
PC = a + b×DO (1)
Daily Output (DO) Production Cost (PC)
Day 1 5045 2542
Day 2 6127 2812
Day 3 6360 2776
Day 4 6645 3164
Day 5 7220 4102
Day 6 9537 4734
Day 7 9895 4238
Day 8 10,175 4524
Day 9 10,334 4869
Day 10 10,855 4421

Questions:

1. Find the least-square estimates of the parameters a and b in equation (1).

The least-square method is to minimize the sum of squared differences (or
errors) between the values of PC predicted by equation (1) and the
corresponding actual values listed in the third column of the above table.

2. Verify your results using Excel’s Regression Tool.

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CB2203 Data-Driven Business Modeling

Question 2: Charity Advertising Budget

A charity organization will conduct two advertising campaigns on television

in City 1 and City 2 in order to attract donations. The organization’s
experience believes that the donation of the city is a function of an
advertising expense in a city. After analysis, the organization obtains the
function in the form of Y = 1 – exp(– αX), where X represents an advertising
expense (in thousand dollars) in a city, Y represents the corresponding
fraction of the city’s population that donates, and αis the city’s
parameter.

Note that exp( ) is the exponential function, which is available in Excel.

In particular, the organization has individually obtained the three pieces of

information relevant to either city, as shown in the below table.

City 1 City 2
Parameter 1 = 0.006  2 = 0.004
Population 750,000 600,000
Average donations per donor $2.00 $1.50

For example: If the advertising expense in City 1 is $120 (000), the corresponding
fraction of City 1’s population that donates will be 1 – exp(– 0.006×120) = 0.51

The organization has the budget of $400,000 for advertising on television in City
1 and City 2.

Question:

The organization wants to know how to allocate the advertising budget for the
two cities so that the total donations (= sum of City 1’s donations and City 2’s
donations) are maximized, subject to the advertising budget of $400,000.

Knowing the maximum total donations, the organization also wants to know
the amount of City 1’s donations and the amount of City 2’s donations.