Week 6 Flashcards
What is a simulation?
A simulation develops a model to evaluate a system numerically over some time period of interest to estimate characteristics for the system.
Why use simulation?
To understand risks/uncertainties that interact in a complex fashion and to test scenarios without interfering with the actual process.
List advantages of simulation.
- Straightforward and flexible
- Can analyze large and complex situations
- Facilitates what-if analysis
- Does not interfere with the system
- Can examine interactive effects
- Time compression is possible
- Inclusion of scenarios that others may not permit
List disadvantages of simulation.
- Can be very expensive
- Long, complicated process to develop
- Do not generate optimal solutions
- Managers must generate all conditions and constraints
- Each model is unique and generally not transferable
What are the steps involved in a simulation analysis?
- Recognize uncertainties in the system
- Create probability distributions for uncertainties
- Determine alternatives as a decision maker
- Mimic the process with probability distributions
- Compare results of different simulation runs
- Make recommendations based on results
What are the two major categories of simulation?
- Monte Carlo
- Systems
What is Monte Carlo simulation?
A process of generating random values for uncertain inputs in a model and repeating this for many trials to understand the distribution of output results.
What is the Newsvendor example about?
It involves deciding how many copies of a newspaper to order to maximize average profit based on demand probability distribution.
What are the estimated total R&D costs for Moore Pharmaceuticals?
$700 million
What is the discount rate assumed for computing NPV in the New Product Development example?
9%
Fill in the blank: A random continuous variable between 0 and 1 is generated using _______.
RAND()
How can random variables for the Normal distribution be generated in Excel?
Using the formula X = NORM.INV(RAND(), mean, stdev)
What does PDF stand for in the context of probability distributions?
Probability Density Function
True or False: The area under the PDF for a uniform distribution is always one.
True
What is the formula for generating a random variable following a triangular distribution?
X = a + (b-a)*RAND()
What is the purpose of using Excel add-ins for simulation?
They make building the model easier and automatically calculate various statistics.
What does CDF stand for?
Cumulative Distribution Function
List some common distributions used in simulation modeling.
- Uniform
- Normal
- Triangular
- Lognormal
What is the formula for generating a random discrete variable between a and b in Excel?
=RANDBETWEEN(a,b)
What is the significance of the mode in a triangular distribution?
The probability of any number close to the mode is higher than those further from the mean.
