Non-linear Optimisation

Models
Dr Yamini S.
Operations and Analytics

Yamini | Advanced Operations Research 1

 Introduction
A nonlinear optimization problem is any optimization problem in which at least
one term in the objective function or a constraint is nonlinear
Non-linear terms include 𝑥1n , 1Τ𝑥2 , 5𝑥1 𝑥2 , and log 𝑥3
Many business processes behave in a nonlinear manner
• The price of a bond is a nonlinear function of interest rates
• The price of a stock option is a nonlinear function of the price of the
underlying stock
• The marginal cost of production often decreases with the quantity
produced
• The quantity demanded for a product is often a nonlinear function of the
price
• The amount of effort is a nonlinear function of the sales
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 Applications of non-linear Programming
• Allocating a media budget
• Markowitz Portfolio selection
• Minimizing value at risk
• The Black-Scholes option pricing model
• Quadratic Assignment Problem
• Forecasting model
• Production Scheduling
• Cobb-Doughlass production function

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 Local and Global Optima
• A feasible solution is a local optimum if there are no other feasible
solutions with a better objective function value in the immediate
neighborhood
For a maximization problem the local optimum corresponds to a
local maximum
For a minimization problem the local optimum corresponds to a
local minimum
• A feasible solution is a global optimum if there are no other feasible
points with a better objective function value in the feasible region
• Obviously, a global optimum is also a local optimum
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 Multiple Local Optima
• Nonlinear optimization problems can have multiple local optimal
solutions, in which case we want to find the best local optimum
• Nonlinear problems with multiple local optima are difficult to solve
and pose a serious challenge for optimization software
• In these cases, the software can get “stuck” and terminate at a local
optimum
• There can be a severe penalty for finding a local optimum that is not
a global optimum
• Developing hybrid algorithms capable of finding the global optimum
is currently a very active research area

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 Multiple Local Optima
−𝑋 2 − 𝑌+1 2 −𝑋 2 −𝑌 2 − 𝑋+1 2 −𝑌 2
𝑓(𝑋, 𝑌) = 3 1 − 𝑋 2 𝑒 − 10(𝑋Τ5 − 𝑋 3 − 𝑌 5 )𝑒 −𝑒 Τ3

• The hills and valleys in the graph

show that this function has
several local maximums and local
minimums
• There are two local minimums,
one of which is the global
minimum
• There are three local maximums,
one of which is the global
maximum

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 Single Local Optimum
Concave Function 𝑓(𝑋, 𝑌) = −𝑋 2 − 𝑌 2 Convex Function 𝑓 𝑋, 𝑌 = 𝑋 2 + 𝑌 2

40

Z
20

4 2 0 0 2 4
-2 -4 -4 -2
X Y

• The maximum value for this particular function is • The minimum value for this particular function is
0 and the point (0, 0) gives the optimal value of 0 0 and the point (0, 0) gives the optimal value of 0
• Functions such as this one have a single local • Functions such as this one have a single local
maximum that is also a global maximum minimum that is also a global minimum
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Lawn King manufactures two types of riding lawn mowers.
One is a low-cost mower sold primarily to residential
home owners; the other is an industrial model sold to
landscaping & amp; lawn service companies. The
company is interested in establishing a pricing policy for
the two mowers that will maximize the gross profit for the
product line. A study of the relationships between sales
prices and quantities sold of the two mowers has
validated the following price quantity relationships.

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Q1 = 950 - 1.5p1 + 0.7p2
Q2 = 2500 + 0.3p1 - 0.5p2
where,
Q1 = number of residential mowers sold
Q2 = number of industrial mowers sold
p1 = selling price of the residential mowers in dollars
p2 = price of the industrial mowers in dollars

The accounting department developed cost information on

the fixed and variable cost of producing the two mowers.
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The fixed costs of production for the residential mower is
$10,000 and the variable cost is $1,500 per mower. The
fixed costs of production for the industrial mower is
$30,000 and the variable cost is $4,000 per mower.

A. Lawn King traditionally priced the lawn mowers at

$2,000 and $6,000 for the residential and industrial
mowers, respectively. Gross profit is computed as the sales
revenue minus production cost. How many mowers will be
sold, and what is the gross profit with this pricing policy?
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B. Develop an expression for gross profit as a function of
the selling prices for the two mowers.

C. What are the optimal prices for Lawn King to charge?

How many units of each mower will be sold at these prices
and what will the gross profit be?

D. Solve this as a constrained optimisation problem

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