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# Homework Set 3

## Due November 14, 2014 in class.

The focus of this homework is on integer programming methods, multi-objective optimization,
and decision analysis. You may communicate with your fellow students about the questions in the
homework but you must complete and write up the homework on your own. The questions listed
below are in the approximate order which material will be presented in class. The associated dates
are the approximate class that we will finish the material needed to solve the problem. Problem 1
deals with material from Sections 11.6 and 11.7 in the book, Problems 2 and 3 deal with material
from the online supplement to Chapter 7 (available on LMS), Problem 4 does not have a corresponding section in the book, and Problems 5-7 deal with material covered in Sections 15.1-15.4.
1. (October 10) Apply the branch and bound method to solve the following mixed integer program:
maximize 20x1 + 10x2 + 25x3 + 20x4
subject to
x1 + x2 + x3 + 2x4 12
3x1 + x2 + 2x3 + 2x4 20
x1 + 2x2 + 5x3 + 3x4 30
x1 , x2 , x3 , x4 0
x1 , x2 , x3

integers

Note that x4 does not need to take an integer value (so no need to branch on it). You must
provide your branch and bound tree and your reasoning for fathoming nodes for full credit.
You may, however, use Excel Solver to solve the linear programming relaxations for each
node in the branch and bound tree. You do not need to provide a printout for each node and
solve of the linear programming relaxation but please provide a printout for an example
node.
2. (October 21) Management of the Albert Franko Co. has established goals for the market
share it wants each of the companys two new products to capture in their respective markets. Specifically, management wants Product 1 to capture at least 15 percent of its market
and Product 2 to capture at least 10 percent of its market. Three advertising campaigns are
being planned to try to achieve these market shares. One is targeted directly on the first
product. The second targets the second product. The third is intended to enhance the general reputation of the product and its products. Let x1 , x2 , and x3 be the amount of money
allocated (in million of dollars) to these respective campaigns, the resulting market share
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(expressed as a percentage) for the two products are estimated to be: Market share for Product 1 = 0.5x1 + 0.2x3 and Market share for Product 2 = 0.3x2 + 0.2x3 . A total of \$55 million
is available for the three advertising campaigns, but management wants at least \$10 million
devoted to the third campaign.
(a) Formulate a goal programming model of this problem. Be sure to provide your goals
and any constraints placed on your decisions.
(b) Determine a solution for this problem given that there is a clear priority placed on
Product 1.
(c) Determine a solution for this problem given that there is a clear priority placed on
Product 2.
(d) Suppose that management believes that the goals for each product have roughly the
same priority. More precisely, suppose that if both market share goals cannot be
achieved, management considers each 1 percent decrease in the market share from
the goal to be equally serious for the two products (in other words, Product 1s market
share being 14 percent is the same as Product 2s market share being 9 percent). Formulate a linear programming model for this situation and solve it using Excel Solver.
Provide the intuition behind allocating the marketing in this manner.
3. (October 21) A developing country has 15,000,000 acres of publicly controlled agricultural
land in its use. The government is planning a way to divide this land among three basic
crops (labeled 1, 2, and 3) next year. A certain percentage of each of these crops is exported
to obtain badly needed foreign capital (dollars) and the rest of each of these crops will be
used to feed the population. Raising these crops provides employment for a proportion of
the population. Therefore, the main factors that are considered in allocating the land to these
crops are (1) the amount of foreign capital generated, (2) the number of citizens fed, and
(3) the number of citizens employed in raising these crops. The following table shows how
much each 1,000 acres of the various crops contribute towards these factors and the last
column gives the goal established by the government for each of these factors.
Factor
Crop 1
Foreign Capital
\$3000
Citizens Fed
150
Citizens Employed
10

Crop 2
\$5000
75
15

Crop 3
\$4000
100
12

Goal
\$70,000,000
1,750,000
= 200,000

## (a) Formulate a goal programming model for this problem.

(b) The government has concluded that the following deviations from the goals are equally
undesirable: each \$100 under the foreign-capital goal, each person under the citizenfed goal, and each deviation of one from the citizens employed goal. Formulate a linear
programming model to solve the goal programming under these deviations. Use Excel
Solver to determine how to allocate the land across crops.
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(c) The government has indicated that they are not too confident about the scale of the
weight placed on the citizen-fed goal. In particular, they tend to believe that it is more
important than the other two listed goals. Provide an appropriate analysis that will
determine the level of importance that needs to be placed on the citizen-fed goal before
the government should deviate from the plan from Part (b). Hint: Think about the LP
model of the goal programming and the role the weights of the goals play in it.
4. (October 24) The advertising division of a major company is planning how to allocate their
advertising budget for TV programming during the spring season. There are ten options for
shows to advertise during each with their own cost and reach for two targeted sections of
the population. The table below provides the reach (in thousands) of advertising on show i
for each of the targeted sections and the cost (in millions) to advertise on the show.
1
Section 1 20
Section 2 8
Cost
1.2

2
3
8 15
15 4
.8 1.0

4
20
5
1.2

5
6
15 6
10 15
.8 2.0

7
5
20
1.0

8
15
20
1.6

9 10
30 1
0 10
1.2 .6

## The advertising budget is \$6,000,000.

(a) You have been asked to provide an analysis in order for the advertising division to understand the trade-offs between targeting the two different sections of the population.
They would like you to propose four different efficient solutions (where the objectives
focus on either targeting Section 1 or targeting Section 2) in allocating their advertising budget. Provide this set of solutions along with the weights you placed on each
objective in obtaining each of these four solutions.
(b) For the fall season, the advertising division chose to sacrifice 25% of the best possible reach for Section 1 and 5% of the best possible reach for Section 2. They have
expressed a desire to balance the sacrifices for the sections as best as they can between the fall and spring seasons. Provide a suggested advertising allocation that helps
achieve this balance as well as supporting analysis to back up the selection.
5. (October 28) Farmer John sells fruit and vegetables at a farmers market in the middle of a
city. He is bringing tomatoes to the city for this weekends farmers market. The tomatoes
are very ripe and, therefore, he will need to sell the tomatoes at the farmers market and
then have to discard any that were not sold. However, there is a cost to the farmer to bring
tomatoes into the city for the farmers market. In particular, it costs the farmer \$3.50 per case
of tomatoes to prepare them and bring them to the market. Farmer John can sell each case
for \$9. Farmer John estimates that he will be able to sell 12, 13, 14, or 15 cases of tomatoes
at the farmers market. Based on historical sales, he believes that the probabilities of being
able to sell 12, 13, 14, and 15 cases are 0.1, 0.3, 0.4, and 0.2, respectively.
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(a) Develop a decision analysis formulation of this problem by identifying the decision
alternatives, the states of nature, and the payoff table.
(b) How many cases of tomatoes will Farmer John bring if he uses the maximin payoff
criteria?
(c) How many cases will he bring if he uses the maximum likelihood criteria?
(d) How many cases should be brought according to Bayes decision rule?
(e) Farmer John believes that the probabilities of selling 13 and 14 cases are incorrected.
Reapply Bayes decision rule when the probabilities for 13 and 14 cases are (i) 0.2 and
0.5, (ii) 0.4 and 0.3, and (iii) 0.5 and 0.2.
6. (October 31) The management of M+L Inc. is considering hiring a new Vice President of
Product Development. They believe they have found their candidate in Tucker Sharkey. They
believe that Tucker is twice as likely to be successful in this position as being unsuccessful.
If Tucker was successful, M+L Inc. would realize an expected profit of \$1,500,000 and if
Tucker was unsuccessful, would realize an expected loss of \$1,800,000. A personnel company has developed a test for candidates to VP of Product Development to help determine
if they will be successful or not. They charge \$300,000 to administer this test. Past experience with this test indicates that successful candidates will be predicted to be successful 80
percent of the time, whereas unsuccessful candidates will be predicted to be unsuccessful 70
percent of the time.
(a) Develop a decision analysis formulation of this problem by identifying the decision alternatives, states of nature, and the payoff table when the test by the personnel company
is not conducted.
(b) Assuming that the test is not conducted, use Bayes decision rule to determine which
decision alternative should be chosen.
(c) Determine the expected value of perfect information. Does this answer indicated that
M+L Inc. should consider hiring the personnel company to conduct the test on Tucker?
(d) Determine the optimal policy regarding whether to hire the personnel company to conduct thes test on Tucker and whether or not to hire Tucker. Be sure to clearly identify
the steps (e.g., your resulting decision tree and probabilities in it) used to obtain this
policy.
(e) Determine the expected value of experimentation for this situation.
7. (October 31) A soft drink company is considering launching a seasonal soda that will be
sold for a limited duration. They are considering selling the new soda X-Mist during the
upcoming summer season. The company believes, based on its limited market analysis,
that there is a 0.75 probability that X-Mist will have a successful summer season and have
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estimated that they will receive a profit of \$8 million if it is successful. If X-Mist is not
successful over the summer season, the company will incur a loss of \$1,800,000.
The firm Market-Strategies can do an extensive market analysis for a fee of \$70,000. MarketStrategies has demonstrated that it is 90 percent reliable in its market analysis for soft drinks,
i.e., a soda that will be successful in the market will be reported as Successful by MarketStrategies with a probability 0.9 and a soda that will not be successful in the market will be
reported as Fail by Market-Strategies with a probability of 0.9.
The soft drink company must decide whether to launch X-Mist and whether to hire MarketStrategies to conduct this market analysis prior to making the launch decision on X-Mist.
(a) Construct the decision tree for this problem.
(b) Find the probabilities for the branches emanating from the event nodes.
(c) Analyze the decision tree to identify the optimal policy.
(d) Now suppose that Market-Strategies fee is negotiable. What is the maximum amount
that the soft drink company should pay them?