Monte Carlo Simulation

The principle behind the Monte Carlo

simulation technique is representative of the
given system under analysis by a system
described by some known probability
distribution and then drawing random
samples from probability distribution by
means of random numbers.
Random numbers between 00 and 99 are
used to obtain values of random variables
that have a known discrete probability
distribution in which the random variables of
interest can assume one of a finite number of
different values.
The Monte Carlo simulation steps
1. Setting up a probability distribution for variables to be analysed.
2. Building a cumulative probability distribution for each random
variable.
3. Generate random numbers. Assign an appropriate set of
random numbers to represent value or range (interval) of values
for each random variable.
4. Conduct the simulation experiment by means of random
sampling
5. Repeat step 4 until the required number of simulation runs has
been generated
6. Design and implement a course of action and maintain control
 Example
The manager of computer world, a store that
sells computers and related equipment, is
attempting to determine how many laptops
the store should order each week. A laptop
sells gives the profit of Rs. 4300. The number
of laptop demanded each week ranges from 0
to 4.
 From past sales records, the manager has
determined probability of demand for laptops for
the past 100 weeks.
Demand: 0 1 2 3 4
Frequency: 20 40 20 10 10
Simulate the demand of 15 weeks from the
following random numbers: 39, 45, 72, 53, 37, 02,
87, 98, 10, 47, 93, 21, 95, 15, 69.