GAMS

1GAMS: General Algebraic Modeling System

Linear and Nonlinear Programming

The full system documentation is provided electronically with the software and is also available on-line at: http://www.gams.com/docs/document.htm

12The lectures are based on:

-- McCarl, Bruce A., and Thomas H. Spreen. Applied Mathematical Programming Using Algebraic Systems. Available at: http://agecon.tamu.edu/faculty/mccarl/regbook.htm

-- Paris, Q. An Economic Interpretation of Linear Programming. Iowa State University Press: Ames, Iowa, 1991.

3Outline1. Types of Programming Problemsthe general mathematical programming problemdifferent types of mathematical programming problems 2. Linear Programming (LP)assumptions of LP an example of LP problemduality in LP (primal & dual)programming without using algebraic modeling3. Nonlinear Programming (NLP)price endogenous model comparison with LP

34Types of Programming Problems The general mathematical programming problem: Optimize Subject to (s.t.)

-- X is a vector of decision variables -- F(X) is called the objective function -- G(X) must belong to S1 -- the variables individually must fall into S2

5 Different Types of Mathematical Programming Problems: F(X)G(X)Xa linear programming problemlinearlinearnon-negativean integer programmingproblemsome areintegersa quadratic programmingproblem quadraticlinearnon-negativea nonlinear programmingproblemnonlinearnonlinearnon-negative62. Linear Programming Assumptions of LP

DefinitionExampleProportionalityRelationship between Outputs and inputs are proportional If the net return per unit of xj produced is cj , then 100 units of xj have 100cj returnAdditivityEvery function is the sum of individual contribution of respective activities a1x1(wheat)+a2x2(corn) =available landDivisibilityAll decision variables are continuous (can take on any non-negative value including fractional ones)x1=12, x2=3.8CertaintyAll parameters are known constantsa1=5, a2=27 An Example of LP Problem

GAMS program and results: see handout 1!8 Duality in LP

-- Economic theory indicates: scarce resources have value

-- In LP models, scarce resources are allocated, so they should be, valued -- Whenever we solve an LP problem, we solve two problems: the primal resource allocation problem, and the dual resource valuation problem -- If the primal problem has n variables and m constraints, the dual problem will have m variables and n constraints 9Primal and Dual Algebra

Primal

Dual

10Example

PrimalDual11Summary

PrimalDualmaximizeminimizeconstrainty0x0constraint=constrainty freex free=constraint1112GAMS program and results for dual problem: see handout 2!

13Important Economic Interpretation

-- y1 is associated with the first primal constraint (land), y2 with the second primal constraint (labor)-- dual variables (yi) can be interpreted as the marginal value (or shadow price) of each resource

Thus,

variable y1 gives the marginal value of the 1st resource (land) variable y2 gives the marginal value of the 2nd resource (labor) 1314 the value of the land and labor used in producing a unit of x1 should be greater than or equal to the marginal revenue contribution of x1 (40, price of x1)

the marginal value of land plus twice the marginal value of labor should be greater than or equal to the profit earned by producing x2 (30, price of x2)

15 Programming without using algebraic modeling -- take the above primal problem as an example: see handout 3! -- only good for small sized problems for medium or large sized models (more than 30 rows and/or columns) to concisely state problems in an abstract general fashion use algebraic modeling!!! 1516Before we finish LP, remember that the default LP solver is Cplex!!!173. Nonlinear Programmingturn our attention to continuous, certain, nonlinear optimization problems relax the LP additivity and proportionality assumptions

18focus on nonlinear objective functionIt is much more difficult for nonlinear solvers to deal with nonlinear constraints general NLP solver is Minos!!!

19 price endogenous model -- a quadratic programming problem -- originally motivated by Enke and Samuelson -- fully developed by Takayama and Judge (1973) 20 -- general form:

maximizes the integral of the area underneath the demand curve minus the integral underneath the supply curve s.t. a supply-demand balance

-- the resultant objective function value of the general form is commonly called consumers' plus producers' surplus

2021

22

2223GAMS program and results: see handout 4!24 Comparison with LPTwo important changes:

the objective function equation contains the nonlinear squared terms in the SOLVE statement we indicate that the problem is a nonlinear programming problem by saying SOLVE USING NLP