Chapter (3 > Nonlinear Programming Bell. Maximise fla" 100%," + 10x, # HORM + Sx t Ons « Bay subject tot 9x, + 3x7 Ba, #500 Br, +4, #350 Sx tdx, 4150 ks $20 N%O) Ky20, Ky7O OUR Marginal Cost: Total Gost we — ° Cost Marsal Cot 19560 1 1 ’ H i — + 0 > > | WD Ant shyped ant shiyped E. in The obfeeti ns a ach Yevm objective Functten cha: ges (as above) fam Sy Xi ij Rij = 0 ars (ys; -¥0) 80x - 40) where Bij 15 ME shipping cost fromcennery & te warthouse | and S&o = o X minimum acceptable expected return and 520, 5 20, Wart a Fd? fin) + file) thos) with — f(x) = 100x,73 + 10x, fi (xa) = 1x4 + Bx, § by) > SOx +5Sxq 27h 200.“ te ON £0 for x, 30 4 ae 2 12244 co Be 40 axe ie 4 2 2 -Brg* <0 fer 70 ig fof, and fy ore concaye over the non-neaahie orthant so F must be concave in the Same reion, The constraints ave near and therefore, convex so the prublem Is a Convex mei problem. r Pry 13-213.2-2 ue = B20 ast 30 Yh fea s9s Xf < 200%. 2g ee 95,52 Mhes asaSz af S omer evecy whae twee Be, 4 Say Se Kes Ur Ke ee =P slope bs - 375 Constraint boundary: ee, + Sx 2 B29, Objective Smution = 2c ie CECH SxS = & .-+ pees 3 ¥ Fivtea 30 aes Por Kok So tee objective Purction is teugent Po His comstrming AF Cx murs C2, 6) WAH, Comateatnt bounde. Bur te = > x a> Katee = ae oy Dejective Purction ot (3,5): (Pa ROR) FISTS Hwa RS SO => Px, > eaq~ (82 - 2 aeeerieste TE eR aR Cee este te => hc.) =-4 (e33-23 CGS eer eT rE > Atal Say, ant $s Ee 4 Cea) = So He obsectivn Thmction is Hes SOnstreing at eeomeye Cad x 1325, Car AB Gee 46 tox eK => xfs dtot oe = .404) of 39.596 Atbivovn mT ae Prone 24TE is focal mariwun RB SIO Lng > Pare%de.oIss is foeat wien 13-313.2-5.¢6) fee x739s9e Phoonk Bf, . 6-0 v0 =>) is Vernet ateve. for cx tour thee ann dhco se 2 iis Unter t balou, 13.26 Coad af o-2 we => Lis concove Coy BE sterreizro va @ fis convex ey) BA ez eee {2 Por wr _ Lis neither axe =o for va} 7 conver wer concave cay oe SIR Zero Ve = 2 is convex (orgie see ste £28 He VEY Se TS WEIFKER conver woe comcewe . 19.2-%, Con) ae. 2-2 <0 Vo aK) ose <2 <0 WR KL) are ov * . . RAS - si | Fete BOO Via) => £is concave (6) BR 4 > veKe) Be ea ro vex) ask a8 e - (aT =B-GN=E4ISO om rxy) = ° iS conver CER D0 veux Bhs gre von ae LeBaal]*=-1<0 SPP is nesther convex wor Comeave at > Prd (4 of hd 0 > BS z - L$ T= 0 —e PF oiis bots conver ak concave (3-4 Bat27% Coy ask. Bere Vexured Ba Fee teh. e-{O Vins, xe) aetee Bee [oa [= se-st2 Tee Money) = =... is. cco ver it Brhes _ ae FZ > O Miers? BRT TO WOrened De 2. art Bye. - ite SIZ Be B ro Verse) => fe 15 conver PoC rerny) = fog OKncd => fer is conven, => 2 is convex 132% Cod moximire $Cx>= Rew, Swat fo BERD Pee a1 ze 38-38 - BES Tem oe - REI" = 2 is concave GL convex) Freres Worse) Bie =z>0 Ox, 42) Sa SR (TS 4-0 26 Wexum Lois Conver = the roblen. js QA conver oO rennin. poothac, , Prey Iaa 1 GER) is optimal wi b) Feasible region? qeanee wt and oy (m)=-X2 ave beth concave functions not conver , 50 the feasible region des not nted fo be conver, (Sewens 1 ay = femn eqertrerty Fo ¥ Cy ye) a 5 betel: ¥Cy ye) ao eouvex et ro, “arzo vy ayad Now ere js, in Fart, ne now ogni vity COnstrejints en tom ta poh tH ict ly Sprmising, oceorali te mein tee te Ho cee aa a ate Sot Howeve-, in Bo eorine weeny F cong ee applica aa tet eee regias Sse Sk ie pd ae here. BB. Cay Mawimine (Oyster, + 1D" : -sce Subject to Bi

+t UTC“ AK + b= 0 and this 15 the Gina Te Poblen, wits =e(5) Me Q AT 47S) -4 0 ea wef Ax + ATO AK ae 3-8 prifl nee 5 Eprerssee | . a * s ‘ x iteration | dcK/ax | 4-3, if fe Iteration | 194-4, 13-9wsh-s Cad $iex) = 4x84 2E-4 teed = -4 oye Z e'¢a) = 32 since PCH) is continvous Hare wie & point jim OR REI see tet PES x om se since ts coneewe Perction Guis ia a conven program) te eptinel selution woot be me Ha intent Otnel, fy) Retin Letoovae | xD Lm Fame” | fo Se eae I o} 2] at 2 eet of Fh os | tase as] os | tt eas | 2 cos | os | 1 | Oars | zt vias | 0 | oars | 0.etes | 2.156 cetdas | osaizs | overs | O.ba38 | 2156 Soroo | alates | oveian | samt | 2186 st I I 1 I A). Te set this consider the fue cases! HAS Ry ARPA) Ra%m) + 5x8, + abn) Precefore , we have Ray “dae so tim (KA, bin 2" oy me noe 2 Sorte) 22 Suppese ttre points qenerakd by Huis procedure de not eomege, tren we kro there is E> such that, no mater what NV we choose, there will be n 2 and m7N se that Ie RN ze. Bub f we choose W so that I Wed) . Supmesey % lies) Rice The, global Maxime) ovt ret Lees tart Cue fee. By te Mew fnlue Theor jem i Ro ee HE FLED Mede RADE) aie aeuh: Lawn Side if ner-potitive, since 22>, fale aah EK DS CR-V Be, so ME) Pla) sO, A Contradiction, Case z: 22k. Usi tree Mea Valve Theo, we hae Ze wit Reman Ky POP MR) CR RIP CAD FO tied implies FORIEPCE), contradiction. SO KF must be Mee global Menino. 137-10wae Ce) The orqvrent Pollows Qs in pat Ce) by observi eat ete of tle Meal Valve Theor Cathie isSbetween Fake) is iQ the port of te homnin whera LL is concave. Bow) Cobd The precadere south converge 2%, not to xt whiet “is the qleeet Ane i ene Kok Ke xe CO) Suppose FCeIEO wot Het m global mmcimun oceves vat f x - bat KR. By tle Mek Vawe Thearn tere ents cn a ith Be ae at Ma Pdee the) ee Ped EAR) ACH RIE Ce PRR), a contradiction. Se a Bisbal mawimumua connet oseur, Suppose Px >O, wut that ow ater maine, ecevrs at @ bet «rk. By rte Mead Vatve Theor fhere Onde ity Se re eR mk HD-Pee tobe) or Pony BPEL) + Cx BIR ME) > PEK) a contradiction, Soe glottal erwin comnet oteur, £8) Suppose Pony is concave amt tin Pu <0, but Hunt an Ko exists. So fx. 20 BUS Ptoe is Wremstone ctacrecuiny » se for x= Ke PMxr2o ool Un Pn BO eo Conttadistion. Sane ce exists, Suppose Px) is Conran at Ling POd>e, ert thet an Z, exists. So Pex. 80 Blt fed us monotone Atcrensing so for «> Kes P ery so and Lig $x) BO, aw contrddietion. So no wo axists. va Em tithe cote, we Kaew there is no global pet Ce martinen fron 13-4134-7, pre £,(x,) 4 42lx2) F,(a) 2 32%, = x4 Fal)? FO %y -10KE H xP - XY BR 92-4K? Fo =D Ka ’ Using Whe automat one-dimensional search pacedunt CE 0.001) With inital bounds Cond 4, and Pix) AB 4 SOK, 10K + KF X,Y we gett X25 h8OFE , £¢(Kd= 100,936 BK, F%.2 FROFE

2x, 72S is eptions. ce (a) with Ke automate reattee: Solution: (1X2! = (0.004, 6.008} grad £(%1,X2) = ( 1e-€,-Be-3) Ie] x Jered ford | xe + ecored fed | | xtettarad f1 Dio, Ot, 2 [C 140.667>]-1.33, €]¢ —161.38t 0.687% 03] 9.25]c0.667,0.687) 3 1€0.667,0.6679]( 0,-1.339] Aeautimate contre CEs 0.01) gies: Solution: (%i.%2) = (0.005,0.003) rad £(%1.%2) = (76-3, 36-8) he (Yn, ~ 4x, , Ya, -@x2) Vr O > beste) (0,09 1s the ophrial soluhon. 13-43W854 oy xe [oad fox) | KF + eared #oRT |e | Pat Cored AF ai TiO OK, alt a, 0 aoe, 2 {¢8.528,-2.2994(0,361,0.2199]01 52940. 56r/-2.29%0.220)| 1.31) {2.002, 2) 3 [e2.002, -23|¢ -0,0,0039) Autimatic renting (Oreo): Solution: (1.42) = (1.957, grad £1%2,X2) = (0.002,0.001) WF = (-AnyeDny #8, a%,-yx,-12) VEO > beyee) * (2,2) is the phon! solubion WES oe | red €004) | ko tared HORT |e | etvetgrad Tie, wt 6 alc &, 0 an) Oak 2) oO 2 JC 12, Odo 0.4, 1.2)]¢ 1.24 0.68, 0.46 1.209) TIC 926, 018 3 iC 6, owe 1.2, -0.43) Aatimattc rontine (£2 0,01) Solution: (1,2) = (1.994, 0.939) grad £(%1,%2) = (0.003, 0.01) UE (-4x,42xeth , a2, -2%2 -2) vi =O > (x,,xa) = (2,1) TECK, yaa = Cn By HF Bee, DHE Zead Aes Weud | Pmt VPC) Tre| x4 EVP) = (800 0,250) Fs cur estimate , S14 oP aDB53 We can rewrite Fas Fe Fla sxe) +f (rere) with £,2 Bayng-x? -3ab Fu = any -AF - Sat For any green xy Gncluding the ophinal one) ate realiae Hat by symmelny Xye% at the ereximiting pod fir F with xq of the guith value, Therefore, fo mermiee Ff we can maximize F, or f,) and oblain Ox,,%2). From He seluhon to menimizt fue can seb 42x, and F22h fo fed the Selubon te our orignal problem. We can solve maximite$, with the eeurseanre, b) Using Plx)e 3% Xa- Kr =3KE : {0.158,0.083) | (-0.07,-0.02) | (9.16-0.076,0.08-0-02t) (0.063,0.056) (9.063,0.056) (0.042,-0.15) (0.0640.04r,0.06-0.15t) 0.135 (0.069,0.036) re specu, ft 1, -3)[C T+ tt, 1-7 Gey (1.135, 0.595) 2| (1.335,0.595) | {-0.49,-0.16) | (2.1¢-0.49t,0,59-0.16¢) (0.343, 0.336) 3 | (0.343,0.336) | (0.323, -0.99) | (0.34+0.32t,0.34-0.99t) (0.387, 0.202) 4] (0.387,0.202) | (-0.17,-¢.05) | (0.39-0.27t, 0.2-0.05¢) (0.144,0.131) S| (0.344,0-132) | (0.103,-0.35) | (0.144 0.1t,0.13-0.35¢) (0.158,0.083) 6 Final solution: (X1, %2) = (0.068,0.036) The estimated solution mo git original pvhlem alll be 6%, hay X39) = (0.069, 0.036, 0,069) ©) Autimatc rontmt (£2 0.005) gives! Solution: (X1,X2) = (0.004, 0.002) 135-8 grad £(%1,%2) = (-2e-3,-Se-4) @ yw Jared fox") |x? 6 eared RI] TF | HeaRIaeed A |__| jt TG Deo, DI ot, SH] OIC 8 1S Die OF HSoIC 15, OC OF St, 15+ OD] 0.5/0 0.75, 1.59 3 19.75, 159K 0, 8759) Solution: Aulimatic comtit (£20.01): (X1/Xg) = (0,996,1.998) grad £(%1,%2) = (0.008, -2e-8) @) rep arad tnd | nee eared Fees fee petted A —l I 1 \ J i a a 2 [e0.771,-0.7794(0.002, -09] 7 Solution: Antiantte reatint (E>001): (ister erin FO max ~#i0) ) (Xp.Mgi = (0.771,-0.77) grad £(K1,%2) = ( Be-€,-Be-6) 13-15 nI5.6-1, Converting min to max, the KKT conditions are: DN -4y%axsd-u go xX (-4x- ax 44-u) 0 3) x-2 <0 4) ulx-2) =0 9) XBe i di) ana! (6) Sare a (tise con get Hs ban > Fram 134-5, G4), Of X£1, se KEY and (Y) =P UB, Feom (1), we see that K#O (4 HO), so fom (2) we have -4x%-2%4+4=0 (or adey ae °) Solving forthe reot (rem!) of this cuble, we get xe UES +Y- RE = 352 (6-2, The KKT conditiens are 1G), [- aux, £0 adel). XiCr-2ax) ©o 1GeD. J-2u%, go RGD. Ma (i-2uXa) =o %XT+RP-1 So 4. UCxtext-eo 5 YX, 20, %,20 $. 420 = a Foe X2 (RH) , apes auto = This satisfies all he KKT conditions ,58 X= is optimal, 13.63, KKT comolitions : Pod -4xS-4x,-2x, +20,4U2 50 Bad KiC- 42 - Hx Zeeeze, eso =0 (ed -2x-8xr ey rzun co 2%) Ki C2) Bee Hetzer HO Bod 2xsn. 210 Be> Kp 42x, 210 HOD Cte ray Hod Oo > 4 6-K)-2e24/0> =o $2 x, 20, x,20 6) Wize, Vato feo. fe, 4222060, 10) De s> wWe2uas fo Ow 44) Se Uo to 4, = BO but pren tnd toes not Gott Se Cw ere CO,se) ES Het optim! 13-16 nNBE. Cay tee KET conditions lad 24-2, -4. 40 Ded x, Cag -2x ud =e Tey fo-2m -42 sO Zed KC “2m -V=ZO BY xe 8, KL E7 4a ACK. -8P= 4 6Y vO Sx 20, %. 20 6) v, 20 ,ze Take «,~8 Zar => u=8 phan Ld) 3, Hed, F) Kk OD ove setehek Take Wo te) 2 ware Hen 8S, BI, 4, TD RK 6? ewe setisPied Se Cann? = C8) 1s optinet since teas is Cousens preg Tebavere F CRIN Se Ky BE w2H-2m20 Vote = wrt ig tee q Wekinvn over the FeariUe cegion 3 (O~2k,2O at ese at Se sZto Se ATS 1S HD Global mem nun. _ 2 4 136-5, a) 2S. -camep fe wt s-—t—, to =¥%,x, 20 at Cx Ka) a MeL es] <2 VX,,x, 20 axt Oxi 7 [Rox ‘eh Sof is cancave for XX, 20 GeRAAK HS 1S linear and, hence, conve Thas, this is a canvex program. (2-1813,.6-5, b) The KKT conditions ave: }e) yay, 74 £0 2a) x(a uyeo tby-t— - £0 » THE ak, 74 2b) Xa (izeae, 724) =e 3) Ki tax,-5 #0 FY UK Fax SFO 5) ¥,20, x, Be 6) 4eeo Toging UFO, (4) => Xe 2K, 25 Trying XO =P X25 , then 2a) > atin, FS Fince CheX) = (6,0), 4 satisfies all KET condition, (2) £050) is optimal , CV since INCL Xt Xa) is a monstere sMetty facceasin Function of (+ X,+%a), the poblem is egeivalent ts the Vinear program: may imine TAY, 4% Stbject re Xi 2X. 45 K, 22, KL zo and 50 we expect an exheme pont sation. The exheme pemts of the feasible reqien are (5,0), 0, Fens (20), and i# 33 clear that, ot He three, (5,0) 15 optimal B66. coy , Bee __ it. ex, : - BE -- chm fo vem tel BA. -2 <0 VCR ya) D8 9? oe Ft. 2 Pre 3k ~ eS = Eat 2° Ved xed =p Po is concen *% Swpt@xr-3B fs Nuea, aud, heme, conver, se this 15 e cenver Bregram. 13-1813.6-8. cud The KKT conditions ; Tar 4 -uU 2£oO eet ~ —- = ae xLatr-lse 1b) -2x,-Zu 40 ZS x%L-2n.-2u] 40 Dx, r%«, 43 4) ol xyt2ea7 DEO S) x, 205; x20 a) vz0 Teyis VFO 4) =D Kytter a3 eye XO MF Zed ved one 0,4) setisties ted, 189,209, 39,59 #6) So OXya.d = CBO) it Optimal. fed Since KT 1S mene toutcall steetly decreasing for veto ak tnCactld is monctonickity strictly Increasing sit if intvieively eller + ene wort ike to jacuenrve ey ae meek My posible cut cterese ke fOWerh © eb eve as persible in ae optimal folution. The Pecsitie eaten is Bnice® ROE ce spect since if we takeS Fo +o be He Fecsivte regio mp Lege FIle “is Cow F] = bts,093, ER Ca) The KK conditious: Pad to ex, BR oO Bay x Corte Fayre & {BY Bo 2K 9 EO Ded KaCh-2rec te F BD xt xe 2 4S vlerttes 2) =O SE) x20) MFO hes, tee ERT Conditions cemvet be Te TE Cee OD se 610 Le met optimal. Ge) Cee) © SFA 38 ), ee te veh) setistes en? he KKT conditions, mA Se since wee tee Come Plog om GP -1,3-55) Ts optimal (3-14G4-B. The KKT conditions : In) 36 41x, Het uy so Dea) KC364 ISK, - 1K s- Od FO th) 26-9x2 -v £0 2h x2636~- 9nd Ur=0 Bd wlan, 63 4) Chea ky-Bd=O s> x, 29, *, ro ©) ure So Por Cw eed F612 ze> > ve ae 2e> > v0 Ths, He KKT conditions cannot be met ae bared = CUED, On Be ORI iF met optimal, 13-9, GD The KKT conditi Ind 4 -~v to was! ze ch-yeo re Ss +u £0 ZO nL weg ee] ee BY x Ka ed 4) ULxi- em - 22s SDK, 2O, mz 6> vz Por Cxyyx2? = C42? Zed 2 x3 Zed =e ust Bo Ox. XA SCH 2) Koes not satisPy te Ker On mMi tion ,atjrence, ib not optind . \ Mey Try Krzo, ute Zorw v 4> me Kore Pi 9,39, 5986) awk 62,1) SetisPier led, 16,7 2, 32,5) Seeds Cue) zabis fies the KT comet @ FF .o ¥ Ox ed xt ah. Btw zo Varo ze Ths, # comnet Ge conenve, a te th is wet = conver progres 13-L013,69, CAD Fexd meorotone strict uti oP Ka ant is Hecrecs Sprint ote, fe Thad ison inerensig wrenetele atria © a aly aeky thes, RR Cee ad Pemsint Sa ET Bove RTA CI a AL pessiete ad xy muck ae peas bf we clegrensed owert = ge . The Vote region bee atioes Me, erenSet Wittout Veout. Re eo only be Lheerens ant Gene xem fe Rares Powert, x. = +o be However, then fo tthe. BER a ae =a at «xqno Converse’ Yr iS ne tha Ae erense we ean fi xu te 0 eremse He te Mee 2. thes, He Sear be Vem is “nice! ek Ha optimal Solution it at fx,,x.d=¢2,0>. fed) Marinize x Susgectte x, xy TPE SO ae. Xa+t =6 ¥) 0, xy ZO FEO ’ n Keninime Ky ere ee “UNE Blanes xe ed XFO, KrzO GeyypeCrso> ts dorian! (3,600, GY The KKT conditions: te i-v so Ber edie wro20 te> 2-axt -v so Ber mCZ- Fx - ws BD x, enael HD ux emi +o Sd x, 2o,Krize 6) vt t+ is to check tet bn (EE 1) BatisPies me KKT Conditions. Thus, ’ Cer rds(t- BY is eptinnk Since this is A wovew program. eas (3-21V3beld, oy) The KIKT Caeditions | Lad 20-42, — Vet e Zed KC2O-U,2K, — 42d FO Led to ~My BKa Bee £o Zer x, 10- yj ter Buz FO Bed xtextet Bd Kitt fh Hed Ux reds IO SD UyCw, tex “BIOS S) x, 20, xa 2° 6? ¥, 2%, 0,20 Ttheosy to checte Hat Cours tures CEE 58,0) Sotuviel Fhe KKT couditions, ( £89) we bee ew comven pre Geyer > 2, 2) se Sikes is of 13.6-ll, @) The KKT conditeas: fa) ¥%,- 24 so Ray ¥,(Hx,-24) =O 1b) 2-u £0 20) ¥4(2-4) =o Ye) H+ 2%3-u4 $0 Uc) %3(4-a%5-4) <0 DD 24 Xat%y-4 $0 4D AM Kat hy) FO 5) %, 20, ¥,20,% te 4) Ux0 3e(2a) wm uaa Finte Chk, Y 2 UL and wer satishes all Ae KRT ndihens, Kis can be ostinal, b) Mo, she objective Puncsten is nat convex. Ber. Yt Minimize #0n) RAaxinste - 90x? Sodje to QiGe Ee; SP subject te -gited s ~be KO “20 has KK KT conditions: S Zvigt - BE <0 a «(Ei Be BY qcde") B be Ror inl oy Case gueetdee 3 ce tae 5) xX 20 gety- Gv zo Ze. (3-2213.6-13 6) fm eguivdled nonlinear programming problem is: Magm2e 2 = -Bxr xe suyeete: x, xX, 410 Mey $710 2D 1,70, Ths nenlinear poy Fits the Pollouun * ~tineariy Conshained Ophmitechin Problem , because all constoiwds are Iméan. ~ Quadratic. Programming Froblem, because al! conslmints are linear Gnd He objective only intolves the squares of yarialules ~Qrnvex Froyvamenng Froblem , besaise the objeche i concave as shoon below and the constraints ate inéar and, Herefore, Conven Using the est or the oppendix ae ] at I tv 2) -0 2 me, =820 50 f is concave. ~ Geometric Programming Froblim , because the first constraint can be wren 0s 8 9, Ui s%e) = Plane) +2 RO x2) with et tee, Pe a, and Peay, Similarly foe Me second constraint amd the objechve funchon. ~ Frachonal Programming Froblem, because £(%,4)«-daf-xg » 1 » WI, FO)> axed and flay 1, fo The KKT cendrhens are ©) Fin Waele), ¥A%,=00 , 50 Hla) ¥(b) Nea) 4x, U4 Un £0 art ate matically satished. Letus try tb) -2vzg-u, ta, 0° Ala) x, (dy -uy tz) £0 {by Cay FH) =O Bla) xytx, -l0 £0 (b) -x-x, #10 £9 de) a, (%4x,- 10) =0 Xi Xq FO. hen 2a) et) give TANAU toy = Oe -2K,- tury PF K1=2%, > XA = 70> HEF, Xe S Mow 200) gives -u, tery = 42 QO) a, b-x,-x, tld =O sO, p= BE satisties his 5 U,%0 , %%O Gactually Uc ro, Uy re works’) 1% : 6 U,%O, up?O OMe CF, BY layurd=lo, 2) satishes all KET candptiens , $0 (8 Re) = CR) fs optional. (3°23 hd- ) An eguivalent poahinear programming prot ' I3.G-t4. (a equivalent neahineac programming problow 15 Marmirze Fly) = — CY = 4 Oye ty® lyst) subject toy, + yt yy 42 "41 7 Ye Ys £2 yy 7 Here yO (2) The KKT Condihens ave P(e) = Bdge i?-aytur <0 O) 8 lyst) ~4, ta, £2 fj) te -u, +4, <0 Za) y, Cy a -u,sa,) © GY yy C8 (yet a, 4 ay) 0 €) 4, Ch -atuzy =O 3) y+ 4aths 2 £0 &) “Ya-4, tL SO Ya) a (ye 4a ty y-2) (») uz 0-4)" Yy- Ye 42) 7 $ 472 Yeh ust & 4,20 a, %o, (2) Fee x2 d24,2) we have Y= U,0,9) Ria) mphis -3(2")-asusso Ot dyes i 2ley implies ~/6 -a,eu Hit a = tle The KKT Conditions aré net sabisfied by x= (21,2) WRHIS, Ca) TLL KT conctitions: fad @-2x,-vso Bar x G-Ur-vI sO be) B-3BrF-v to Ber eCT-BeF- v=o BS xvaemet 4) vox tear td =o $2 Ri zorKeze ed) v2e. b> Fer Cx xd = 6 Mas VeD Loo => x, Bed = Ue 4 So Ory ade CH, AD I Ket optinant be) EE 1s cacy te hecke tet Gym ule C004) Satisties tte KKT covdition aut ouce We Cae A convek Progze so ta Ha WL, is Optimet. a 49-24366 @S The KKT cocaition lad P-Ux,-v £8 Zod 2Ct- tx, vdeo Iw 2-3 «0 252 Xi C2~- By D=O ted) f-2v £0 Zed xsCv-278° Beye Bea ta S12 4) Olay teat tKe —12dE8 5) K. 20, "2 FO, Xs 2S 6) vie fo. SHaDsewUZ> 2a =e od Z2e> > oF Zo Ven SO CUT Core Ge a optinit solution. Ge> Ee cory te chee Hat Ces saeu ls (By 0%) SetiPies the KET epuitions aut 30 Ow kaye > = OMS, 79,0) is optined sot tte Pee grams ip conven. I34A7, The KKT conditions . Pay -Z-vGtnrso Zar xC-2 + utx, 220 16> ~Exe = OGRE O ZY al-Sestudny =o ted -2x, ~ve-2es3 20 Ler KpC-2ea tudes} =O BD KM rts we ey 4) ld -¥R-tek- KP EO SY kK, 20, tO, X320 ©) vee For Cem = Crt) Zed we vet Zoey uae zoo = vst So SK UMA RV ECOL IY comnet be opting 13.6-13 . KET conditions: e Xa -4424= lay-4¥} +2ax,a so TE Xe X27!, 20) > -Y424=0 Ray KX (-¥xPvaKa) =O or utd 1by-4y%, 4 2K2.4 £o Cy XD=CLN, GER satistes 2B 2-4 %,42%,4) HO all R&T canditions $0 Ci.) 2) -¥f-xp42 So is optional, 4) “CG -xE+ayco 5) X,20,% 20 Suze 19-2513.699, The KT conditions * vad B2- 4",%~ Bu, -ter 8 Oo Ladi C3U = Gx, F- FV - MWS [> Fo ~ ons + Bar 4K Pu, Fr, £O ZS) Ky CSO~ TOR, FBR EK Fn FU dE Bo) Berek eu Bed VCSK, rey ~ WFO BY Zei+ Sx, ele HO UCR, HSK, 16) =O Sd e230, K2tO ) Uy%O V2 TO Por Ceiyx.>s C2) Lede eo) PB UAHA ZO Zed > urSo,e-lo = xy eed =C2R UY y Be 2g « Ine, G? BE 2-4 20 axe xe Bee TPR] = 16 ro ven => Fis strictly couceve | hey KT Qe Fe Racas OXTt Weds Aad >o WOx yx) #KA0) =e Qs positive defi not optional. WCx. Ky) =-8 <0 Wee. Re) Ke The KK T woudition;s = lad IS + Hea 4a, -V eo Bed M.C1S4 any 4K, - VEO Ie) 30 +44, - 8x, “ZU KO Zed xCFo + ex, ~ TH -ZIIES B> x, +t €2e 4) GOu tome -se) te ee a> v2ze St is eety te verify thet Ceuma jv) 01% 93) satisPles these conditions. (9-26RCo) The KET conditions: Jed F-Uix-veo Zar x, C8- axe -viroa 16) 4~2x, -v co Zed Kild-tn-u r= 0 BD Ramee 4) vlna, -2320 S) x, 20, %2a6 6. vre Se is eoty to veri Setis Mies the this tot Giul= (,0,4) neeve conditions; Lance, since is nw conver Programm Ceumdacrar is opti nel, COD The eb jection function Makinize im vector notation SER) — EIBCL SCE Hence, the sg aledt Problann ig: inimine Boothe sueject me 2K my ayy 4a) ® axe ~y2t'¥s +2, 54 Ket Ke ky, 2 2S, MBO, KZ 26 Yi 22, ya2, yaro 2,20, 2,20 The complementarity conshrunk is* xy, Xeya Kay =O Ce} aasjeql Coefficient of I Right YerWol 2] x1 x2 aS Ske xT a | ice it t ttt t zloit 2 2 2 4 1 9 06 0 j-tz msi 2 9 4 4 9 4 0 oye 20) 0 2 4 1 0 4 oe eso ow 4g © 0 0 442 Bas|ea) Coefficient of T Right vero] 2] x1 x2 Saw | ete a Hid ' za 0 6 2 1 1 ww aie (MMU 0 2 4 yg a tg wizial 9 2 ye eo sa ge Mino 4 to Go 0 0 aye sB-2t137-2. @) Geont,) lal Ceefficiene of vorWWol 2] x1 KS KS KET OB alu rt ZIP 0 4 oof 1 2 Oo 2 Q@apyo 0 2 + 4 9 1 0 2 wzjop 0 Ot tt? maf) 101 0 oo fase coefficient of Var[Wo} 2] Xt x2 XH OT MB li rire rlgjyyoo 0 09 © © 4 1 0 isso) 0 0 1-05 -05 05 a5 1 we] 2] of 0 10 0.25 -0.25 -0.25 0.25 0.5 wi] 3] OF 1 0 O.a5 0.25 0.25 -0.25 0.5 Ths provides the ophwal solahon x,2 2 ,%420, d) Using the Excel Solver we pet Xp= 21 270 le vector no: Ne) ist 15.33, God The ovjactive Fonction Mancina Cae, Fen) ~ Porm (4 TELE) Hence, He Cgvivatent problem is: Mininive Rete Susject to #0 x, -20x, “Y | tya Fatt FRO HBO Mit NORE et Yaedyy +4, 8O Kit Ky SK Te Kitten KM on KyZO, Hy2a, X20, %qROsY,ZO) KZA, Y520, 924220, ere eouttenint ft he enforced comple mente XV Yet RYE + Kao t HYG FO (3-238439-3 (by eal coctticient of | atohe ariel 2] x1 32 5h SSP | sla rit ' 21 o)1] 2 w@ 2 5 1 1 0 © © of-m yee} wor 01 1 8 4 8 8 olan Orejajoi 2% 0 1 6 0 1 0 1 0 oj 80 wisioj 1 1 6 9 0 8 8 ol ht oe wi sjo] § 6 © 0 8 oO Ol te Bos [ta cocfticient of | eiohe ver[No} 2] x1 92 XS xe KS SOT XBOX X10 | ide —Iie! rid t ZO} 0 0-15 5 05 1 05 9 @ 9 | 60 A) 1 1) 0] 1 -0.5.0.025 e025 -0.03 00.05 «899 «GO aS wl 2] 0] 0 0 15 45 05 +1 05 1 0 0 feo H9{ 3] Of 0 1.54-0.03 -0.03 0.05 0-003 0 1 55 Xe] 4] Of 06.5 -0.03 -0.05 0.095 0-008 0 ot a7 13-24913.73, &) 88/6 Coefficient of | Riohe Var[Mo| Z| x1 x2 KB LXE AT MIO | ide (eont.) Zloty oO 0-15 -6.5 0.5 1 05 oO o x] 1] 0] 1 00.017 9.017 -0.02 90.017 00.35 @yejz2jo) 0 0 15 65-05 1 05 1 0 | 3} 0] 0 40.62 -0.02 0.017 v-0.02 0 0.667 wel 4) 0] 0 0 0.85 0.05 3.05 000s OS bas Ea) coefficient of | right arfuol 2} X12 9G Mk OS XS ONT MB 9X | sce i I ziolt] 0 Dp 8 3 1 2 0 wm LO mito] 18 6 8 8 8 80.85 0.54 | 1.985 Brej zo) 0 0 6 1 tt 80 | 30 v2] 30] 0 16.005 0.003 <0 © 0.08 0-055 0.4 | 4.087 wigho) 0 0 1 ttt LD sea] coetfteient of | Rion ar|nol 2] x1 x2 SKS MS? KD TD | ice —i-l-l. nil 1 Play 0 0 0 8 © 8 tt 8 lo Wale 3 0 0 0 6 0 0 onss 0.8 | 1558 wel 20] 0-00 1:0.333-0.35--0.330.555 30-10 | 1 2] 3] Bj 0 10.003 8-0 0.601 0.004 0 -0.65 0.485 | 4.085 wl sof 00 104.33 0,335 1.335 0.55 0 30 | 10 This provides the aphwat solution (x, ¥,) = {1.993 , 4.033) Gy) « ® #0 BAY a) The KK cocdites + le) Z-2@x,-uto Ze? K,C2-2n,-4RVS (> 4-3, -v £0 Ze) Qct-am-Ud FO 3D wieme en 4) GOK try- BITS S) Rize, K20 > ure Ee you plot He poicts ebteines Im fed it Th pcaity Clee Huet you are convergi te a boundary point solvtion. So x, xjure E> Cue Ud C812, 4) Setishies the above conditions. So Ckiymd= C8, 623 if eptinnt. (3°3013,2-4.b) Mininine Erte Subject te BE Yi Ys 4B =z Sr Yt ys +t. -4 Ky teat ea 2 XE, %a2e, Ka%e, ¥, 20) YA2O/ Ys, 7, LO, BLO Tre enforcecl conplementwity Constraint is: Mey tm tks Ya tO OQ for xis. By mash, Ue yas 4 ee, Rirat Ceustretnt Lecomes -y tte Yue seetud constraint Secomes yy tt2 FO yug third constraint becomes Kgso nd banca, He complemedtacity courte’ becomes By, rhayrs Oy byt Wr FPO = yr FO, yaeO Se zt etitO = Zee hes, C.B,U 222 Creed Ps optinel! a) Coettietent of | Right VorIMol 2] X12 XB Kh KS XS XT KB | ide mi 1 zit) 2 3 2 1 1 0 8 Of] (awio) 2 0 1 4 6 ft 8 Of2 wizgjo| 0 ot 0 1 0 1 O16 wj3jo} 1 1 0 0 6 9 8 4 he tosleat cocfficiont of | Right Vor}No] Z} x1 x2 XS XE OKS GTX | Side _l tit zl 2 0 1 7 0 0 4 O12 @Moujno 2 0 1 1 0 4 8 Ole ve 2] 0] 0 1035 (0-0.35 00.5 Of 1.385 wal 3] 0] 10-058 (00.388 3.521 | 0.687 asicat coefficient of | iahe varfuo| 2] x1 2S RESET | i J} rid I Zot] 6 o-7.67 10,667 90388 2 | -0.67 Geli e] 0 oem 1-06 1 ossr 2 | Oe x2} 2) 0, 0 40.353 G -0.33 0 0.333, oO | 1.385 Xi]3] 0) 10-035 00.585 9 -0.35 1 | 0,867 (3-3! ges199-4 dV leon") sla Coettictent of | aioe Verio} 2] x1 02 XE XS HT XB | side t zl 8 08 1 1 ato Grwpyo 9 9 4 0.6 06 “1.2 $0.6 wzzjo) 0 18 D2 0,2 04 | 1.2 mpstaq} 1 0 Oo “D2 0.2 02 02 0.6 | 0.8 Tins provides the ophinal solution Uy %e) - (0. be) uso 2) Using The Excel Solver we pet x08, Xz4e 1395,.@) me eet conditions: fed 126-18x%,-v,-3va so Da) x, CRE fbe = 2 y= BUad EO led 142 —2OK,-ZuUr- 23 co ROD xa CidL-Vexa-Dur-2uzd20 Say x, <4 Hod uCx,-4) Fo Bed rx. ele RO) Cig 12) = Bed Beit 2x0 He) vyC3x stn 18) =o re is easy te verify thet Ox parr asd le 5,9, te) Fhistion el Suece ebwctifien) Theuce, AAR) Cara) 2 8/3,5) 15 optimal. b) Miniwine 2, Subject to (4x WY aby #2, Ere ory “n Kay Te yy 2¥s trie (3°3239-8 ¢) foe CHa, 6,26) HOw, 1,050 = CH mys) the thick contteiat = Ka = V3 phe fourth couikeiat => xye 2 tee PEEK consteint = Kg =O the Picst constraint => “UAT TS the seco coustemint yaya" Yer e =P zsz.to > Cla, 5) 20K Ke) is optima! 131-6 gad} . Minimum acceptable expected retum = 13 Minin sezentah.e expected retum = 13 regres ‘eount Per Block Rittiend, Fac Sot _ Stesk 2 See Feco | soe sik? | rat Sie saat 20 0 @ Bagot Ea 2 cy 0 expscieaRetn | 5 e 13 xmecm Raton | vo | te00 14 Fk Do Rik 4 +9 __| sto Sensor [a2 Selaow 18 3s JomtRisx Skok} Stock 2 Joie Risk Stock | Steck 1 5 Slork 1 Steck? Sion 2 Munurum acveplable expected netuen Arrount Por Bock Fane Hare Jrroure Per Blo igh Hank cto Soot Susez | tes si Factor soot sea | Teta su Biaeer 2 30 30 ea Budget 7 = 2 o Exmacted etn | 5 so sec ts Srpecteg mata | xo | 1600 te Fisk 4 oo | ros00 ick, ‘ sco | saat Souter 76 76 Sane oF 14 ie Rise Sioa Stok? SortRih Sock steer ‘tact = ‘Sioa = Sic? Stock 2 ” 8. 28a la 686 | 5 Wad | 456 we | 14.2 188 13-333,44 tar The KKT Conditions are? 1@) -aly-t) +3 -Ya-u, £0 Wb) 2 Uag-2)6 3 ~ uy Yu fo Ala), (-26,-1) +3 -gu,-u,) =O Cb) xy F2lag 2) #3 -u,- Ha) =O Be) Ya, +x, -20 £0 bd 2, $4, -20 £0 9@) ul 4x, #20) =O {b) uy bx, #4xg 720) 70 5 X,%O Ly %O 6 uO ure ) Siace the ophinal soluhin & nob on a boundary From da), 26) 46) Gnd YO) , respectively, we hate’ = 2lm-1)43 ~ 4a, dy O = 2 2M 3 -u,- 4a =O 4, =o yo Substhehag fre fast 2 tne the fese 2 we get -2x, +5 -2x, +7 =O &, %, $0, the ophmal seluhon us 2.7% Has 7%, (2) mininiise ara, Subject toi Ax, tHa, ta, sy, tz, 25 Bay + Uy Hay yn FB 7 Yn, + ey +20 Hote ty 220 X,70, UP, y,20, WY, BEvE for e712. Complementarity Conshrowt ¢s' Hy, + kaye + Uv, 4 a¥y =O QD sas(eq coefficient of | Right ¢ Varo} 2) x1 2 eG XSLT | sige ais i mri 1 Rioja 2 -2 5 5 + 4 6 0 0 of- wiipo) 2 0 6 1 4 0 4G 8 fs formjzjol 0 2 1 4 9 4 9 1 8 cl? wesypo) £1 0 8 0 oe 8 de wel sop 7 8 60 00 a . oe aa3ad ‘Alcon? sasttal coefficient of | ight Vario] 2] X) x2 X8 hGH OXT HBX IO | ide a mri | zloty} 0 2 4 8 0 4 to 8 OE wo) § 0 2 05 05 0 05 Gc 0 0 fas “ywl2e] om 4 « 8 41 0 4 8 OF wisja} 0 61-8 2 BO Bt tO vel fo] 0 8-2 OS OS 0 OS 8 8 TS sas ital coetticient of | esahe Var|so| 2] x1 x2 XS XS XT XB D0 | ide IL 1 1 t zjojt} 09 0 0 0 © o + 1 0 9 Jo iy Mit}o) 1 0 2 45 95 0 SF 0 0 Oo LBs Dyzjajo| 9 1 05 2 0-05 0 95 0 O35 yoj3]o) 9 0-85 2 OS 2 oS FO BS wo sjo) 0 0 BS OS 2 OS 2 OT ° This shows 9 Sp ys Me ts ophimel with ayeu 2) USiig Hae dkeel tolvt we mek Seek S 238 sg ag deed TS, a A Ee BS EPS Bias 83x, and Fale) = tm 202-3 25, Filovet , F,¢25)> -5.25 fF (5)=4, Fy lode, Fxl25)= 7.25 and fy (S) 9-6 fo -s.25-1 Sigs SEN ieee ~ 25 2 R28 xb Sa =a The approximate linear programming medel ist Minimize - 25 xy 2.54, 15m, + bee Suigect te: Yay tH, + a trap $20 Bt fe #44 + 4x, £20 o¢ My S 2S for U2 and 5-42, b) as|ea} coettictent of | rie Yara) 2] ESET HO | ide lit |__ ii i zlopa ¢ 25 0 85 0 9 25° 0 as 0 lars I wiafo] 0 1 8 kt o 6 6 irs mjsypo 138 eo oo 0 [2s a 1 0 o jes B50) 6 9 1 8 0 eo 1 0 jas a The aphoral solahon & 7,225, % 220, my 425, Ay fn krms ef the eerginel variables we have #2 2% t%_e7 25, IF hytye 25 13-35—IBFL Chet ¥,2 Kat keat Yat Xegt Vag , Kae Kart Var? Kage Kay t Yas FOG) = OX, Pelee) = Oxn-2) 3 xe Fede 1, $= - 3,4, (2) 2-8, FO = 5, $02 -3, Flsd= Ft Fille 4, F200? 2,8, = - 6, folay= =B F204) = -B, fars)2 -6 a, =e L260), + 3-65). . Fe 5,5 wat 7, Sat Fs +2, Sgt 0, Sy 7 2, 5g Su = 6, Sez2 -4, Sage -2, Spy 20, Sas 2 The aggreximate hiaear pagcamming mated is; Minimize - 4%, ~2¥n + 2Xig t4¥is ~ EX TH za - 2K 2g 42a Sabet At Ait Mt My Hig Past haa 1X43 +Xay ts S20 But ¥r + ¥ea + Lye Lig Fath hag! May Was $20 OSX SP Be oh ana fs LUGS, ) Solving this sing the Singlex MEMsd, we get: Optimal solution Value of the Objective Function: z= ~18 we 1 2 ° 0 ° 1 1 1 0 o Ia tems of the ortghal variable, we hart ‘=k FF gt Lay Mis > 2 BUS Vat Kars X234 Kg t Kos = F (wote hat we Imprived by 2, & went bron -195 18) 13-3613.82 a) The profit graph for product 1 is shown below: Profit (8) s40q,— — 19 Production of product | ‘The profit graph for product 2 is shown below: Production of product 2 (tows'd) 13-31B82 (ont 2) i) The profit graph for product 3 is shown below: Profit (8) 4500 1015 Production of product 3 5) Moximidt 360 x, #30%,2* 240 Xe, HOR, 9X5 + 450%, Ha tidy subject te Ka + Rig + hey} aa + Fag Rai t Mant Kage Bx 43x # 2m, Hee eZLS, eee 2o0 Kut Xin #%1 + Kae tas 70 Otnnsis, Of xi Of kyt te, OnKtzo, OF Are Of nat tO) OF Mane | 5 OE Nae where xa xt Big) Ra? Mat eagthag © Xone Kayo Kant Mag ) Felving autemaNcally by Be Simplex Meted ' optimal solution Value of the Objective Function: Z = 18000 % Cys) | 20 font} (938138-2 ¢) cone} ~ Tn tems ef The ortg nal variables, we here Mie Kuta IS Xa Xa aK, *%a3 5 20, X32 %ytXyyuxy, 2S 3) The vestrichon on pretit from by adding the products Land 2 can be modaled following constraint to the tear Progam wi part (be BECK, F30%z +240 Xe, 4 (2OXee + FOX, 29000 ) The Simplex MeHad gives Ke optimal Selatan: Value of the Cbjective Function: 2 = 19900 pate thatthe ptinal hasn't chayeg “Ths ts because X still is Rasible with tHe mew coashaiat (42. 360%, 430% ¥ 240K HO Kez + F 90K 2192°O > G.900 } mal vartabies, we stsil) have $20, X3>25 Ta terms a the orig NiFtS, xy 13.8-3,4) The KKT cauditious + lod #-2x*% -v,-su; $° Za x, CHIP -K-Ssud=EO (6) G-4x,-3u,-to, £0 Zby Ky CO- x2 -3e,-24, 50 39 x4 3x, 28 Fo) Vex, ese Bee Bey Se ere Ce 46) USK, 42K4 1 Bo SD Ki tO, Ke 6) vv, 20 oto It is easy to vee ify Arent Geka u, 02) Seotisfies He abeve conditins, ok se CRm d= CF, E) is optinnt ie, asase 2.0.9) 13-39138-3 y 3,000 power saws and 7,000 power drills should be produced in November, Profit data for doors when marketing costs are considered: Production | Gross | Marketing Incremental Rate Profit Cost Net Profit Net Profit 0 0 0 0 = : $400 $100 5300 $300 2 8800 $800 30 -8$300 3 $1200 $2700 $1900 -$1900 D 4D D a-p> | Profir deta for windows when marketing costs are consider Production | Gross Marketing | Incremental Rate Profit Cost Net Profi Net Profit 0 0 0 0 = L $600 $200 $400 $400 2 $1200 $800 $400 $0 3 $1800 $1300 0 ~$400 Ww ow 20? ow 2W ¢) The profit graphs for doors and windows are shown below: Weekly Weekly Profit Profit ® so 300. 1 2 Production rate{for doors Production rate for windows 19-40Xa 2Xait Xen Kaz he 2 , 2F X23 F)= 4y,-¥, ok xs-2yt Fills 0 F.C) 2 3, S00, fines | 1 Faltgle bua 2e Fro o, HONS 4, £112)=4, Piso 4, Seas, Saye 4 Sige -15 The apervimate linear (agraaming msde) is: Mayimi BF Xu BX. = 1S Kay +4 Koy ~4 Xoy Sujet kt 4 Ris + 3% + 3k +3K2y <8 Sn +52 #SHy HUM + UM 2g HW LIY ON SI) fee CEU Zant J42F, e) The Smplex methed gives He solution: Value of the Objective Function: 2 = 7 Kt FatMat Xry? 7 or Yt ¥oreYart¥ag =! (alse Xx72 gives opfnat objective value @=3 ) R20 = %_70 Cals XyrOD¥25° since Xn #O Xn Fo gto ute D Xaze0 since Kay to } So spectal restrtetien for He mode! 5 satisfied . wetted the sg Thimake solution is faicly closer (id) orl 2) = (et$3,15) Hb, The approctimak sear programming made! is: Maxime — 31%, 4 Px 738 Hs THOM 2a Mes subject to 3a, +34. 34,5 TH, 7 Fez thes fH Rey +2 12K t5xy Sue to Hee 216 OE) for Er? and F723, b) The achmatte routing (Simylee meHis) gives fhe solution! Value cf the Objective Function: 2 = 100 Xn) 1 xg ‘ te) : Xa ¢ 2° 1 *5 (%n) 1 x6 C¥3) ° Dy noms of He original variables, we have: Hie Mat XaeXy= 2, Xp Kaye XazeXez 2 _ 13-43138-9 hee Pix, de Se, Oemez Zt4y, Dex ss IZ, ss x, Fi Gay) = $time Dan, Stress Bexney So Mearinize BC, 4A Cd SeSiet to Ax, +E ste Bx, HD xl a4 we, mre Possibiy, tre Bee) are ge EL Fee wise Vi em OpOoriamtions tree ohjeck fe Wuetiown. 38-8 — @) Assume thet ie te optines linear pre soluble of tL ve there exitts mA vig sun thet Kee cues ya Create hems solution With vi, minty ii Dayenn Les Mijn Miche ea. THis votetion wu Cemaitie Hie ails ere A Cinene Bed apt ace TA ERE: Bet Soy Ki + SigprXeieny feccnese eC jet? Sire; Siu MSE Kee ee SME + SOO ieD"YG) ethene. ' Bey Cees + MC jed) > SEER Since Sep 2 Seeger Fe cter more, 68257 Sé¢54)) Ves step # Seeger > Sii> Sides Pom gieay; YE> Sti kes , > sigveye Bis MOREE RECEDING Haden SO S8iKeG + Sits XG, > SGX, 9 Seeing Kee Ths, He original solution Wey oe “Seine, & Rake tee see cssumptions as above and construct xo Crowe x a9 Chove. For the Nuew- epproximate oF gp we WN Keen miiKg recites” the with mee ise Bnce qi wes Conver. These, it con be shown by the Goamtytis above He inepelities in He DP FIVE § 1 Sits Ons if we reverse i potecoprinks plows: PERG t Nery Keegan SMES KEG t See send Recdery So x! is feasible. Furtter, Sy SHSKES + SeesaraMecjens Se < wes wet optimal. (3-4 mdBES Let Paws 5 15% OF ttece ate peomen, Ax) of lewr Ot Kn, + /000 24x, -1000 loooex, The (Cren-lineo > Arey ramming robles is: MEELIS PLR TE ins & Svbject to Pin.) + Packy) # Co,e0e Ky & BeeS Ka leo K. LO. x. 2d (@) het xB Ko Aesote requler ont overting production bt pled oth oe js: Mewimirve sr xR ete xb ens? subject to ISK RxVSK Pe 1OXR424 x0 £60, 000 xR s toc] Kfs1eao XR etooe Ke Stoo *R 20, x,°20, xR 20, n220 &) Since overtime production is mora costly than requle- foes the objetive of Vii peotel producti Fiemme, will force ae eyite aS tote A! waa St (a) The ebjechive funchon Is linear and , therefore, concave yoy, “(28 } aa) Bat Naz ax! Appendix Git, 2) is conven. Similarly 24, 3% ae Mae 84. 7a \'* 2-0-0 oat 3%i [ithe 40-0 =0 20. se From tte Hest in the, 20% $0 926% a) 1s alse conven, 13-45bet Ke yt eh From constraut 1 we know 2y2<13 25S, Herefore, using imkyer breakpoint orth require F near prtces, Let Gu) -Re* Jax exe, Jala deat ond Jasltd>he Consent 12 Gul) + Gye) and Conetaedt 2 = qaiC)) #9 2a) qu lOO, Gul 2 gy l2I°B, gy L3I° MF, gail =O, gale), ga,(2¥ and g,,(3) 4 het 5,2 US a2 Sux Set The appeonniale Sintar proscam & Maximize 52, + 5%, + 52,5 +2, subyece 1) aa, 4 by, 1 Joxy tre £13 Pu 3, tong, 29 CF hy SI Of 21 Hyg X20. We could have 04x, 41 but the constants wil) enforce the upper bound ©) basjeq) Coetticien: of | Rigne varlwo] 2] x1 x2 XS KGS KSAT XB | side SS rt 1 zii) 9 0 © 0 0 4 & ayes Blifo) © 0 10 oz -0.2 -0.2 -0.8 Jo wiao) 8 8 0 tes M130) 1 0 0 0 8 8 tt wdop oo 1 0 8 8 8 In terms of the poblen 75: Xe Kythin thy = [tte 2 Xe 13-4BBA @) Let X,2 Ku Kiet ¥ey , Xa? Kart Kent Xey yi Fee Ba KT (Te ra xt £9} concave 5, ye Ay (Kade 1%2> Kp sare Key Subject Xt FXm +S Key + Xey + 3Kra tS Key $7 RnZOy Kin 2 y Keg ZO, Kay 2OrK pz BO, Xpg RO Ku S10, XE Xi 2n, Ney £1, Kea Sl (Key $1) b) The Simplex Methed gives the soluttin Value of the Objective Function: 2 = 52 ect a 2422 pe convex) axe Xa (en) *5 (xn) Xe Ox) Fa toms af the original varibtbles, we have Fee kat Wat Gye W X22 Xa, # Kae t Mes = 2. c) The KKT coadstiens! T 1 0 L 1 0 fa) 32-4x3 -2%,4 Se Fram (4), ¥,82#%_ Dao Ray ¥,(3a-9¥X}-2%,4) =O These values satisty o It Ib) 4-2%,-2%24 So ef He KKT conditions 25) Hl CH -ak, 2x24) 2 8 So He solution to 14 Hacer B) xPaxt-a20 4/fOXi mation Is, 0 fuer, 4) U(XtKF-9) =O phe optimal te the original S$) X, 20, X, 20 poblem, are 13-4%153-10 0) FN= Fn * fale) ity 34%? Abe 9x2 - xd 7 Sa: 6- 6% <— Po ie 08%, <1 MH 2D - bX, eH po HF 04H KE ot Meither F, ner 4, ave cancave (we only need 0 show one of ese art not concave), 30 $x) is not concave. Lee Ke he Ket Ky Mey Xas Kut ker Sleds 0, N= 2, 4,094, EGO FU) eH 16 Ful) = 0, AEDs 4, Hele) 2/2 Se, 542 BE, Se Shed, 54-4) Byrne Sut 4, Sa.28 We need special cettetions O%X%ato if Xy Si > Sey |» Gi) and (eli) art autematically Satisfied Yon optimizing. The appakimate bie fyronlatien is! Maximize Ay #AKiV— 1 Kay LOY + ha HB Kae, Seb ete Aig Xe FL tee SY —Khat Fin so “Xu t%22 So Xap binary Gayl Gyn, 2,2) ©) The solution (by BLP antematte rating ) is: RiP 2, RrEO, Kp HO, MO, Kael, Keel oad ZH/Z In terms of Hoe original variables, we have Xp hut her that ¥ ry HO, Kee Kay tH, FQ C4n altemate salation 15 %sF2, X21 whicd alse gives He optinal objective valeur B= 12 ) (3-48BAL VEO te)? (ie y ame ) veCL = C4, $) Solving: max $¥,+$%2 De ames =P 45, xe etaanal CE) t4-D CY 1 Fa) tucresses 95 & nereases wew X = (5,6) Cwhich is the salattin found in 13,6-$(b) ) atite: velo) = (t,4) Salviag Lf: max ttt the 25. Meo “3 Feuness = * 5, ¥e Werke x= (5,0) +€00,6) Se X 2050) js aptimad Since VEN) = Cor Ce) Cr ORS he LP te be solved ts max GFE Ky SE XML ES wy K,25,Xpe0 fs eles Ne salen, 20, ki Zo (er) Thus, xP (MPP) 44 (SKIP, O- KE) = (5,0) attr 2 Hterthn, CE*=1 since FCK) jncreases wih t) (Tare act 6 complications fer (4,¥2) #60;0)) 9-2. vRlum) “(Far 72%) vEle,o)= (1,0) Salvingt max %1 St. KK, £3 M3, %r20 Wee, XZ x's (0,0) #050) e*21 CHa increases uit e) Xs (3,0) (the solution found in 13, 6-6 Cb) ) 2M see: Ha (4, 0) Selving Lf max ay Be YA EB ap V3, FEO 1,20, %Be * x 2 (3,0) 4 t (0,0) So X#C3,0) Ts optimal, 13-4413, 9-3, k x(k-2) cL | <2 | Xi (*) l oe | xik) afc 8 “5 | 3] (4, | | oo 8} a -4 She uo oot sel e no ‘ L 0) Fina] solution: VEEN, Xe) = C2476, BKT- 3) but since ¥, £1,X. 41 Caiace Xet¥rS4 ¥,20,%y Zo) Akin 6 < 3x2-3 (2%)-6 $-4-<-3 4 3KE3) So the resulting LP will be of He Ferm Mia Ch, + Ke e, sen we Let Me $1 Ly (1,0) will always be H4e Wee, Ky ze eptinal sofatien . KOCK OYE (1X, x” Seat tet, x= 61,0), the optimal 13,9-9, k x01) [2 [= | xXpp lk) rad xt) (5 8) 15 10 30,0) | 9.088 | {(7.196,4.561) (7.196/4.561) | 4.459 | 22.3 o, ass | 9.119 | (6.337,5.807) (6.337,3.807) | 12.88 | 8.89 30, 0) | 9.07 | (7.996, 5.4) 0, 45) | 0.ca9 | (7.283,6.256) 1 2 3 4] (7.996, 5.4) | 4.615 | 18.79 5 6 5 (7.283,6.256) | 19.83 | 9.982 33 | ovcsa } (9 $24,5.917) 5.917) 4.611 | 16.72 o, 1s) 0.072 (7,903, 6.569) 17.903,6,569) 9.666 | 9.056 3c, o} 0.045 {8.887,6.277) Final solution: (8.8866, 6.277). 13-50@ x] eon a | | xem [ot | xk afro » 2 sfc 6] os]. oo a5 2 { oO 1.5) 2 0 1 2, OD 0.32 ( 0.64, 1.02) 3 ( 0.64, 1.02) G.72 0.96 ( oO 2) 9.175 (0,528,1.192) 4 | (9.$28;2.192) | o-sea | o.d17 | + 2! 0) | ovoa2 | ¢alen3.102) 5 | (o.ee3!1log2) | 0-672 | oss | ¢ 0; 2) | ocaze | talsactcisa) s | co's73i1lisa; | oleae | ote03 |) 2! 0} | loge | caleresa 117) Final solution: ( 0.676,1.1166). b) 2 2 appreximation = (08,12) ‘of egtimal 1.117 0.676 2 x1 30, xoet) [ar |e xzptk) . xt) 1 t 0, oO 126 162 ( 2, 6 L ( 2, 6) atc oa # 30 ze C4, 3) | 0.333 | es? 5) 3] iz.se7, 5) 8 s2b¢ oa) 3h | eet tes) os) Pinal solution: (2.6667, St Thishagtimal since Ha 3 gave Same print as Her. 2 13-5139-' 13940. cay kK] ea [et | { 0, a) (2.188,1.458) {2.902,1. 686) (2.024,1.721) (2,188,1 (1.902, 1.688) (2,024,1.721) (1.966, 1.763) Final solution: (1.9652,1.7629). weeny Poet |e | mtr | |__ I Te of | soye 3, O| ae, 9) ] 0.001 | 35.56] C0, eye I iS | a8, 2) | 0.606 | ¢1.097,0.812) ez | xml _! 1 |__| Trees, 02 [ean yp 35] C o atc % M] Sf 2c 3 | (0.333,0,6679 | 2.667 | 2.667 | C1, Gel the KKT conditions: ted B-Bxtou #8 Zed K,CB-Bat-vd=s0 lO) #-2x-y so ZO) KOCH OER EO BD x, exited 4) UCR tk IS FO 5) ¥, BO, Kg zo 6) v2 z+ is eas to verify teed Cres v= U5 5) Se~tisfres feast, conditions, so Cx, mded/a Vs), the estimated Soluhcn from parted, 's aphinal . (B-TLPinal solution: (0.8079,0.6011). b) 9.602 mem fet | x(k) 2 0.5, 0.5) 3.5 L (1.25, 0) 0.541, (0,906,0.229) 2 | 10.908,0.229) | 2.027 | a.sar | ¢ "0, 2.5) | o.aae | (0.771,0.568) 3 | (0.771,0.586) | 2.164 | a-as7 | ¢ 1.28, 0) | 0-216 | (0.875,0.448) 44 io.e75,0.44) | 21223 | aaaz 1 “a, 2.5) | 0.076 | (0.808.0-601) (2) The KKT couditions : fod 4-4¢x,3-Fu cue Zad x C4 -4x,2-Guyen £4) @-2xe~20 so 26) xi(2- Ux -2I=0 3) 4x, +%e, 35 SQ vw texy-s)eo $5 x, 20 ° jy Strate Are stishien fy Cerda, 0268934, 7134, Se Seas CHozel ail is Optimal. (3-53 PIT}sy 1910-1. @) PCy sr) = 3K, HYKa- KP My - aK ved ») vP(x sede 2 asxtee [eth] 42k. tre] > VP(.4); 1) [itl xeevPe = (ati Be, erste) t% 2 0.006606 Mew x’ 2 (0.34F4, 0,3524) A) he true solution 35 5,3), The pereentege over In: 14-3381 20,70% xX, is 3 Xp. ts 1% 863). ho 50,55 % f& is 3h 2101 = 0.51% i [200-8 a) eases Meet am” Taare tht] b) VPlxsr)= [Aree + le +e] 2- -2 anaes Gay 1 s y ‘ > P(t) I) - [| t Kite VPS = (de ott, d+4Et ) C%= 0.0367 New x! =(0,7058 0, 6425) (3-541310-2. ¢) 2.688 3.395 3.801 3.849 3.854 (ROH SD oly se) = Kt 2a aKa Vat ~ 2 [inte tet HE] AW-2%, + too les eXyrte)* * anea* nay “2%, - 8%, +00 len 0 ek sci * Gana 7 E = VP(C55); 100) = [307] X'4# trex in) = (5+ St, 5-34e) t% 20003529 Mews X= (39,1862, 4.8802) < 6 4.976 4.891 4.888 0.01 0.0001 Note that because of miaimigation , wt Coaverted Min Hx) to Max - Fix) Aso, g(x) = b becomes _ gixy s ~b 13-51310-4, God The KKT cousitions: (+? led wr, BEL ESO eee eh Zo? KC ka DUK Se tb) x,-u, so 3 Ze) KAQd Rn, — EO 3B) K2 4x, 43 2 O92) 4) UEwr em BITS 5) x, 29,220 o) ou, 20 Cx rad sdijr) satisties thes SIF US. 1BIO°S. a) PC x sr) 2 -2%,~ (Re 3= (Zp + ) b) 2P(x: > PIO ea eae 28 wees a7) 2 ~ Akate + toe 0D Ra? YE +3 Sk ) c x Xz Note (%,,X_,) 903, 3) T3708 393% te Cuts) wore 3.078% 31510 aro , $e ford Boot! «= 3,036% OG %2) = 13,3) Fs toe $,000% 3,007 option! ep oe | omy x [tm | ___1__|___. o| ele) 11 1) 3.707 | 3.796 | -8.068 24 aor p3.07 | 3.179 | -s.172 3 {0.000% | S.007 | 3.056 | 6.017 4 | o.on600% | 3.001 | 3.011 | -s.002 1310-6, sr) QD th ayPlxjr) = zs acr un OPlayed b) ass = “ethegeaes > X= JE 2 PCxie) , ak, ent aes =O=> X,20F r x Xe Mote that (%,,X3)—> (1,0) TK Ke | LAY t as r-> 0,80 wor 1,048e ot (KX) 201,08) 75 optimal. to"? 1.0050 oat tore 4.0005 © 0,007 13-J61310-6.) | © ! mt | x ! to vy re ti |e +] Vp rae 1 | 4.762. 24 0.01 | 1.056 $0.1 | -2.273 3 [6.0001 | 1.006 J 0.01 J -2.027 © | o.agooor | 12003 j o-oar | -2.003 130 -F, POS 0D eaten aa a = hy 1B10- ° 1 L 2 0.01 3 6.0001 31g a o.ca0001, 324 te yp het 13,10-9, PR-tey + Teta ae 7% TR (3-3T130-100) Solwing for the roots of atex-goo-o we fad x Vs feosibie tn the range Co, ~'2&5\] ox Lo, 21-866) F'K) = 1000-800 x #12047 - 4x? Fe) = ~800 #240x - 1ax* Foy = 240-24 A tough sketeh of 7x): fia) x X corresponds to o local mractimlon 06 rntinionurm 1 te a a % se (bl Aeration | dFOO/dK | £0) —_ |__| tn 7 1 38550 1 | as | 700.68 2 | an | 720.08 3 | 06.5 | 72.56 & [enn | m8 S| 408 | 733.36 él I 733.3 Stop 1 Iteration | df00 70H | foe \ ° t 7 + | +1083 | 20546 2 | sae | sos08 3 | Mee | 20559 6 Lema | 20560 3 | 45458 7 20s 8 | 78 | 2561 step i Thee is a local marrmum near Lb0I6 and a global PraKimim near 21,05) 13-38130-e) x Tnitial erial solution X= 3 2 i gives X2U025 (84) =793.4) 2 as max 4 o Baittal trial solution KIS } gives X*2107 (Hia= 20562) 3 as max The global marioum is X*= 2,07 "BOW Len) Ponye) =3x,xq - 2x dew e (oot et gt sO Seag teat gets tl et et) = Be kind — regi y vr (b) k \ PoP ew po yp top i, |___ a Tt 1] 1 10.995 | 1.007 | 0. 2 1 oor jolee ! 1.469 | 0.92 3 | a.osor | o.e48 | 10175 J on16s7 wrmnia) PO)? teded sway tr (5 wo, I v7 i Ti ot pas 2 | 0.0001 | 2, 3 | 0.000003 | 2. 4 | c.onoteo: | 2. Wea) Px 50) = sin Bx, 4 cos 3K, tin Grain (Toe FA 10Ky t * feo-ron aes + * +) {b> SMT can be useat to oblein Keglobal minimum H “enough® different shorting poicats are used and SumT is run fam cach. If we cheese = tebtce oF points ever the Feasible region 50 that the adjacent paints don't chenge by more tae 37 then this set of paints will work For €6). Since sin and cas have periad 290, choosing lattice paints with grid size nat grtater than ST will casure that He arqumcats of ThE Sin and cos MEMS In f tll not change by mare tan 27 between adjacent lattice pints. Since the second constraint ensures X, S10 and %, S40, wt con see that at most Bay 23 gtacting paints are required H chesen well (3°59Vliet a) Yes, £0) = 4,04, +Falee) o Fi (4,) = 4x,=¥F & 2-2 <0 Filtudle Or tt co ot So £6) is concave, Gon WFAA is convex again 42 G08) Golug) De gata = Kr Se ais ‘“ , . 9 ey Fel) is Is 4 conven programming problem, beth convex ) b) Me, This 15 not 9 guadratic pragrammiag problem since He Constraints are net Uaear, ©) No, The Frank-Walfe algorithm in 13,9 regvires linear constral ais $0 cancet be used for this problem, AY KET conditns are! Tay 4-2%,-2%u £0 [ae X,e! (1b) ust 1b) X,(4-2%,-2%,4) =o 2a) 1 ~2y but his violates (4) ~ 4X2 8xX.4 20 : . 2b) %1(l0+2x,-ex,0) <0 30 Ou pe) C40) cannot D xt ead 1g go be optimal . HW) Uleteaxt ideo 8) X,20,X,20 ) uz ©) het X12 Kut Mat Kig* My) X22 Xart Kaa CB FC AK Rtas) eK. XE F,Co)20, £023, Filed, D2 3, Fa =0 Fyld= 0, #20029, Faley zie Pa ae Sat 32233, Sar 43 2-t el, Su? 9 S222 F Gerais: ate St) 4x BOD 0, gil, gyld=4, 4,f3)29, ql GeCF0, 420074, qafales = se ss ty Bet es HF 723, biy2S, bye F tus 4 » trea 13-@O13-4, €) Leont) The apprvimate LP is: Maximize 3X0 + Ya — Xaz - By 49%, + BX ee Sabjeat Eu # Ba Sig Phe + 4, +taxy 416 of%y £1 Cates) $) the Simplex Methed gives te solution: valve of the Objective Function: 2 = 16.4165€67 Tn teams of the original varlables, wt hove Yat Kat hiat Xg theg oC, Xe Kart Xan SE 9) POs AHO [yee OTE h) c.01 ©0601, 0. c6c001 43-6!cases Seta) Tf Lydia wants to ignore the risk of her invest ment she should invest all her money into promis i i ions of the the stock that promises the bighest expected return. According to the predictions investment advisors the expected returns equal 0.2 (=20%) for Bigbell, 0.42 for Lotsofplace, 1 for Internetlife, 0.5 for Healthtomorrow, 0.46 for Quicky, and 0.3 for ‘Automobile Alliance. Therefore, she should invest 100% of her money into Internetlife. The risk of this portfolio equals 0.333. b) Lydia should put 40% of her money into the stock with the highest expected returns, 40% into the stock with the second highest expected returns, and 20% into the stock with the third highest expected returns. We can also find this intuitive solution by solving a simple linear programming problem. We define the variables as follows: BB = proportion (in percentage points) of Lydia's money invested in the stock Bigbell All other variables are defined correspondingly. The sum of all variables must equal 1 and no variable can exceed 0.4, 12 14 5B [toP ja ~~ Heo Aua Ba | 603s |” G005[ oa] 0031] -o.027 [0.01 16] _LoP [0.005 oa] 0.085| 0.07|-0.05_| 0.02 a7} 0.03 Ooss| 0333] ari] 0.02 | 0.042 18] HEAL _|-o031 {~~ -o07|-o.11| 0125] 0.05 | -0.08 49{ Gui {0.027 | -0.05| -0.02| ~~ 0.951 0.085 | -0.02 Zol Ava [0.01 ‘o.02| o.042| 0.061 0.02 | 0.08 21 22] 23 24) Formula in cal B22: | =MMULT(SBS5:5GS5,B515:6920)" 25 [Formula in cel C22: [-=MMULT(SBSE:$G$5,C$15.C$20" 26 [Formuta in cel 022: P-MMULT(SBS5: 9685, 0815 $20)" 27, Formula in ced E22. FeMMULT($8$5:$635 £515.52)" 28] Formula in cel F22. 20" 2 [Formula in col G22: ai 5,515°) The solver dialogue box for this problem appears as follows: | (forescts asi fpetsisass <= sefs:sc$5 Sil ps3 = $055 The toral expected return of her portfolio is 69.2% with a total variance of 0.04548. The risk of Lydia's portfolio is a quadratic function of her decision variables. We, therefore, apply quadratic programming to her decision problem. 13-63d} Lydia's objective is now to maximize return — beta*risk. The constraints are the same as in part (b). ROSCOE CEES i 2] Sever |e —| toe neat ara | Ta 3 pings [7 Top a [abectve[ 2] 0 | 08 | a8 t 03 | os06s S| sotten |e oa 80 Maximum | 0.40. 0.40, 240 c40 0.40 040 | 0.04546 Risk 7 025 1 bes 8 Formula in cell H3:__ |’ =SUMPRODUCT(B3:G3,B6:G5)" $ Fomula neal Ha "| =H5 HAS" rid Fomula neal ASABE a oman cel HE 7262285. COT 12} is [ia] i 24 Forma in cel B22: | SMMULT@BSS S635 851518820)- 25! Formula in cell C22, |JULTISBSS:$GS5,0515:C820)" 26) Formula in cell 022: /=MMULT($B$5:$685,0915:0$20)" 27, Formula in cell £22 Fz] Formula in cell F22: 23) [Formuta-n cell G22. 13-64e) Due to the small emphasis (beta = 0.25) Lydia puts on risk her investment portfolio is the same as in part (b). For the investment policy of part (4) Lydia invests $6000 in ILI (1500 shares at $43, $6000 in HEAL (120 shares ax $50), and $3000 in QUI (20 shares at $150). For beta = 0.5 the optimal portfolio does not change (we only display the relevant output of the spreadsheet): A 5 c 2 E F [6 qs 7 ‘Sewer| 88 tor [Wi] HEAL | GUI_| AUA | Totals 3 | busaet 1 1 1 1 7 7 7 Pt 4 [opectve | 03 | 042” [Tt 05__| 048 | 03] 065026 5 |“Soution |? 0 os 04 020 0692 Reum S| Maximum| 040 | 040 | c40 | 0.40 | 049 | 9.40 | 0.0464 Risk Zz os bes For beta = | we obtain the following resuh: a B c D E EF. a el z 2 Sever [88 top |r| Heat [our _|AUA | Totals 3 [budget [1 1 7 o 7 1 1 io 4 | objective | 02 | 042 [+ 05 | 048 | 03 | oscssas? S| Souton [0 Gosseaa Da 04 16504 0 [ 0.6906418] | Roum S| itexmum| c4o | o40 | 040 | 049 | 049 | 940 [00836158 | | Risk t ee tee Lydia invests 40% of het money in ILI and HEAL respectively, 16.604% in QUI, and 3.396% in LOP. When beta = 2 the portfolio changes again: Cys = c 2S E F [6 a 1 z 3 4 5 | “Soutien oor o4 04 Gives 0 |oeesise1| | Reten 6] Maximun| 040 | 0.49 | 040 | 9.40 | 0.40 | 0.40 [0.04z6033/ [Rsk Zz 2 ‘eta Lydia invests 40% of her money in ILT and HEAL respectively, 12.83% in QUI, and 7.17% in LOP. 13-65g) The general rule is that as we include more and more different stocks into Lydia's portfolio, the total variance (risk) decreases - or gets “diversified away”. LOP has a negative covariance with respect to QUI and HEAL. Including LOP into the portfolio thus reduces total variance. The benefit of this lower variance outweighs the fact that LOP offers a slightly lower expected return than QUI (42% vs. 46%). However, low variance becomes more and more important as beta increases, That explains why LOP is being substituted for QUI. h) The return of Lydia's portfolio is no longer a part of the objective but now becomes part of a new constraint: return >= 0.35. The objective is now to minimize the risk. A EB c o E FE G H 1 J i 2 Sewer_[— 68 | top| iu | eAL_ [au Aga | Tora 3 [puget [1 7 7 spo. a CO 4] retum 02 0.42 4 05. 0.45 0.3] 0.3501906 |>=| 0.35. Schien [OS7I7 Orweets 0 Dises61 0.209 0.10608] 00013600 | RlaE Maximum | _0.40 0.40. 040 0.40 O40 0.40 Formula in cell H3:_|"=SUMPRODUCT(B3:G2, B5:G5)" 10} [Formula incall H4:_/"'=SUMPRODUCT(B4:G4,85:G5)" [Formula in cell HS: |"=SUMPRODUCT(B22:G22,B5:G5)" 12} 13 14) BB LOP cr REAL Qu AUA 15} 8B 0.032, 0.005) 0.03] -0.031] 0.027 | 0.01 Lor | 0008 0.1 6085] 0.07] 005 | 002 {0.03 —[6oes| o.as3) 0.11] 0.02 | 0.042 HEAL 20.031 ~0.07| 0.14 0.125] 0.05 | -0.08 Qui 0.027 2.05] 0. 0.05] 0.065 | -0.02 | 20] ALA 0.01 0.02] 0.042] 0.08] 0.02 | 0.08. 21 22 TOSS OUT i i 23) 24 [Formula in cell B22: |"=MMULT($8$5:$G$5,8515:B920)" 25) [Formula in cell C22: {'=MMULT($8S5:$G$5,C$15:C$20)" 26) |Formula in cell 022: |'=MMULT($B$5:$G$5,0$15:0$20)" 27 [Formula in cell E22: {=MMULT($BS5:$G$5,5$ 165.520)" 23] [Formula in oell F2: ['SMMULT($B35:$G$5,°$15:F$20)"_ 29 Fomnuia in ool G FexMULT; 156520" 13°66Lydia's optimal portfolio consists of 31.77% BB, 19.88% LOP, 16.84% HEAL, 20.90% QUI, and 10.61% AUA. Her expected return equals 35.92% with a risk of 0.00136. Since the return constraint in not binding in part (h), decreasing the right-hand-side will not change the optimal solution. The minimum risk for a minimum expected return of 25% is the same as for a minimium expected return of 35%. For a minimum expected return of 40% we obtain a new portfolio: A 5 c D E Fo { HEAL Qui 7 2 13.1 4 3 6 cao | 040 040 | 040 [ Lydia's optimal portfolio consists of 22.93% BB, 21.03% LOP, 3.39% ILI, 21.97% HEAL, 18.76% QUE, and 11.92% AUA. Her expected return equals 40% with a risk of 0.00233. Lydia's approach is very risky. She puts a lot of confidence in the advice of the two investment experts. Of course, Lydia cannot expect to find an optimal investment strategy with her model if the estimates she uses for the input parameters are wrong. 13-6FG2 8) When Charles sells a portion of his B-Bonds in a given year, the first DM 6100 of interest are tax-free, but the interest earnings exceeding DM 6100 are levied a 30 percent tax. Therefore, Charles encounters decreasing marginal returns, and we can use separable programming to solve this problem. Define the following variables: NoTax5 = The base amount of B-Bonds Charles sells in the fifth year that yield untaxed interest Tax5 = The base amount of B-Bonds Charles sells in the fifth year that yield taxed interest Similarly, NoTex6, Tax6, NoTax7, and Tax? are defined. The sum of these six variables must equal the total of DM 30,000 that Charles invested at the beginning of year 1. When Charles sells B-Bonés with the base amount NoTax5, he earns 0.500 1*NoTaxs in interest. In order for him not to pay any taxes on this amount, the interest must be less than or equal DM 6100. We have to include this constraint. Any additional base amount of B-bonds sold in year 5 yields Charles only 0.7*0,5001=0,35007. A similar reasoning applies to the variables for the other years. The objective is to maximize Charles’ interest income. TEES Interest | 05001 (0.350071 C6361 [0.444671 0.7823 | OSA7E1 0 g6c479 «0 | 7797 52 12597 69) 2 Notas “Tass [Notas | Tae [3 Fe 4 CUntexecs [osoor|—o fo | 0 ST Untexess [0 | 0 tess [oo BL Untexee? | oo Too Tiras 7 3 3 | 13-68by) 9 ‘The optimal investment strategy for Charles is to sell a base amount of DM 96i4.79 at che end of year 6 and the remaining DM 20395.21 at the end of year 7. His total ater- tax interest income equals DM 19098,62. When Charles sells all B-Bonds in the seventh year, then he must pay 30% of taxes on the amount of interest income exceeding DM 6100. This amount is earned interese not only from the last year, but it includes interest from all the previous years. Se Charles does not pay 30% tax on the 9 percent interest he eared in the last year, but he effectively pays tax on the total interest of all the years. This tax payment decreases his, after-tax interest so much that it pays for him to sell some of his bonds in the sixth year in order to rake advantage of the yearly tax-free income of DM 6100. Compare the total amount of interest Charles earas if he sells tax-free after year 6 and taxed after year 7 In the former case his total interest equals 63.51% white in the latter case it is only 54.761%. Therefore, itis better to sell some bonds at the end of the sixth year than to keep them until the end of the fast year. 13-694) The following observation greatly simplifies the analysis of this problem: The interest rate on the CD is much lower than the yearly interest rates on the B-Bonds. Therefore, itcan never be optimal for Charles to sell B-Bonds in year 5 in order to buy a CD for year 6 if he does not take advantage of the maximal tax-free amount of selling B-Bonds in year 6. Put differently, Charles will only buy a CD for year 6 if he already plans to sell B-Bonds in year 6 to obtain at least the maximal tax-free amount of interest. The same argument applies to year 7. This observation implies that Charles will never eam untaxed interest on a CD. Therefore, his yearly interest on the CD will always be 0.7*0.04 = 0,028 = 2.8%, Define cD6 Amount invested in a CD in year 6 cD7 Amount invested in a CD in year 7 The amount of money Charles can invest in a CD in year 6 equals the base amount of B-Bonds sold in year 5 plus the total after-tax interest earned on the base amount. This condition results in the constraint CD6 = 1.5001*NoTax5 + 1.35007*TaxS. The corresponding constraint for CD7 is CD7 = 1.6351*NoTax6 + 1.44457*Tax6 + 1.028*CD6. x Bo ETF wT Z os0oi[ | oo | 0 ‘oto SESE ‘oO [0 ‘0 [0 [e190 o-]-0 6100 = Ravens | Tas FxG| Tene | ODT _|NoTax7| Tax7_| Tota 0 2 ‘9__[o.7ez4 0] “6100 oo | -o. o_o [7.06 [iessaaasp 1 [0 [0 | 0 TsOOT TOGO 0.028 1 0.6a510.14487 0.028 1O.7eTd0.St7E | TaVDT OE 12587.56 0 18297,569604.79 0 24514.607707 Se400 19: orale K SATIS! F SRO ommula col 4: =SUMFFOOLOT (BE14,B10:110)" FeSUWPROOUCT(6818,610:110)" r =i9,B10 10)" 13-40e) Equalto: = @ max Cig © yaueot: [t jy Changing Cel: ———— 7 fasioagio gee |) + Subiect to the Constraints es «flat 5285 <= 4195, ists8 <= $LE6 a | 15387 = $47 The options for the solver are the same as before. Charles should sell the maximal base amount of B-bonds in year 5 that yields tax-free interest and then invest this money (base amount + interest) into a one-year CD for year 6. In year 6 he should sell again the maximal base amount of B-bonds that yields tax- free interest and then invest this money (base amount + interest) and the money from his CD into a one-year CD for year 7. In year 7 he should sell the remainder of the base amount of B-bonds. He again takes advantage of the maximum tax-free amount, but he also sells a base amount of DM 400.13 for which he must pay taxes on the interest earnings The right-hand side of the selling constraint needs to be changed: a Ce ee TET 2] Sener met Tes |_ Os [Nera Tae ReTeT| Ter] Tose Soling—[ 1 7 a a "J -$0000--=] S006] ¢ | Untexacd Posto oo 0 BT Untexoss | 0. |e | 66g8if 0 [0 [0 | 0 | 100 =a}: 00. ‘S Untexear | —o [a a A 0. 700 est 61 ‘invests | F800 [i-s60r —1—~[ 9-9 0 |e os SL om Te esti = ‘af “interest | 0.5007 [o-astOy 0.008 | v.e3510-a451 0.020 107 Raf DseTey| 0080.06] To| Solin] 12007 5 "9 18287 seasos.rg 0” 345t4.0a7707.34 20400. a L i orinaiah CST IS, SUMPODUCTIBS IST ON OT 73 irl neal Je SUMPPODUCT(EA EB GIO} 4 mula in eat JE SSUMPRODUCT(AS:I5 310 0 +8 ula in JE 76 ula coF a7 IFormula in cot se: Te [Forma in cal Js 19,57 G1)" 1 The optimal investment strategy is similar to the previous one, except that Charles must now pay taxes on the interest earned from selling a base amount of DM 20400.13 in year 7. 13-F1£) The right-hand sides of the Untaxed5, Untaxed6, and Untaxed7 constraints need to be changed. ‘Server | oras [Tas cor Notes? | Tat [ Toa Texeds J 0-007| —o ole 122 ‘o t-0, ° 48 Be Un ‘o—[—0. 12200 fs Too Tsaor | T3s00p ote] 0 | Coinvest 6 0 | Tee | reser fiaaey—1 2 ote 0 i sor “0.635 110.44457 0.008 | 07651 O8ATET| ODOR. OG. ier f oO T4098 0 23853.5615¢0504 0 cn mala ca oT ct iB oot I aBIOr z ia ool I: (S516, 810.10) cE (ort ool J: ig ia ool J: (SPIT BIOTIO} a7] in ool JE = 8,610: 1 [Fermin col J [=SUFFEOUCT(89:9.810:110) By getting married in the fifth year, Charles can increase his interest income by (22008,09 - 1997.86) = 2010.23 German marks. He should sell the maximal base amount of B-Bonds caming tax-free interest in year 7 (DM 1595.04). The remainder of DM 14404.96 he should sell at the end of year 6. His entire interest income on this base amount will be tax-free. He then should invest the total amount (base amount + interest) in a CD for the seventh year. 8) Instead of maximizing his interest income Charles now wants to maximize the expected dollar amount he will have at the end of the seventh year. He considers exchanging marks for dollars either at the end of year 5 or at the end of year 7. We define CD-US = The amount of money (in dollars) Charles invests in a two-year CD at the end of year 5 US = The amount of dollars Charles converts at the end of year 7 ‘The total amount of money in dollars Charles has at the end of year 7 equals (1.036)42*CD-US + US; this function is the new objective. At the end of year 5, 1 US$. is assumed to equal DM 1.50, so Charles can exchange marks for dollars at this rate in year 5; this condition must be included as a constraint. Similarly, we include a constraint for the currency conversion at the end of the iast year. I9-F2Rr 3006 [= [SOOT +00 fea] 6100 + 3 ° b oto > OTS ieiar.sesooo.m 0 2120827 0 eyaRRCIMEED of oT ngrse 01720. % sowra 2 . 2 ° rae HTT TORT Forms eal , = Forman n cot te SBI KIS teal Le xegi1xI7 oman eat? PREDICTS 7 BUTT SNP RDDUCTIBO RG BIT RT iFommaain sale | Exes Se Target coh [RETR Equd to: Fx Cig CO vale y Changing Cets: poset 3] cuss Subject to the Constraints: ~ Options 1 [ods <= nde Shange [RLS 7:8L49 = gregh Reset Al Charles converts DM (1.5001*12197.56 + 1.35007*10004.92) to dollars at the end of year 5. With the exchange rate of DM 1.50 for $1, he is able to invest $21203.27 in the American CD. At the end of the seventh year he converts the remaining DM. (1.7823*7797.52) to dollars. The total amount of his investments at the end of year 7 will be $30478.23. 13-73