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Managerial Economics

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regression

Econ 162 2nd Semester 2017-2018 (1st Exam) analysis)

3. Optimization (mathematical programming): Finding the

Economic Decisions and Mathematical Optimization optimal (most efficient) way of using limited resources

Problems

4. Game theory

**Scope of Managerial Economics
**

Theory of the Firm

- Douglas: Managerial Economics is the application of

- Goal: Maximize the long-term value of the firm

economic principles and methodologies to decision-

(sustainability)

making process within the firm or organization.

- Salvatore: Managerial Economics refers to the application 𝑁 𝑁

𝑃𝑟𝑜𝑓𝑖𝑡 𝑡𝑜𝑡𝑎𝑙 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 − 𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡

of economic theory and the tools of analysis of decision 𝑉𝑎𝑙𝑢𝑒 = ∑ = ∑

(1 + 𝑖)𝑡 (1 + 𝑖)𝑡

𝑖=𝑡 𝑖=𝑡

science to examine how an organization can achieve its

objectives most effectively.

- Discount rate increases over time.

- Profit: Business or accounting profit vs. economic profit

Management Decision Problems

o Accounting Cost: What comes out in your

1. Product price and output

balance sheet

2. Production technique (in an economic sense, the

o Economic Cost: Opportunity cost (value resource

proportion of input to output, such as the mix of labor

would’ve earned in an alternative activity)

and capital)

o Example: A secretary being paid Php10,000

3. Make or buy

(accounting cost) should really be paid

4. Inventory level

Php15,000 (economic cost).

5. Advertising medium and intensity

o Normal rate of return: If you are paying all your

6. Labor hiring and training

resources the value they would’ve earned

7. Investment and financing

elsewhere, economic profit = 0. (value of

**Economic Concepts: Framework for Decisions revenue = value of cost)
**

- Theory of Consumer Behavior - Economic profits or losses exist when:

o How consumers choose o Barriers to entry: Monopoly Profit (above normal

o Consumers have preferences and choose based rate of return)

on those preferences. Positive economic profit

o Consumers try to maximize their utility but are Product sells higher than opportunity

constrained by their budget. cost used in producing it

- Theory of the Firm Happens when someone has market

o Technology of a firm (vs. preference of power or monopoly power, restricting

consumer) potential competitors

o Try to maximize profit o Unexpected changes in demand and supply:

- Theory of Market Structure and Pricing Frictional Profit

o Pricing depends on kind of market Example: After a storm, producers take

o Market can go from perfect competition to advantage of the high demand.

monopoly o Successful invention of innovation:

Schumpeterian Profit (reward for innovation)

Decision Science: Tools and Techniques of Analysis

1. Numerical analysis

o Extraordinary success in meeting customer needs 𝜋 = 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 − 𝐶𝑜𝑠𝑡

**and maintaining efficient operations:
**

𝜋 = 31.8𝑞 − 0.05𝑞2 − (1,000 + 9𝑞 + 0.064𝑞2 )

Compensatory Profit (reward for good business

foresight) 𝑑𝜋

= 31.8 − 0.1𝑞 − 9 − 0.128𝑞 = 0

𝑑𝑞

Do firms maximize profit?

- Optimize vs. satisfice 𝑀𝑅 = 𝑀𝐶

**- Separation of management and ownership
**

31.8 − 0.1𝑞 = 9 + 0.128𝑞

o Managers who don’t own the firm are more risk-

**averse because they are answerable to the actual 𝑑2 𝜋
**

= −0.1 − 0.128 = −0.228

owners. 𝑑𝑞2

**o Internal market discipline: Managers still end up
**

𝑞 = 100

thinking like owners because if they don’t

maximize the firm’s profits, their income will also

1st Condition: When you make marginal profit = 0 and

be affected.

solve for q, what you come up with is the quantity where

o Optimal contract (compensation scheme): Fixed

the additional revenue from producing any more would

wage + profit-contingent compensation

add an equal amount to your cost.

o Labor market discipline: Poor performance

2nd Condition: At q = 100, MR = MC.

creates bad reputation for managers

3rd Condition: Profit you make by producing more (e.g.

o Product market discipline: Firms are likely to go

200) can only be lower than profit made at optimal q (100)

under if profit is not maximized

or else you were never at the maximum profit in the first

o Capital market discipline: Vulnerability to

place.

corporate raid or takeover (when value of firm is

lower than its potential)

Profit Maximization Example 2

**Profit Maximization Example 1
**

Suppose a firm’s inverse demand function is given by 𝑝 = 120 −

0.5𝑞 and its cost function is 𝐶 = 420 + 60𝑄 + 𝑄 2 .

Profit = Revenue – Cost

a. Find the firm’s optimal quantity, price, and profit.

𝑝 = 31.8 − 0.05𝑞

𝐶 = 1,000 + 9𝑞 + 0.064𝑞2 𝜋 = (120 − 0.5𝑄)𝑄 − (420 + 60𝑄 + 𝑄 2 )

𝑑𝜋

Note = 120 − 𝑄 − 60 − 2𝑄 = 0

𝑑𝑄

Demand equation in given is an inverse demand function

because, here, p is determined by q. In reality, it’s price 𝜕2𝜋

= −1 − 2 = −3 < 0

𝜕𝑄 2

that determines demand. Not the other way around. (q

should be dependent variable_

𝑄 = 20, 𝑃 = 110, 𝜋 = 180

2 types of cost: fixed (1,000) and variable

At maximum profit, 3 conditions are fulfilled: b. Suppose instead that the firm can sell any and all of its

𝜕𝜋

a.) Marginal profit = 0 ( = 0) output at the fixed market price of 120. Find the firm’s

𝜕𝑞

**b.) Marginal revenue = Marginal cost optimal output.
**

𝜕2 𝜋

c.) Marginal profit is declining ( < 0)

𝑑𝑞 2

𝜋 = 120𝑄 − (420 + 60𝑄 + 𝑄 2 )

**Profit Maximization Example 3
**

𝑑𝜋

= 120 − 60 − 2𝑄 = 0

𝑑𝑄 Leda Co. is developing a new product. An early introduction

**(beating rivals to the market) would greatly enhance the company’s
**

𝑄 = 30, 𝑃 = 120, 𝜋 = 480

revenues. However, the ____ development effort needed to

expedite the introduction can be very expensive. Suppose the total

Note

revenues and costs associated with the new product’s introduction

Profit in B is higher because every additional unit sold

are given by 𝑅 = 720 − 8𝑡 and 𝐶 = 600 − 20𝑡 + 0.25𝑡 2 , where t is

earns him an additional 120. (MR=120)

the introduction date (months from now). Some executives agreed

In A, the firm is prevented from selling more than 20

for an expedited introduction date 12 months from now (t=12). Do

because at any Q > 20, MC will be greater than MR and

you agree?

marginal profit will be negative.

** Example: If A made Q = 30, MC > MR. Negative profit
**

𝜋 = 720 − 8𝑡 − (600 − 20𝑡 + 0.25𝑡 2 )

𝑑𝑅

𝑀𝑅 = = 120 − 𝑄 = 120 − 30 = 90 You want to find time, t where profit, 𝜋 is stationary.

𝑑𝑄

𝑑𝐶 𝜋

𝑀𝐶 = = 60 + 2𝑄 = 60 + 60 = 120

𝑑𝑄

Example: If A made Q = 20, MR = MC. Optimal

𝑑𝑅

𝑀𝑅 = = 120 − 𝑄 = 120 − 20 = 100

𝑑𝑄 t

𝑑𝐶 𝑑𝜋

𝑀𝐶 = = 60 + 2𝑄 = 60 + 40 = 100 = −8 + 20 − 0.5𝑡 = 0

𝑑𝑄 𝑑𝑡

** Firm sells more in B because the price is fixed. Selling 𝑡 = 24
**

disagree

more in A would lower the price per unit.

**Profit Maximization Example 4
**

Firm A Firm B Multivariate Optimization

Suppose a firm’s profit function is given by 𝜋 = 20 + 2𝑃 − 2𝑃 2 +

**4𝐴 − 𝐴2 + 2𝑃𝐴 where P is price and A is advertising. Find the values
**

of P and A that will maximize profit.

**1st Step: Get partial derivatives.
**

Imperfectly competitive market: Downward sloping

demand curve for individual firm

𝜕𝜋

(𝑎) = 2 − 4𝑃 + 2𝐴 = 0

Perfectly competitive market: Horizontal demand curve 𝜕𝑃

for individual firm

𝜕𝜋

a.) No matter how much output an individual firm (𝑏) = 4 − 2𝐴 + 2𝑃 = 0

𝜕𝐴

provides, it will be unable to affect the market

price. 2nd Step: Solve both equations together.

000𝜆 ℒ = −10.000 6 − 2𝑃 = 0 𝑃=3 You equate your expenses to your budget because you want to 𝐴 = 2𝑃 − 1 maximize the service by using up all resources available. The firm faces a constraint in production in that 4 hours of skilled labor are required to produce a unit.5𝑀𝑆 − 𝑆 2 4 − 4𝑃 + 2 + 2𝑃 = 0 such that 30.5𝑀 − 2𝑆 − 30.000𝑆 + 60.200.5𝑆) = 0 and 60. 𝜕ℒ 𝑐) = 1.5 + 0.5𝑆 + 0.000𝑆 − 270.000 per medical member.000𝜆 = 0 𝜕ℒ = 300 − 4𝑄 = 0 1 + 0.200. (𝑎) 2 − 4𝑃 + 2𝐴 = 0 In this example. a.5𝑀 − 2𝑆 − 30.000 − 30.000𝜆 = 0 𝜕𝑀 Suppose the firm’s profit is estimated to be 𝜋 = −10.000𝑀) Profit Maximization Example 5 Constrained Optimization 𝜕ℒ 𝑎) = 1 + 0.000𝑆 = 0 the service-maximizing employment combination.5𝑆 It’s determined that service (Q) can be described as follows: 𝑄 = 𝑀 + 0.5𝑆 𝜕𝜆 0.000𝑀 = 0 𝜕𝜆 𝑀𝑎𝑥 𝜋 = −10.000 + 400𝑄 − 2𝑄 2 such that 4𝑄 ≤ 300 Solve all 3 equations together.5𝑀𝑆 − 𝑆 2 + 𝜆(1.000𝑆 − 60.5𝑆 + 0. Construct the Lagrangian function that would determine 1.5𝑆 + 0.000 𝑄 = 75. 𝜆 = 25 1 + 0. 𝑐) 1.000 − 30.5𝑆 − 60. to maximize profit.000(4.000𝜆 = 0 so you make constraint 400 = 300. Logically.5 + 0.000𝑀 = 1.000𝜆 = 0 𝜕𝑆 labor are available.200.000 𝜕ℒ = 400 − 4𝑄 − 4𝜆 = 0 𝜕𝑄 𝑏) 0.200.5 + 0.2 million/month.000𝑀 = 0 Monthly employment costs are 30. AHC has a budget of 1.000𝑆 − 60. 1 + 0. 𝑆=4 . you are maximizing Q.000 + 400𝑄 − 2𝑄 2 .000 − 30. 𝐴 = 2(3) − 1 = 5 ℒ = 𝑀 + 0.200.5𝑀 − 2𝑆 − ( )=0 2 Maximization Example 6 Constrained Optimization 1 + 𝑀 − 4𝑆 − 1 − 0.5𝑆 𝜆= 60. (𝑏) 4 − 2(2𝑃 − 1) + 2𝑃 = 0 𝑀𝑎𝑥 𝑄 = 𝑀 + 0.000 per social service member 1.000 ( )=0 60.5𝑆 = 0 AHC is considering hiring medical (M) and social service (S) staff.000 + 400𝑄 − 2𝑄 2 + 𝜆(300 − 4𝑄) 1 + 0. 𝑀 = 4.5𝑆 − 60.5 + 0.5𝑆 0.000𝑆 − 60.000 − 30. which has 2 types: medical 2𝐴 = 4𝑃 − 2 𝐴 = 2𝑃 − 1 and social service.5𝑀𝑆 − 𝑆 2 .5𝑀 − 2𝑆 − 30.5𝑆 = 60.200.000𝑆 − 60. and only 300 hours of 𝜕ℒ 𝑏) = 0. Calculate the profit-maximizing profit and value of 𝜆. you would use all 300 hours available 𝑎) 1 + 0.00 − 30.

𝑥𝑛 ) ≤ 𝑏1 . 𝑥2 ≥ 0.000 ⋮ 𝑔𝑚 (𝑥) = 𝑔𝑠 (𝑥1 .5𝑆 1 + 0.…. Contour: (of the objective function) is the set of points for 𝑀𝑎𝑥 𝑓(𝑥) subject to 𝑥 𝜖 𝑋 which the value of the objective function is constant . Classical Programming Consumer Problem 𝑀𝑖𝑛 𝐶 = 3𝑥 2 + 6𝑦 2 − 𝑥𝑦 subject to 𝑥 + 𝑦 = 20 𝑀𝑎𝑥 𝑈 = 𝑥𝑦 subject to 𝑀 = 𝑃𝑥 𝑋 + 𝑃𝑦 𝑌 Nonlinear Programming . 𝑦) = 𝑥 2 + 2𝑦 2 − 𝑥𝑦 .…. Mathematical Optimization Problems: Choosing a point or 𝑔2 (𝑥) = 𝑔2 (𝑥1 . 𝑀 = 18. Mathematical Optimization Problems 𝑀𝑎𝑥 𝑓(𝑥. . which 𝑥1 ≥ 0. 𝑥2 ≥ 0.𝑔𝑚 (𝑥) are called constraint functions. Example: 𝑦 = 𝑓(𝑥) o y objective function subject to o x instrument o you want to maximize or minimize y 𝑎11 𝑥1 + 𝑎12 𝑥2 + ⋯ + 𝑎1𝑛 𝑥𝑛 ≤ 𝑏1 . 𝑥𝑛 ) ≤ 𝑏2 𝜆= = = 0. The function to be optimized is the objective function 𝑓 (𝑥) = 𝑐1 𝑥1 + 𝑐2 𝑥2 + ⋯ + 𝑐𝑛 𝑥𝑛 . 𝑥𝑛 ) = 𝑏𝑚 contour (if you’re maximizing) or lowest possible contour (if you’re minimizing) where 𝑔1 (𝑥). 𝑔2 (𝑥). 𝑥𝑛 ) = 𝑏1 .000 60. Variables (that the function is dependent on) are called inequality constraints and non-negativity constraints instruments . 1 + 0. Could be for maximizing or minimizing a function Linear Programming . 𝑥𝑛 ) ≤ 𝑏𝑚 𝑥1 ≥ 0. Objective function is linear and the constraints are linear . The set of all feasible x is the opportunity set of x. Possible Solutions to Programming Problems .00005 . Involves choosing values of certain variables to optimize a subject to 𝑥 + 𝑦 ≤ 8 function subject to constraints .00005 60. … . Non-negativity constraints and inequality constraints 𝑔1 (𝑥) = 𝑔𝑠 (𝑥1 .5𝑆 = 4.𝑏𝑚 are called constants. 𝑏2 .5(4) 𝑔2 (𝑥) = 𝑔2 (𝑥1 . … . … . Contour Map: Set of contours Mathematical Programming Problems . 𝑥𝑛 ≥ 0 consists of the values of x allowed by the given Geometrical Solution to Mathematical Optimization Problems limits/constraints. and 𝑏1 .5(4) = 18 𝑆 = 4. … . … . Equality constraints decreasing (if minimizing) 𝑔1 (𝑥) = 𝑔𝑠 (𝑥1 . Example: Minimize cost subject to output constraint. 𝑎𝑚1 𝑥1 + 𝑎𝑚2 𝑥2 + ⋯ + 𝑎𝑚𝑛 𝑥𝑛 ≤ 𝑏𝑚 . 𝜆 = 0. … . Example: Maximize sales subject to a profit constraint. … . … . Preference Direction: Direction in which the value of the Classical Programming objective function is increasing (if maximizing) or . 𝑥𝑛 ) = 𝑏2 set of points in the opportunity set at the highest possible ⋮ 𝑔𝑚 (𝑥) = 𝑔𝑠 (𝑥1 . 𝑥𝑛 ≥ 0 𝑀 = 4. The instrument x is feasible if it satisfies all the constraints 𝑎21 𝑥1 + 𝑎22 𝑥2 + ⋯ + 𝑎2𝑛 𝑥𝑛 ≤ 𝑏2 ⋮ of the problem.

within the triangle or on the diagonal. 𝑥2 ≥ 0 All points on the line segment (thick.1) x2 where q is output. K is capital. Income can only buy combinations of x and y that are constant. 𝑥2 ) = −8𝑥 2 − 10𝑥22 + 12𝑥1 𝑥2 − 50𝑥1 + 80𝑥2 subject to 𝑥1 + 𝑥2 ≤ 1 x1 8𝑥12 + 𝑥22 ≤ 2 Bounding Face Solution 𝑥1 . get the point on the diagonal that is tangent to a utility curve. } 𝑎 𝑏 Boundary Solution at (0. Objective function here is non-linear because you take xy x1 as one term. Preference Direction: Northeast Non-linear Programming 𝑀𝑎𝑥 𝐹(𝑥1 . Horizontal Intercept: 𝑃𝑥 Note: Along a contour. 𝑥2 ≥ 0 𝑀 x2 𝑃𝑥 Tangency Solution . . Because you are maximizing. Vertex Solution at (4/3. the value of the objective function is . Constraint is linear because 𝑃𝑥 and 𝑃𝑦 are parameters (constants). L is labor. a is the amount of labor needed to produce 1 unit of output. . Interior Solution . Vertical Intercept: 𝑀 (unique solution) 𝑃𝑦 𝑀 . Note: Look at what you have less of then match it with the x1 appropriate amount of the other input. and b is the amount of capital needed to produce 1 unit of output. y 𝑀 Linear Programming 𝑃𝑦 𝑀𝑎𝑥 𝐹 = 3𝑥1 + 2𝑥2 subject to 2𝑥1 + 𝑥2 ≤ 6 𝑥1 + 2𝑥2 ≤ 8 x 𝑥1 .10/3) . red line) are solutions so you x2 have an infinite number of points/solutions. x2 . Linear Programming Leontief Production Function 𝐿 𝐾 x1 𝑞 = 𝑚𝑖𝑛 { .

0.25𝑞3 ≤ 𝐿0 2𝑞1 + 𝑞2 + 1. 𝐾} L . y. x. At q = 50.25𝑞3 ≤ 𝐾0 𝑞1 . 0. o y: more K used o z: minimum labor and capital used Suppose a firm can choose among the following linear processes: 𝑞1 = 𝑚𝑖𝑛{𝐿.25𝑞3 𝐾 = 2𝑞1 + 𝑞2 + 1. = so 𝐾 = ( ) 𝐿 𝑎 𝑏 𝑎 The total input requirements are: Example 2 𝐿 = 𝑞1 + 2𝑞2 + 1. z produce the same output but using different inputs Note: The more production techniques you have. 𝑞2 .Example 1 Only 1 production technique L = 100 K = 200 a=2 b=1 100 200 𝑞 = 𝑚𝑖𝑛 { . Example 3 3 production techniques K 𝐾 = 2𝐿 𝑞1 = min{𝐿.5𝐾} . the smoother the o x: more L used isoquant (curve). } 𝑀𝑎𝑥 𝑅 = 𝑝𝑞1 + 𝑝𝑞2 + 𝑝𝑞3 𝑎 𝑏 𝐿 𝐾 subject to 𝑞2 = 𝑚𝑖𝑛 { .5𝐿.25𝑞3 2 production techniques 𝐿 𝐾 Problem: 𝑞1 = 𝑚𝑖𝑛 { . At point z. 𝑥1 and 𝑥2 . } 𝑐 𝑑 𝑞1 + 2𝑞2 + 1. } 2 1 Note: Midpoint of the line segment (thick black line) is where 50% 𝑞 = 50 of production technique 1 is used and 50% of production technique 2 is used. 0.8𝐾} 𝐿 𝐾 𝑏 .5L 𝑞3 = min{0. Isoquant: L-shaped figure .8𝐿. These 2 products are processed through 2 machines.8𝐾} 𝐾 = 0. you use up all of your available labor and end up with excess capital. 𝑞3 ≥ 0 Linear Programming Problems Example 1 A company produces 2 commodities.5𝐿. Only produce at point Z because producing at any other 𝑞2 = min{0. 𝑞3 = 𝑚𝑖𝑛{0.5𝐾} 𝐾 =L 𝑞3 = min{0.8𝐿. 𝐾} point is inefficient. Maximum hours available are . 0.

0) 0 𝑥1 𝑥2 Hours Machine 1 6 4 120 The solution is point B. y Vertex solution is found along the bounding face solution. where 𝑥1 = 10 and 𝑥2 = 15. 𝑥2 ) VOF Point (𝑥1 . but only 0. 𝑦 = 40 Point (𝑥1 . y. C (20. The 𝑥2 firm employs 5 workers who assemble the computers and 2 workers who run diagnostic tests on the computers before they are 6𝑥1 + 4𝑥2 ≤ 120 sold. 𝑥2 ≥ 0 profit.15) 1. whereas the upscale model yields 250 per unit in profit. 𝑥2 ) VOF . 𝑥 + 3𝑦 = 200 0. Solve for point b: Note: Use equal signs instead of inequality signs because the point is on the boundary of the constraint. 𝑥2 = 15 𝑥 = 80.18) 990 𝑥1 and Php55 for 𝑥2 . 𝑥 + 3𝑦 ≤ 200 Contour must intersect with the vertex. At what quantities of x and y should the company produce to maximize profit? Notes The shaded area is the feasible region. respectively. x and an upscale model with several added such that 6𝑥1 + 4𝑥2 ≤ 120 3𝑥1 + 10𝑥2 ≤ 180 components.18) such that 𝑥 + 3𝑦 ≤ 200 Point B Intersection of first 2 constraints 0.0) 900 D (0.5𝑥 + 𝑦 ≤ 80 𝑥. Whether the solution is a vertex solution or a bounding 0. the solution is always a vertex. The basic model yields the firm 100 per unit in 𝑥1 .5𝑥 + 𝑦 = 80 𝑥1 = 10. x d c 𝑀𝑎𝑥 𝜋 = 100𝑥 + 250𝑦 Point A (0.120 and 180 for machines 1 and 2.5 hour to run diagnostic tests on the basic D C model. It takes 1 hour to A assemble the basic model and 3 hours to assemble the upscale B 3𝑥1 + 10𝑥2 ≤ 180 model. point D cannot be a solution because not a b producing anything will not give you any revenues.275 be manufactured in order to maximize profit. Machine 2 3 10 180 Profit / unit 45 55 Example 2 A small company manufactures different kinds of computers: a 𝑀𝑎𝑥 𝜋 = 45𝑥1 + 55𝑥2 basic model. Profit is Php45 for A (0. 𝑦 ≥ 0 Point C (20.0) Notes Point B Automatically eliminate point d because not producing 6𝑥1 + 4𝑥2 = 120 3𝑥1 + 10𝑥2 = 180 anything will not maximize your profits.5𝑥 + 𝑦 ≤ 80 face solution. Intuitively. Each employee works 40 hours per week. Determine the optimal 𝑥1 and 𝑥2 that should B (10. It takes 1 hour to run diagnostic tests on the upscale 𝑥1 models.

Point (𝑥1 .000 b c D (0.5) 50 Answer: Yes.667 a B (80. where 𝑥 = 80 and 𝑦 = 40. because by doing so.10/3) 36 produce more computers. 𝑛) You can convert inequality constraints into equality constraints by adding slack/surplus variables. 𝑥2 ≥ 0 𝑀𝑎𝑥 𝑐𝑜 = 𝑐1 𝑥1 + 𝑐2 𝑥2 + ⋯ + 𝑐𝑛 𝑥𝑛 Determine the optimal quantities of each commodity to be produced and its associated cost. 𝑎11 𝑥1 + 𝑎12 𝑥2 + ⋯ + 𝑎1𝑛 𝑥𝑛 ≥ 𝑏1 4.000 C (160. Get the vertical and horizontal intercepts of each 𝑀𝑖𝑛 𝑐𝑜 = 𝑐1 𝑥1 + 𝑐2 𝑥2 + ⋯ + 𝑐𝑛 𝑥𝑛 constraint.40) 18. 𝑎𝑚1 𝑥1 + 𝑎𝑚2 𝑥2 + ⋯ + 𝑎𝑚𝑛 𝑥𝑛 ≥ 𝑏𝑚 𝑥𝑖 ≥ 0 (𝑖 = 1. Calculate the VOF for each vertex.181/3) 16. (Constraints will change) Example 3 General Form of LPP A company produces 2 commodities. and wishes to n variables (instruments). … . subject to 𝑀𝑖𝑛 𝐶 = 2𝑥1 + 10𝑥2 𝑎11 𝑥1 + 𝑎12 𝑥2 + ⋯ + 𝑎1𝑛 𝑥𝑛 ≤ 𝑏1 subject to 𝑎21 𝑥1 + 𝑎22 𝑥2 + ⋯ + 𝑎2𝑛 𝑥𝑛 ≤ 𝑏2 2𝑥1 + 𝑥2 ≤ 6 ⋮ 5𝑥1 + 4𝑥2 ≥ 20 𝑎𝑚1 𝑥1 + 𝑎𝑚2 𝑥2 + ⋯ + 𝑎𝑚𝑛 𝑥𝑛 ≤ 𝑏𝑚 𝑥1 . 𝑥2 ) VOF Would adding more assembly workers and more testers add to A (0. 𝑥1 and 𝑥2 . 𝑎11 𝑥1 + 𝑎12 𝑥2 + ⋯ + 𝑎1𝑛 𝑥𝑛 ≤ 𝑏1 is replaced by 𝑎11 𝑥1 + 𝑎12 𝑥2 + ⋯ + 𝑎1𝑛 𝑥𝑛 + 𝑠1 = 𝑏1 .6) 60 more profits? B (0. 𝑛) Steps Minimization Program 1. you will have more time to C (4/3. Connect the intercepts to get the curve of the constraint. In a maximization program. Determine the area to be considered by looking at the inequality signs of the constraints.0) 0 𝑥1 The solution is point B. m constraints minimize cost. subject to 3.0) 16. … . 𝑥2 A (0. 𝑎21 𝑥1 + 𝑎22 𝑥2 + ⋯ + 𝑎2𝑛 𝑥𝑛 ≥ 𝑏2 ⋮ 5. 𝐶 = 2𝑥1 + 10𝑥2 subject to the constraints: Maximization Program 2𝑥1 + 𝑥2 ≤ 6 5𝑥1 + 4𝑥2 ≥ 20 𝑥1 . Determine the vertices. 2. 𝑥2 ≥ 0 𝑥𝑖 ≥ 0 (𝑖 = 1.

No intersection so no solution.25𝑟 = 1 → 𝑟 = 0. 3. determined that if the company produces a low-priced standard model. 𝑤 + 2𝑟 = 1 → 𝑟 = 0. 𝑥1 The more expensive deluxe model will require 1 hour for cutting and dyeing.5 − 0. 𝑥2 James. region goes into infinity (unbounded). 2/3 hour for finishing. 2𝑤 + 𝑟 ≥ 1 1. where 𝑠1 is the slack variable. Inc.5𝑤 the feasible region.25𝑤 + 1. 2. and 2𝑥1 + 𝑥2 ≤ 6 5𝑥1 + 4𝑥2 ≥ 40 packaging. a small manufacturer of if it involves maximization. the manager. and the intersection of the 2 lines is the solution.2𝐶 − 𝑤 Possible Outcomes 𝑟 1. ½ hour in the sewing department. 1 hour for finishing. then the optimal solution is an extreme point in a. Each bag requires the following operations: cutting and dyeing the material.. (c) and (d) will coincide. and 1/10 hour for inspection and packaging. but not Consider the problem of James Bond. b. Bounding Face Solution: Degenerate problem In a minimization program. and ¼ hour No solution if problem involves maximization because feasible for inspection and packaging. from objective function: 𝐶 = 5𝑤 + 5𝑟 → 𝑟 = 0. . sewing.8 − 𝑤 d. If the linear programming problem has an optimal solution. tennis bags. 1. 5/6 hour for sewing. 𝑟 ≥ 0 Theorem (Dantzig). each bag will require 7/10 hour in the cutting and dyeing department. 2𝑤 + 𝑟 = 1 → 𝑟 = 1 − 2𝑤 c. LP Linear Programming Example 3 problem has a solution if it involves minimization. finishing and inspection.25𝑤 + 1. No feasible solution 2𝑥1 + 𝑥2 ≤ 6 5𝑥1 + 4𝑥2 ≥ 40 𝑥2 𝑤 Solution is the line segment (thick black line) Notes 𝑥1 (c) and (d) have the same slop so they are parallel.25𝑟 ≥ 1 𝑤. 𝑎11 𝑥1 + 𝑎12 𝑥2 + ⋯ + 𝑎1𝑛 𝑥𝑛 ≥ 𝑏1 𝑀𝑖𝑛 𝐶 = 5𝑤 + 5𝑟 subject to is replaced by 𝑎11 𝑥1 + 𝑎12 𝑥2 + ⋯ + 𝑎1𝑛 𝑥𝑛 − 𝑡1 = 𝑏1 𝑤 + 2𝑟 ≥ 1 where 𝑡1 is the surplus variable. If the feasible region is not bounded from above. If C = 4.

The coefficient matrix of the dual constraints is the transpose of the coefficient matrix of the primal 𝑦1 . 708 hours for finishing 𝑎𝑚1 𝑥1 + 𝑎𝑚2 𝑥2 + ⋯ + 𝑎𝑚𝑛 𝑥𝑛 ≥ 𝑏𝑚 𝑥1 . such that Coefficients of the objective function in the dual problem are the constraint constants of the primal problem. The row vector of coefficients in the primal objective 𝑦1 = 540. you are still maximizing profits because you’ve used up all the time you have for some parts of the process.* 𝑦 + 𝑦 ≤ 135 10 1 4 2 3. 𝑀𝑎𝑥 𝜋 = 10𝑦1 + 9𝑦2 Coefficients of the objective function in the primal problem are the constraint constants of the dual problem. After studying the workload 𝑎11 𝑥1 + 𝑎12 𝑥2 + ⋯ + 𝑎1𝑛 𝑥𝑛 ≥ 𝑏1 𝑎21 𝑥1 + 𝑎22 𝑥2 + ⋯ + 𝑎2𝑛 𝑥𝑛 ≥ 𝑏2 projections in each department.e. Notes When you plug the values you got into the constraint * Inequality signs must adhere to the general forms: functions. 7 𝑦 + 𝑦2 ≤ 630 10 1 The original problem. 𝑥𝑛 ≥ 0 and 135 hours for inspection and packaging will be available for the production of tennis bags during the next 3 months. Example 1 Primal Problem: Duality in Linear Programming 𝑀𝑎𝑥 45𝑥1 + 55𝑥2 Given a pair of LPPs. 𝑦𝑚 ≥ 0 𝑦1 = standard. (2) 𝑀𝑎𝑥 𝑏1 𝑦1 + 𝑏2 𝑦2 + ⋯ + 𝑏𝑚 𝑦𝑚 subject to 𝑎11 𝑦1 + 𝑎12 𝑦2 + ⋯ + 𝑎𝑚1 𝑦𝑚 ≥ 𝑐1 The accountant of the company calculates that the profit 𝑎12 𝑦1 + 𝑎22 𝑦2 + ⋯ + 𝑎𝑚2 𝑦𝑚 ≥ 𝑐2 ⋮ contributions of each standard and deluxe bag are Php10 and 𝑎1𝑚 𝑦1 + 𝑎2𝑚 𝑦2 + ⋯ + 𝑎𝑛𝑚 𝑦𝑚 ≥ 𝑐𝑛 Php9. 𝑦2 ≥ 0 constraints. slack hours. you find that you don’t use up all your available Maximize ≤ hours. … . called the primal problem. You end up with unused hours of sewing and Minimize ≥ inspection and packaging. the inequality 𝑦1 + 𝑦2 ≤ 708 3 signs in the primal constraints are reversed in the dual 1 1 constraints. Answers: 4. 600 hours for sewing. 𝑦2 = 252. Change “maximize” to “minimize” (or vice versa) 2 2.668 function is the column vector of constants in the dual constraints. 𝑦. i. 𝑦2 = deluxe … where (1) is the primal problem and (2) is the dual problem. James reckons that 630 hours for ⋮ cutting and dyeing. . respectively. 𝑦. Even if you don’t use up all available hours.James’ production is constrained by a limited number of hours (1) 𝑀𝑖𝑛 𝑐1 𝑥1 + 𝑐2 𝑥2 + ⋯ + 𝑐𝑛 𝑥𝑛 subject to available in each department. is transformed 1 5 𝑦1 + 𝑦2 ≤ 600 into a dual problem through the following procedures: 2 6 1. … . 𝜋 = 7. Except for the non-negativity restrictions. 𝑥2 .

the minimand can never fall below the 6 4 maximand. 𝑥2 ≥ 0 𝑀𝑖𝑛 2𝑥1 + 10𝑥2 Answer: subject to (10. 25/8) where VOF = 1. If x* is primal feasible and y* is dual feasible. 𝑥2 ≥ 0 (95/16. 6𝑦1 + 3𝑦2 ≥ 45 4𝑦1 + 10𝑦2 ≥ 55 𝑦1 .275 (cost) Dual Problem: Theorem.e. If the primal is unbounded (feasible region goes to 𝑀𝑎𝑥 − 6𝑦1 + 20𝑦2 infinity).15) where VOF = 1. then 𝑉𝑂𝐹(𝑥) ≥ 𝑉𝑂𝐹(𝑦).275 (profit) 2𝑥1 + 𝑥2 ≤ 6 5𝑥1 + 4𝑥2 ≥ 20 Dual Problem: 𝑥1 . 𝑦2 ≥ 0 From Example 1 Primal Problem: 6 3 [ ] 𝑀𝑎𝑥 45𝑥1 + 55𝑥2 4 10 subject to Example 2 6𝑥1 + 4𝑥2 ≤ 120 3𝑥1 + 10𝑥2 ≤ 180 Primal Problem: 𝑥1 . subject to −2𝑦1 + 5𝑦2 ≤ 2 −𝑦1 + 4𝑦2 ≤ 10 𝑦1 . 𝑥2 ≥ 0 𝑀𝑖𝑛 120𝑦1 + 180𝑦2 Primal problem needs to be written in general form. subject to . If x is primal feasible and y is dual feasible. and 𝑉𝑂𝐹(𝑥 ∗ ) = 𝑉𝑂𝐹(𝑦 ∗ ). subject to 𝑀𝑖𝑛 2𝑥1 + 10𝑥2 6𝑦1 + 3𝑦2 ≥ 45 subject to 4𝑦1 + 10𝑦2 ≥ 55 𝑦1 . subject to Theorem. then the solution to the Dual Problem: objective function of the primal problem will always be greater than the solution to the objective function of the 𝑀𝑖𝑛 120𝑦1 + 180𝑦2 dual problem. then x* and y* are optimal solutions. 𝑦2 ≥ 0 −2𝑥1 − 𝑥2 ≥ −6 5𝑥1 + 4𝑥2 ≥ 20 Answer: 𝑥1 . 𝑥2 ≥ 0 Theorem. i.. then the dual is infeasible. [ ] 3 10 If the problem has a solution. 𝑦2 ≥ 0 6𝑥1 + 4𝑥2 ≤ 120 3𝑥1 + 10𝑥2 ≤ 180 𝑥1 .

Only 𝑎12 𝑦1 + 𝑎22 𝑦2 + ⋯ + 𝑎𝑛2 𝑦𝑚 ≤ 𝑐2 two resources are consumed in manufacturing: wood (300 board ⋮ 𝑎1𝑚 𝑦1 + 𝑎2𝑚 𝑦2 + ⋯ + 𝑎𝑛𝑚 𝑦𝑚 ≤ 𝑐𝑛 feet in inventory) and labor (110 hours available). then 𝑡𝑖∗ = 0 and if 𝑥𝑗∗ > 0. 10 Determining the dual solution from the primal solutions: hours for a chair. respectively. Dual Problem: 𝑀𝑖𝑛 120𝑦1 + 180𝑦2 𝑀𝑖𝑛 𝐶 = 300𝑦1 + 110𝑦2 subject to subject to 30𝑦1 + 5𝑦2 ≥ 6 20𝑦1 + 10𝑦2 ≥ 8 25𝑦1 + 7𝑦2 ≥ 7 6𝑦1 + 3𝑦2 ≥ 45 𝑦1 . … .275 (cost) . then xi* = 0 in primal 𝑀𝑖𝑛 𝑐1 𝑥1 + 𝑐2 𝑥2 + ⋯ + 𝑐𝑛 𝑥𝑛 dual problem. JRB uses 30 board 𝑦1 .15) where VOF = 1. and benches (𝑥3 ) and 𝑎11 𝑦1 + 𝑎21 𝑦2 + ⋯ + 𝑎𝑛1 𝑦𝑚 ≤ 𝑐1 derives a per-unit profit of Php6. 𝑦𝑚 ≥ 0 feet to produce a table. respectively. and 7 hours for a bench. 𝑦2 ≥ 0 𝑦1 = 7/55 𝑦2 = 6/11 Answer: 𝐶 = 98. If constraint in primal problem If there is a slack in the dual has a surplus. then 𝑠𝑗∗ = 0 (ii) if 𝑡𝑖∗ > 0. 𝑦2 . 𝑥2 ≥ 0 𝑥1 . 20 board feet for a chair and 25 board feet for a bench. then 𝑦𝑖∗ = 0 and if 𝑠𝑗∗ > 0. 𝑥3 ≥ 0 Answer: Note: Because you have 3 unknowns but only 2 constraints. If x* and y* are primal and dual optimal. problem.275 (profit) solve the problem by getting the dual problem. If xi* > 0 in the primal problem. 𝑎11 𝑥1 + 𝑎12 𝑥2 + ⋯ + 𝑎1𝑛 𝑥𝑛 ≥ 𝑏1 then there is no surplus in the then there is no slack in the 𝑎21 𝑥1 + 𝑎22 𝑥2 + ⋯ + 𝑎2𝑛 𝑥𝑛 ≥ 𝑏2 ⋮ partner constraint in the primal partner constraint in the dual 𝑎𝑚1 𝑥1 + 𝑎𝑚2 𝑥2 + ⋯ + 𝑎𝑚𝑛 𝑥𝑛 ≥ 𝑏𝑚 problem. chairs (𝑥2 ). then yi* = 0 in problem. subject to If yi* > 0 in the dual problem. 𝑀𝑎𝑥 45𝑥1 + 55𝑥2 Primal Problem: subject to 𝑀𝑎𝑥 𝜋 = 6𝑥1 + 8𝑥2 + 7𝑥3 such that 6𝑥1 + 4𝑥2 ≤ 120 30𝑥1 + 20𝑥2 + 25𝑥3 ≤ 300 3𝑥1 + 10𝑥2 ≤ 180 5𝑥1 + 10𝑥2 + 7𝑥3 ≤ 110 𝑥1 . then Min VOF(x) Max VOF(y) Dual problem: Max Dual problem: Min (i) if 𝑦𝑖∗ > 0. problem.18 (95/16. He also uses 5 hours of labor to produce a table. … . problem problem respectively. vs. then 𝑥𝑗∗ = 0 Subtract a surplus (ti) in primal Add a slack (si) in primal where t* and s* are vectors of surplus and slack variables. 𝑦2 ≥ 0 4𝑦1 + 10𝑦2 ≥ 55 𝑦1 .Theorem (Complementary Slackness). try to (10. Php8 and Php7. 𝑥𝑛 ≥ 0 𝑀𝑎𝑥 𝑏1 𝑦1 + 𝑏2 𝑦2 + ⋯ + 𝑏𝑚 𝑦𝑚 Example 3 subject to JRB manufactures tables (𝑥1 ). 25/8) where VOF = 1. 𝑥2 . 𝑥2 . 𝑥1 .

4 20𝑥2 + 25𝑥3 = 300 → 𝑥3 = 12 − 5𝑥2 If left-hand side is greater than right-hand side. 30𝑥1 + 20𝑥2 + 25𝑥3 ≤ 300 5𝑥1 + 10𝑥2 + 7𝑥3 ≤ 110 𝑡𝑜𝑡𝑎𝑙 𝑔𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 = 𝑡𝑜𝑡𝑎𝑙 𝑜𝑝𝑝𝑜𝑟𝑡𝑢𝑛𝑖𝑡𝑦 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑟𝑒𝑠𝑜𝑢𝑟𝑐𝑒𝑠 . Therefore. 𝑥3 = 12 − 5 (11) = 11 If left-hand side is equal to the right-hand side. Plug in values of 𝑥1 .18 30𝑦1 + 5𝑦2 ≥ 6 7 6 30 ( ) + 5 ( ) = 6. this 4 10𝑥2 + 7 (12 − 5𝑥2 ) = 110 means that the slack/surplus variable is positive. 𝑦2 ≥ 0 Constraint 3 𝑀𝑖𝑛 𝐶 = 120𝑥1 + 180𝑥2 25𝑦1 + 7𝑦2 ≥ 7 subject to 7 6 25 ( ) + 7 ( ) = 7 6𝑥1 + 3𝑥2 ≤ 45 55 11 4𝑥1 + 10𝑥2 ≤ 55 Because the LHS is strictly equal to the RHS (7 = 7).𝑥 = 11 3 11 the corresponding variable in the primal problem has a positive value. 𝑥2 . Notes: Solving for 𝑥1 . you wouldn’t produce at that value of 𝑦1 .e. 𝑥2 = . of using machine 1 and machine 2. respectively) Use the 2 constraint equations in the primal problem to Total opportunity cost of producing 𝑦1 should at least be solve for the values of 𝑥2 and 𝑥3 . prices / opportunity costs / accounting or imputed prices of the constraints in the primal problem. and opportunity cost would be greater than profit.54 Interpretation of the Dual Variables 55 11 Because the LHS is strictly greater than the RHS (6. the surplus 6𝑦1 + 4𝑦2 ≤ 120 3𝑦1 + 10𝑦2 ≤ 180 variable is 0.. opportunity cost and 𝑥3 . 20𝑥2 + 25𝑥3 ≤ 300 Compare the resulting value on left-hand side to the set 10𝑥2 + 7𝑥3 ≤ 110 value on the right-hand side. 𝑦1 would be greater the objective function of the dual problem (cost). the surplus 𝑥1 . This 65 means the corresponding variable in the primal problem 𝑥2 = 11 4 65 80 is equal to 0. 𝑥3 in objective function of primal 𝑦𝑖 > 0 implies 𝑡𝑖 = 0 . 𝑥2 ≥ 0 variable is 0. Because you assume that 𝑥1 = 0. 𝑦1 . 98. you can now solve for 𝑥2 𝑥1 and 𝑥2 are valuation of resources (i. This means 65 80 𝑥1 = 0. which allows you to assume that 𝑥3 > 0. than 0. 𝑡𝑖 > 0 implies 𝑦𝑖 = 0 problem (profit) and make sure it equates to the value of If 6𝑥1 + 3𝑥2 were greater than 45. this means that the value of the slack/surplus variable is 0.18. which allows you to assume that 𝑥2 > 0.54 > 6).Application of Complementary Slackness: 30(0) + 20𝑥2 + 25𝑥3 ≤ 300 5(0) + 10𝑥2 + 7𝑥3 ≤ 110 Plug in the values you got (from solving the dual problem) into the constraints of the dual problem. 𝜋 = 6𝑥1 + 8𝑥2 + 7𝑥3 65 80 𝜋 = 6(0) + 8 ( ) + 7 ( ) 11 11 Constraint 1 𝜋 = 98. Constraint 2 20𝑦1 + 10𝑦2 ≥ 8 𝑀𝑎𝑥 𝜋 = 45𝑦1 + 55𝑦2 7 6 20 ( ) + 10 ( ) = 8 subject to 55 11 Because the LHS is strictly equal to the RHS (8 = 8). the The coefficients in the dual objective function are the shadow surplus variable is positive. 𝑥2 . as large as the gross profit of the product. which allows you to assume that 𝑥1 = 0. 𝑥3 : 6 and 3 are resource requirements of 𝑦1 .

280. and 𝐴 = [𝐵|𝑁].06 95 3𝑦1 + 6𝑦2 − 𝑦3 + 2𝑦4 ≥ 4 𝑉𝑂𝐹(𝑦 ∗∗∗ ) − 𝑉𝑂𝐹(𝑦 ∗ ) = 1.06 − 1.280. B is called a basis of A.21 𝑦2∗∗ = 14.) How will the value of the objective function in the primal Consider a 1 peso increase in the price of 𝑦1∗ . 𝑖 = 1.94 𝑉𝑂𝐹(𝑥 ∗∗∗ ) − 𝑉𝑂𝐹(𝑥 ∗ ) = −10 = −𝑦1∗ 𝑉𝑂𝐹(𝑦 ∗∗ ) = 1.265 𝑦1∗∗ = 10.94 95 𝑉𝑂𝐹(𝑦 ∗∗ ) − 𝑉𝑂𝐹(𝑦 ∗ ) = 1.269. . The rest of the matrix A is submatrix N.73 𝑥2∗∗∗ = 3.275 = −5. b.94 = − = −𝑥1 −4𝑦1 + 2𝑦2 + 𝑦3 + 5𝑦4 ≥ 2 16 𝑦𝑖 ≥ 0.285 Definition.275 = 5.) Solve the problem and its dual.79 𝑀𝑖𝑛 𝐺 = 6𝑦1 + 20𝑦2 + 3𝑦3 + 20𝑦4 𝑦2∗∗∗ = 15. Given 𝐴𝑥 = 𝑏.94 − 1. 𝑥2 ≥ 0 Example 2 Given the problem: Optimal Solutions: 95 𝑀𝑎𝑥 𝑐0 = 𝑥1 + 2𝑥2 𝑥1∗ = 16 subject to 25 𝑥2∗ = 𝑥1 + 𝑥2 ≤ 10 8 𝑉𝑂𝐹(𝑥 ∗ ) = 1. Variables associated Consider a 1 peso decrease in the price of 𝑦1∗ .269. 𝑥2 ≥ 0 6𝑥1 + 3𝑥2 ≤ 45 4𝑥1 + 10𝑥2 ≤ 55 𝑥1 . Optimal solution becomes: If an addition unit of resource 1 is made available. with columns of B are called basic.06 subject to 𝑉𝑂𝐹(𝑦 ∗∗∗ ) = 1. 4 𝑥1 is the effect of an addition or reduction of 1 unit of resource 1 on Dual Problem: gross profit. where A is an 𝑚 𝑥 𝑛 matrix and B is an 𝑉𝑂𝐹(𝑥 ∗∗ ) − 𝑉𝑂𝐹(𝑥 ∗ ) = 10 = 𝑦1∗ 𝑚 𝑥 𝑚 non-singular submatrix of A. 2.94 = = 𝑥1 16 Example 1 Similarly. … . the optimal solution becomes: 𝑥1∗∗∗ = 5.04 𝑉𝑂𝐹(𝑥 ∗ ) = 1.275 −2𝑥1 + 2𝑥2 ≤ 4 𝑥1 . and others. 𝑀𝑎𝑥 𝐹 = 4𝑥1 + 2𝑥2 Dual Problem subject to Consider the dual problem: 3𝑥1 − 4𝑥2 ≤ 6 6𝑥1 + 2𝑥2 ≤ 20 𝑀𝑖𝑛 𝐶 = 120𝑥1 + 180𝑥2 −𝑥1 + 𝑥2 ≤ 3 subject to 2𝑥1 + 5𝑥2 ≤ 20 𝑥1 .15 Simplex Algorithm 𝑥2∗∗ = 3. non-basic.21 𝑉𝑂𝐹(𝑥 ∗ ) = 1. if 1 unit of resource 1 is lost. change when the first constraint is changed to 𝑥1 + 𝑥2 ≤ Optimal solution becomes: 11? 𝑥1∗∗ = 6. 𝑥2 ≥ 0 𝑦1∗ = 10 𝑦2∗ = 15 a. the optimal solution Solve the following linear programming problem by solving the becomes: dual problem: 𝑦1∗∗∗ = 9.

) is a basic feasible solution. . Lemma 1. 𝑥4 ≥ 0 𝐵=[ ] 2 3 Notes: The basic solution associated with this basis is: 𝑥1 + 𝑥2 = 1 Standard Form is always Max 2𝑥1 + 3𝑥2 = 1 Computational Form is always Min If General Form is Max 𝑥1 = 2 𝑥2 = −1 a. Lemma 2. 𝑥3 . then 𝑥 ∗ is an extreme point of the set. 𝑥4 ≥ 0 1 1 where ( . −1. 𝑥 ≥ 0} is a basic feasible solution. 𝑥 = 𝑏. Example 1 Computation Form of LPP 𝑥1 + 𝑥2 + 𝑥3 = 1 2𝑥1 + 3𝑥2 = 1 𝑀𝑖𝑛 − 𝑐′𝑥 𝑥1 . 𝑥3 . For 𝑥𝑗 ∈ 𝐵. Let B be a basis for A.Definition. 0.) Retain objective function for Standard Form 𝑥3 = 0 b. If a basic solution associated with the basis B. 𝑥2 . Every extreme point of the set {𝑥 | 𝐴𝑥 = 𝑏. Set 𝑥𝑗 = 0 if 𝑗 ∈ 𝑁. basic solution. The resulting solution is a basic feasible solution. 𝑥2 . If the set {𝑥 | 𝐴𝑥 = 𝑏. Lemma 3. then x is a basic feasible solution to the linear programming problem. then it has a choose them so as to solve 𝐵𝑥 𝐵 = 𝑏. 𝑥2 ≥ 0 𝑥1 + 𝑥3 = 1 2𝑥1 = 1 Standard Form: 𝑀𝑎𝑥 45𝑥1 + 55𝑥2 1 𝑥1 = subject to 2 𝑥2 = 0 6𝑥1 + 4𝑥2 + 𝑥3 + 0𝑥4 = 120 1 3𝑥1 + 10𝑥2 + 0𝑥3 + 𝑥4 = 180 𝑥3 = 2 𝑥1 . If 𝑥 ∗ is a basic feasible solution of the set {𝑥 | 𝐴𝑥 = Definition.) Negate equation for Computational Form to make it Min –(OF) where (2. [𝑥 𝐵 |0] is nonnegative. 𝑥3 ≥ 0 subject to 𝐴𝑥 = 𝑏 1 1 1 𝑥≥0 𝐴=[ ] 2 3 0 Example One basis of A is: General Form: 𝑀𝑎𝑥 45𝑥1 + 55𝑥2 1 1 subject to 𝐵=[ ] 2 0 6𝑥1 + 4𝑥2 ≤ 120 3𝑥1 + 10𝑥2 ≤ 180 The basic solution associated with this basis is: 𝑥1 . 𝑥2 . 𝑥 ≥ 0}. 0) is NOT a basic feasible solution because the value If General Form is Min of 𝑥2 is negative. Computational Form: 2 2 𝑀𝑖𝑛 − 45𝑥1 − 55𝑥2 subject to Another basis associated with A: 6𝑥1 + 4𝑥2 + 𝑥3 + 0𝑥4 = 120 3𝑥1 + 10𝑥2 + 0𝑥3 + 𝑥4 = 180 1 1 𝑥1 . 𝑥 ≥ 0} is feasible.

continue. The linear b. If there is no such r. basis and the basic solution associated with this basis is feasible while all other values in that column are 0. 24/5 0 1 -2/5 48 3/10 1 0 1/10 18 . 𝑥4 ≥ 0 [−𝑐 𝐵 𝑥 𝐵 ] = −𝑐 −𝑐 𝑁 ] [ 0 Tableau 1: 𝑥𝑁 𝒙𝟏 𝒙𝟐 𝒙𝟑 𝒙𝟒 RHS 𝑥𝐵 𝑏 [𝐵 𝑁] [ 𝑁 ] = [ ] 0 Ax-c’x -45 -55 0 0 0 c0 𝑥 6 4 1 0 120 𝐵𝑥 𝐵 = 𝑏 b 3 10 0 1 180 𝐼𝑥 𝐵 = 𝑏 𝑥𝐵 = 𝑏 Tableau 1 is canonical with respect to 𝑥 𝐵 = (𝑥3 . 𝑥3 . 𝑐 𝐵 = 0. (i) Choose the pivot column k such that 𝑐𝑘 < 0 and Tableau 2: |𝑐𝑘 | > |𝑐𝑗 | ∀ 𝑗 ≠ 𝑘. a. is -57/2 0 0 11/2 990 optimal. 6𝑥1 + 4𝑥2 ≤ 120 3𝑥1 + 10𝑥2 ≤ 180 𝑥1 . (𝑏 ≥ 0). 𝑥3 . Intersection of pivot row and pivot column is equal to 1. Otherwise. 𝑥3 = 120. 𝑥4 = 180 Pivot on a22 = 10 basic solution Goal: Steps in Simplex Algorithm 1. 𝒙𝟏 𝒙𝟐 𝒙𝟑 𝒙𝟒 RHS 𝑐𝑘 ≥ 0. there exists a basis B such that 𝐵 = 𝐼. If there is no 𝑐𝑘 < 0 and 𝑏 ≥ 0.) Retain objective function for Computational problem is unbounded. The linear programming problem is canonical with respect to some 2. 𝑥4 ) 𝑥1 = 0. 𝑥2 = 0. Definition. Go to step (i). stop. 𝑥2 . the basic solution associated with the basis. 𝑥2 . continue to the next step. If the linear programming problem is in computational Example 1 form. 𝑥2 ≥ 0 𝑀𝑖𝑛 − 𝑐 ′ 𝑥 = −𝑐0 subject to 𝐴𝑥 = 𝑏 Standard Form: 𝑥≥0 𝑀𝑎𝑥 45𝑥1 + 55𝑥2 subject to Example 6𝑥1 + 4𝑥2 + 𝑥3 = 120 3𝑥1 + 10𝑥2 + 𝑥4 = 180 𝑐 = [−45 −55 0 0] 𝑥1 .) Negate equation for Standard Form to make it (ii) Choose the pivot row r such that 𝑏𝑟 ÷ 𝐴𝑟𝑘 = Max –(OF) 𝑚𝑖𝑛{𝑏𝑖 /𝐴𝑖 } > 0 . 𝑥4 ≥ 0 6 4 1 0 𝐴=[ ] Computational Form: 3 10 0 1 𝑀𝑖𝑛 − 45𝑥1 − 55𝑥2 𝑥 𝐵 = [𝑥3 𝑥4 ] subject to 6𝑥1 + 4𝑥2 + 𝑥3 = 120 3𝑥1 + 10𝑥2 + 𝑥4 = 180 𝑥 𝑁 = [𝑥1 𝑥2 ] 𝑥1 . and the linear 𝑀𝑎𝑥 45𝑥1 + 55𝑥2 programming problem is said to be in canonical form with respect subject to to the basis of A. Otherwise. All values in the first row are positive. Form (iii) Pivot on 𝐴𝑟𝑘 .

For (b). 𝑥𝑥 = 0. 𝑥5 ≥ 0 large negative number. 1/2 1 7/10 0 1/10 11 Tableau 2 is canonical with respect to 𝑥 = (𝑥2 .) The original problem is a minimization problem. 𝑥3 ≥ 0 Use of Artificial Variables Standard Form: 𝑀𝑎𝑥 𝜋 = 6𝑥1 + 8𝑥2 + 7𝑥3 When the computational form of the LPP is not canonical subject to with respect to some basic sequence. This ensures that the optimal solution doesn’t include any artificial variable. artificial variables 30𝑥1 + 20𝑥2 + 25𝑥3 + 𝑥4 = 300 are used. This happens in 2 cases: 5𝑥1 + 10𝑥2 + 7𝑥3 + 𝑥5 = 110 a. 𝑥1 . 𝑥4 .) One of the constraints in the original Computational Form: maximization problem is a strict equality. 𝑥2 ) 6/11 0 0 7/55 6/11 1080/11 𝑥1 = 10. Tableau 1 𝒙𝟏 𝒙𝟐 𝒙𝟑 𝒙𝟒 𝒙𝟓 RHS Example -6 -8 -7 0 0 0 𝑀𝑖𝑛 𝑐0 = 2𝑥1 + 10𝑥2 30 20 25 1 0 300 subject to 2𝑥1 + 𝑥2 ≤ 6 5 10 7 0 1 110 5𝑥1 + 4𝑥2 ≥ 20 𝑥1 . choose a large positive number. choose a 5𝑥1 + 10𝑥2 + 7𝑥3 + 𝑥5 = 110 𝑥1 . 𝑥2 ≥ 0 Tableau 2 Standard Form: 𝒙𝟏 𝒙𝟐 𝒙𝟑 𝒙𝟒 𝒙𝟓 RHS 𝑀𝑎𝑥 − 2𝑥1 − 10𝑥2 -2 0 -7/5 0 4/5 88 subject to 20 0 11 1 -2 80 2𝑥1 + 𝑥2 + 𝑥3 = 6 . 𝑥3 . 𝑥2 = 15. 𝑥3 ) 𝐵 Pivot on a11 = 24/5 Tableau 3 𝒙𝟏 𝒙𝟐 𝒙𝟑 𝒙𝟒 𝒙𝟓 RHS Tableau 3 0 0 -3/10 1/10 3/5 96 𝒙𝟏 𝒙𝟐 𝒙𝟑 𝒙𝟒 RHS 1 0 11/20 1/20 -1/10 4 0 0 95/16 25/8 1275 0 1 17/40 -1/40 3/20 9 1 0 5/24 -1/12 10 0 1 -1/16 11/10 15 Tableau 4 𝒙𝟏 𝒙𝟐 𝒙𝟑 𝒙𝟒 𝒙𝟓 RHS Tableau 3 is canonical with respect to 𝑥𝐵 = (𝑥1 . 30𝑥1 + 20𝑥2 + 25𝑥3 + 𝑥4 = 300 For (a). 𝑥3 . 𝑥2 . respectively 5𝑥1 + 10𝑥2 + 7𝑥3 ≤ 110 𝑥1 . 𝑀𝑖𝑛 𝐶 = −6𝑥1 − 8𝑥2 − 7𝑥3 The artificial variables are assigned large coefficients subject to relative to the coefficients in the objective function. 𝑥5 ≥ 0 and b. 𝑥2 . 𝑥4 = 0 20/11 0 1 1/11 -2/11 80/11 -17/22 1 0 7/110 5/22 65/11 Example 2 General Form: Interpretation: 𝑀𝑎𝑥 𝜋 = 6𝑥1 + 8𝑥2 + 7𝑥3 * x3* = 80/11 subject to * x2* = 65/11 30𝑥1 + 20𝑥2 + 25𝑥3 ≤ 300 * 7/5 and 6/11 are y1* and y2*. 𝑥2 . 𝑥4 .

𝑥4 ≥ 0 1 0 4/3 1/3 1/3 4/3 Computational Form: 0 1 -5/3 2/3 2/3 10/3 𝑀𝑖𝑛 2𝑥1 + 10𝑥2 + 𝛼𝑦1 subject to Tableau 3 is canonical with respect to to 𝑥 𝐵 = (𝑥1 . 𝑥2 ≥ 0 Tableau 3 is canonical with respect to to 𝑥 𝐵 = (𝑥1 .) Each pivot step fails to improve the value of the objective function. 5𝑥1 + 4𝑥2 − 𝑥4 = 20 0 0 14 6 94 -36 𝑥1 .25𝑟 ≥ 1 5 4 0 -1 1 20 𝑤. Degenerate Problem Example (Bounding Face Solution) Tableau 1 𝑀𝑖𝑛 𝐶 = 𝑤𝐿 + 𝑟𝐾 𝒙𝟏 𝒙𝟐 𝒙𝟑 𝒙𝟒 𝒚𝟏 RHS subject to 2 10 0 0 100 0 𝑤 + 2𝑟 ≥ 1 2 1 1 0 0 6 2𝑤 + 𝑟 ≥ 1 1.) 𝑥3 = 𝑥4 = 𝑦1 = 0 Let 𝛼 = 100. 𝑥2 . (E. 𝑥3 . 𝑟 ≥ 0 Tableau 1 is not canonical in form with respect to any variable because no identity matrix can be found 𝑟 Tableau 1 can be made can be made canonical by multiplying the 2nd row by -100 and adding it to the 0th row. Tableau 2 𝑤 𝒙𝟏 𝒙𝟐 𝒙𝟑 𝒙𝟒 𝒚𝟏 RHS -498 -390 0 100 0 -2000 Difficulties encountered in employing the simplex method when 2 1 1 0 0 6 the problem is degenerate: 5 4 0 -1 1 20 a.) Two or more quotients share the distinction of being the smallest. Pivot on a11 = 2 b.) 𝑥1 = 4/3 𝑥1 .) 𝑥2 = 10/3 c. 𝑥2 ) 2𝑥1 + 𝑥2 + 𝑥3 = 6 Optimal solution: 5𝑥1 + 4𝑥2 − 𝑥4 + 𝑦1 = 20 a. 𝑦1 ) Pivot on a22 = 3/2 𝑀𝑖𝑛 − 3𝑥1 − 2𝑥2 Tableau 4 subject to 𝒙𝟏 𝒙𝟐 𝒙𝟑 𝒙𝟒 𝒚𝟏 RHS 𝑥1 + 𝑥3 = 4 𝑥2 + 𝑥4 = 6 . 𝑥2 . If you’re given a maximization problem and the VOF goes down as you move from tableau 1 to tableau 2) Tableau 3 𝒙𝟏 𝒙𝟐 𝒙𝟑 𝒙𝟒 𝒚𝟏 RHS Example 0 -141 249 100 0 -506 𝑀𝑎𝑥 3𝑥1 + 2𝑥2 1 1/2 1/2 0 0 3 subject to 𝑥1 ≤ 4 0 3/2 -5/2 -1 1 5 𝑥2 ≤ 6 3𝑥1 + 2𝑥2 ≤ 18 𝑥1 . so you end up having two or more rows eligible Tableau 2 is canonical with respect to 𝑥 𝐵 = (𝑥3 .g. 𝑦1 ) to be pivot rows. 𝑥4 ≥ 0 b. 𝑥3 .25𝑤 + 1.

3𝑥1 + 2𝑥2 + 𝑥5 = 18 Changes in the constraint constant 𝑥1 . 0 1 0 1 0 6 3 2 0 0 1 18 𝑀𝑎𝑥 𝜋 = 6𝑥1 + 8𝑥2 Subject to 30𝑥1 + 20𝑥2 ≤ 300 (wood) Tableau 2 5𝑥1 + 10𝑥2 ≤ 110 (labor) 𝒙𝟏 𝒙𝟐 𝒙𝟑 𝒙𝟒 𝒙𝟓 RHS 𝑥1 .) Simultaneous changes Changes in the constraint coefficient x1 JRB manufactures tables (𝑥1 ) and chairs (𝑥2 ) and derives a per unit Tableau 1 profit of Php6 and Php8. 𝑥4 . 20.6) a.) Single decision variable (4.) Reduced cost Changes in the objective function coefficients (2. JRB uses 30 board feet to produce a -3 -2 0 0 0 0 table and 20 board feet to produce a chair. 𝑥2 . Only 2 resources are 𝒙𝟏 𝒙𝟐 𝒙𝟑 𝒙𝟒 𝒙𝟓 RHS consumed in manufacturing: wood (300 board feet in inventory) and labor (110 hours available).9) Tableau 3 𝒙𝟏 𝒙𝟐 𝒙𝟑 𝒙𝟒 𝒙𝟓 RHS 𝑥1 0 0 0 0 0 18 10 22 1 0 1 0 0 4 Notes: 0 0 3/2 1 -1/2 3 Instruments: x1 and x2 0 1 -3/2 0 1/2 3 Constraint Constants: 300 and 100 Coefficients of Objective Function: 6 and 8 Coefficients of Constraints: 30.) Shadow price x2 b. 𝑥5 ≥ 0 a. respectively. 𝑥2 ≥ 0 0 -2 3 0 0 12 1 0 1 0 0 4 𝑥2 0 1 0 1 0 6 15 0 2 -3 0 1 6 11 (4. He also uses 5 hours of 1 0 1 0 0 4 labor to produce a table and 10 hours to produce a chair. 𝑥3 . 5 and 10 Tableau 1 𝒙𝟏 𝒙𝟐 𝒙𝟑 𝒙𝟒 RHS Tableau 4 -6 -8 0 0 0 𝒙𝟏 𝒙𝟐 𝒙𝟑 𝒙𝟒 𝒙𝟓 RHS 30 20 1 0 300 0 0 0 0 1 18 5 10 0 1 110 1 0 0 -2/3 1/3 2 0 0 1 2/3 -1/3 2 Tableau 2 0 1 0 1 0 6 𝒙𝟏 𝒙𝟐 𝒙𝟑 𝒙𝟒 RHS -2 0 0 4/5 88 20 0 1 -2 80 Sensitivity Analysis 1/2 1 0 1/10 11 .3) b.

More tables 1/20. 3/20 are the exchange coefficients and less chairs are produced. You can also find the exchange coefficients from your final tableau: Slack Slack (wood) (labor) 𝑥1 (tables) 1/20 -1/10 𝑥2 (chairs) -1/40 3/20 𝑅𝑒𝑣𝑖𝑠𝑒𝑑 𝑣𝑎𝑙𝑢𝑒 = 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 + (𝑒𝑥𝑐ℎ𝑎𝑛𝑔𝑒 𝑐𝑜𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑡 × 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑐𝑜𝑛𝑠𝑡𝑟𝑎𝑖𝑛𝑡 𝑐𝑜𝑛𝑠𝑡𝑎𝑛𝑡) Increase in wood constraint from 300 to 310: . Wood and labor are fully utilized. 𝑥 = 𝐴−1 𝑏 Point B: Wood constraint increased to 500. respectively. More chairs and less tables are produced. Wood and labor are fully 1/10 and 3/5 are the shadow prices of wood and labor. Change in Constraint Constant: Labor 𝑥2 Tableau 3 𝒙𝟏 𝒙𝟐 𝒙𝟑 𝒙𝟒 RHS 0 0 1/10 3/5 96 𝑒 1 0 1/20 -1/10 4 𝑑 𝑓 0 1 -1/40 3/20 9 𝑥1 Point D: Same as point A. Point E: Labor constraint is increased to 130. More chairs 1/10 and 3/5 are the solutions of the dual problem (y1 = and less tables are produced. y2 = 3/5) Point F: Labor constraint is decreased to 80. det(𝐴) = (30)(10) − (20)(5) = 200 1 10 −5 𝐴−1 = [ ] 200 −20 30 10⁄ 𝐴−1 𝑏 = [ 200 −20/200] [1] −5/200 30/200 0 1/20 −1/10 [ ] and [ ] −1/40 3/20 are the shadow prices of wood and labor. More tables (x1) and less chairs (x2) are produced. 1/10. -1/40. 96 is the VOF of the dual problem (minimum) Exchange Coefficient Change in Constraint Constant: Wood Units of one variable that must be given up to accommodate an 𝑥2 increase in another 30𝑥1 + 20𝑥2 ≤ 300 (wood) 5𝑥1 + 10𝑥2 ≤ 110 (labor) 𝑐 𝑎 𝑏 Example Finding the Wood Exchange Coefficient using Matrices 𝑥1 𝐴𝑥 = 𝑏 𝐴−1 𝐴𝑥 = 𝐴−1 𝑏 Point A: No slack. respectively. -1/10. 30 20 𝑥1 1 [ ][ ] = [ ] 5 10 𝑥2 0 Point C: Wood constraint decreased to 240. utilized.

1 𝐿𝐶𝐶𝑆𝐿 = 110 − 60 = 50 New 𝑥1 = 4 + [( ) (310 − 300)] = 4.75 chairs 40 𝑉𝑂𝐹(𝑥 ∗ ) = 97 Sensitivity Limits: Exchange Ratio (Surplus) Reduction in labor constraint from 110 to 80: 𝑠𝑜𝑙𝑢𝑡𝑖𝑜𝑛 𝑣𝑎𝑙𝑢𝑒 𝐸𝑅 = 1 𝑒𝑥𝑐ℎ𝑎𝑛𝑔𝑒 𝑐𝑜𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑡 𝑖𝑛 𝑠𝑢𝑟𝑝𝑙𝑢𝑠 𝑐𝑜𝑙𝑢𝑚𝑛 New 𝑥1 = 4 + [(− ) (80 − 110)] = 7 tables 10 3 New 𝑥2 = 9 + [( ) (80 − 110)] = 4.5 chairs No Surplus in the Original Solution 20 𝑉𝑂𝐹(𝑥 ∗∗ ) = 78 Lower constraint constant sensitivity limit (LCCSL) Upper constraint constant sensitivity limit (UCCSL) Comparing VOFs: 𝑉𝑂𝐹(𝑥 ∗ ) − 𝑉𝑂𝐹(𝑥) = 97 − 96 = 1 = 10(𝑦1 ) 𝐿𝐶𝐶𝑆𝐿 = 𝑜𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑙𝑒𝑣𝑒𝑙 𝑉𝑂𝐹(𝑥 ∗∗ ) − 𝑉𝑂𝐹(𝑥) = 78 − 96 = −18 = −30(𝑦2 ) − 𝑠𝑚𝑎𝑙𝑙𝑒𝑠𝑡 𝑎𝑏𝑠𝑜𝑙𝑢𝑡𝑒 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑛𝑒𝑔𝑎𝑡𝑖𝑣𝑒 𝑟𝑎𝑡𝑖𝑜 (𝑜𝑟 − ∞ 𝑖𝑓 𝑛𝑜 𝑟𝑎𝑡𝑖𝑜 𝑖𝑠 𝑛𝑒𝑔𝑎𝑡𝑖𝑣𝑒) Sensitivity Limits: Exchange Ratio (Slack) Exchange ratio helps you determine allowable increase 𝑈𝐶𝐶𝑆𝐿 and allowable decrease = 𝑜𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑙𝑒𝑣𝑒𝑙 + 𝑠𝑚𝑎𝑙𝑙𝑒𝑠𝑡 𝑝𝑜𝑠𝑖𝑡𝑖𝑣𝑒 𝑟𝑎𝑡𝑖𝑜 (𝑜𝑟 ∞ 𝑖𝑓 𝑛𝑜 𝑟𝑎𝑡𝑖𝑜 𝑖𝑠 𝑝𝑜𝑠𝑖𝑡𝑖𝑣𝑒) 𝑠𝑜𝑙𝑢𝑡𝑖𝑜𝑛 𝑣𝑎𝑙𝑢𝑒 𝐸𝑅 = Surplus in the Original Solution 𝑒𝑥𝑐ℎ𝑎𝑛𝑔𝑒 𝑐𝑜𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑡 𝑖𝑛 𝑠𝑙𝑎𝑐𝑘 𝑐𝑜𝑙𝑢𝑚𝑛 𝐿𝐶𝐶𝑆𝐿 = −∞ No Slack in the Original Solution Lower constraint constant sensitivity limit (LCCSL) 𝑈𝐶𝐶𝑆𝐿 = 𝑜𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑙𝑒𝑣𝑒𝑙 + 𝑠𝑜𝑙𝑢𝑡𝑖𝑜𝑛 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑠𝑢𝑟𝑝𝑙𝑢𝑠 Upper constraint constant sensitivity limit (UCCSL) Change in Coefficient of Objective Variable (or Constraints of Dual Problem) 𝐿𝐶𝐶𝑆𝐿 = 𝑜𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑙𝑒𝑣𝑒𝑙 − 𝑠𝑚𝑎𝑙𝑙𝑒𝑠𝑡 𝑝𝑜𝑠𝑖𝑡𝑖𝑣𝑒 𝑟𝑎𝑡𝑖𝑜 (𝑜𝑟 − ∞ 𝑖𝑓 𝑛𝑜 𝑟𝑎𝑡𝑖𝑜 𝑖𝑠 𝑝𝑜𝑠𝑖𝑡𝑖𝑣𝑒) Improvement Ratio 𝑈𝐶𝐶𝑆𝐿 = 𝑜𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑙𝑒𝑣𝑒𝑙 𝑠ℎ𝑎𝑑𝑜𝑤 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐼𝑅 = + 𝑠𝑚𝑎𝑙𝑙𝑒𝑠𝑡 𝑎𝑏𝑠𝑜𝑙𝑢𝑡𝑒 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑛𝑒𝑔𝑎𝑡𝑖𝑣𝑒 𝑟𝑎𝑡𝑖𝑜 𝑒𝑥𝑐ℎ𝑎𝑛𝑔𝑒 𝑐𝑜𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑡 𝑖𝑛 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑟𝑜𝑤 (𝑜𝑟 ∞ 𝑖𝑓 𝑛𝑜 𝑟𝑎𝑡𝑖𝑜 𝑖𝑠 𝑛𝑒𝑔𝑎𝑡𝑖𝑣𝑒) Variable in the Original Solution Slack in the Original Solution Lower objective coefficient sensitivity limit (LOCSL) 𝐿𝐶𝐶𝑆𝐿 = 𝑜𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑙𝑒𝑣𝑒𝑙 − 𝑠𝑜𝑙𝑢𝑡𝑖𝑜𝑛 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑠𝑙𝑎𝑐𝑘 Upper objective coefficient sensitivity limit (UOCSL) 𝑈𝐶𝐶𝑆𝐿 = ∞ 𝐿𝑂𝐶𝑆𝐿 = 𝑜𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑙𝑒𝑣𝑒𝑙 − 𝑠𝑚𝑎𝑙𝑙𝑒𝑠𝑡 𝑝𝑜𝑠𝑖𝑡𝑖𝑣𝑒 𝑟𝑎𝑡𝑖𝑜 (𝑜𝑟 − ∞ 𝑖𝑓 𝑛𝑜 𝑟𝑎𝑡𝑖𝑜 𝑖𝑠 𝑝𝑜𝑠𝑖𝑡𝑖𝑣𝑒) Slack Slack (wood) (labor) 𝑥1 (tables) 1/20 -1/10 𝑈𝑂𝐶𝑆𝐿 = 𝑜𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑙𝑒𝑣𝑒𝑙 𝑥2 (chairs) + 𝑠𝑚𝑎𝑙𝑙𝑒𝑠𝑡 𝑎𝑏𝑠𝑜𝑙𝑢𝑡𝑒 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑛𝑒𝑔𝑎𝑡𝑖𝑣𝑒 𝑟𝑎𝑡𝑖𝑜 -1/40 3/20 (𝑜𝑟 ∞ 𝑖𝑓 𝑛𝑜 𝑟𝑎𝑡𝑖𝑜 𝑖𝑠 𝑛𝑒𝑔𝑎𝑡𝑖𝑣𝑒) Sensitivity Limits for Wood Constraint Exchange Solution Exchange Variable Not in the Original Solution Coefficient Value Ratio Lower objective coefficient (max) sensitivity limit 𝑥1 (tables) 1/20 4 80 (LOCMSL) 𝑥2 (chairs) -1/40 9 -360 Upper objective coefficient (max) sensitivity limit (UOCMSL) 𝐿𝐶𝐶𝑆𝐿 = 300 − 80 = 220 𝑈𝐶𝐶𝑆𝐿 = 300 + 360 = 660 𝐿𝑂𝐶𝑀𝑆𝐿 = −∞ Sensitivity Limits for Labor Constraint 𝑈𝑂𝐶𝑀𝑆𝐿 Exchange Solution Exchange = 𝑜𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑙𝑒𝑣𝑒𝑙 coefficient value ratio + 𝑎𝑏𝑠𝑜𝑙𝑢𝑡𝑒 𝑠𝑖𝑧𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑠ℎ𝑎𝑑𝑜𝑤 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑥1 (tables) -1/10 4 -40 𝑥2 (chairs) 3/20 9 60 Example 1 .5 tables 20 𝑈𝐶𝐶𝑆𝐿 = 110 + 40 = 150 1 New 𝑥2 = 9 + [(− ) (310 − 300)] = 8.

Every acre .33 for an additional silicon Sensitivity limits for objective function of 𝑥1 : sheet and a maximum of 1.000 (silicon sheets) 0.) Determine the optimal solution to the primal problem. Slack Slack a. If profit < cost. integrated circuits (I) and core memories (M). and cantaloupes will sell for about $1 each. Compare that total cost to the profit. 6⁄ Shadow price of A = Additional profit if you introduce an 10 = −6 −1⁄ additional 1 unit of A 10 Shadow price of A = The maximum price you would be willing to pay for an additional unit of A Lower objective variable (max) sensitivity limit 6−2 = 4 b.5 hours to harvest each acre subject to planted with cantaloupes. 8−4 = 4 If profit > cost. If each game chip requires 0.005𝐶 + 0.4 minute of labor. don’t produce. Every acre planted with Example 2 watermelons requires 50 gallons of water per day and must be Andre manufactures 3 types of silicon chips for computers: central prepared for planting with 20 pounds of fertilizer. because total cost is less than the profit you make. Every acre planted with watermelons is expected to yield 90 salable units.2𝐶 + 0.02𝐼 + 0.4𝐼 + 0. 0. produce.01𝑀 ≤ 10. 1⁄ 10 = 2 1⁄ Notes: 20 Check shadow price of each input.) Suppose that Andre can manufacture an all-purpose Improvement ratios for 𝑥2 game chip at a profit of 1 per chip.5𝐼 + 0. 10 = 4 3⁄ 20 Notes: Check shadow prices of each input.01 silicon sheet and 0. planted with cantaloupes requires 75 gallons of water per day and The following linear program applies: must be prepared for planting with 15 pounds of fertilizer.000 (labor in minutes) He believes that watermelons will sell for about $3 each. Upper objective variable (max) sensitivity limit Example 3 A farmer in Georgia has a 100-acre farm on which to plant 8 + 4 = 12 watermelons and cantaloupes.666.67 Sensitivity limits for objective function of 𝑥2 : c.666. should 1⁄ 10 = −4 any game chips be made? −1⁄ 40 6⁄ Yes.17 for an additional minute of Improvement ratios for 𝑥1 labor.1𝑀 ≤ 200. Every acre processing units (C). Upper objective variable (max) sensitivity limit C = 666.67 I=0 6 + 6 = 12 M = 666.25𝐶 + 0. The farmer estimates that it will take 2 hours of labor to harvest each 𝑀𝑎𝑥 𝜋 = 0.15𝑀 acre planted with watermelons and 2. Determine the total Lower objective variable (max) sensitivity limit cost of the inputs of new product.) What is the maximum premium that Andre would pay for (wood) (labor) 𝑥1 (tables) one additional silicon sheet? For one additional minute of 1/20 -1/10 𝑥2 (chairs) labor? -1/40 3/20 Willing to pay a maximum of 3.

the farmer can hire laborers to harvest the fields at a rate of $5 per hour. excess production would result if the Subtract 66.000 Notes: 𝑊 + 𝐶 ≤ 100 Look at shadow price of land (199) Maximum Rewrite objective function: 𝑀𝑎𝑥 𝜋 = 270𝑊 + 300𝐶 − [(4𝑊 + 3𝐶) + (10𝑊 + 12.planted with cantaloupes is expected to yield 300 salable units. if any.67 and 4 tons of low-grade ore. Acres of Cantaloupes = 40 The company has contracted to provide local smelters with 24 tons a.26 = 0. a. 16 tons of medium-grade ore and 48 tons of no longer optimal to plant any watermelons? low-grade ore each week.33 from 270 then divide answer by 90 to get operating decision is based on minimizing costs? the lowest possible price.5 with 6 tons of high-grade ore per week? d. medium and low. 2.17/unit) Set up new objective function with new prices.) What would be the cost effect of increasing low-grade ore sales by 50%? b.5𝐶)] 𝑀𝑎𝑥 𝜋 = 270𝑊 + 300𝐶 − 14𝑊 − 15. and what is the maximum amount he should pay to lease each acre? 𝑀𝑎𝑥 𝜋 = 270𝑊 + 300𝐶 (20𝑊 + 15𝐶) − [(10 × 50 ) + (5 × (2𝑊 + 2.5𝐶 Example 4 𝑀𝑎𝑥 𝜋 = 256𝑊 + 284.000 per day to run Mine B.5 = 399. Notes: Look at allowable decrease of revenue of watermelon. . If the farmer sells all the watermelons and cantaloupes d.26 90 day of each grade. The farmer can pump about 6.5 = 1.) How much. and the price of cantaloupes increases by $50 per acre.5𝐶))] He should lease all 20 acres for $199/acre.) What is ER’s minimum acceptable price per ton if it is to before it is optimal to only grow cantaloupes? renew a current contract to provide one of its customers 300 + 99. It costs 10. and 12 tons per = 2. After mining and Acres of Watermelons = 60 crushing.) How much can the price of watermelons drop before it is of high-grade ore.33/unit) needs at a cost of $10 per 50-pound bag.33 − 1 = 0.33 e. Subject to 50𝑊 + 75𝐶 ≤ 6. how many acres of each crop should the farmer plant a neighboring farm to plant additional crops. Cantaloupes: $300/acre $350/acre ($1.) Suppose the price of watermelons drops by $60 per acre. In a day’s time. b.) How much does the price of cantaloupes have to increase c. Finally. Mine B produces 2.33 = 203. 3 − 2. 203.) What increase in the cost of operating Mine B would cause ER to change its current operating decision? c. the ore is graded into 3 classes: high.) With current output requirements.74 Management’s problem is to determine how many days per week to operate each mine under current conditions.) Suppose the farmer can lease up to 20 acres of land from he produces.000 gallons of water per day for Notes: irrigation purposes from a well.000 per day to operate Mine A and 5. Is Degeneracy the current solution still optimal? No. respectively.5𝐶 Ethan Resources (ER) has 2 mines with different production capabilities for producing the same type of ore.33 cost of operating Mine A have to rise before ER changes 300 its operating decision? 1. He can buy as much fertilizer as he Watermelons: $270/acre $210/acre ($2. 2 tons of medium-grade ore. How many in order to maximize profits? acres should the farmer lease. Mine A 270 − 66.67 produces 6 tons of high-grade ore. how much would the 399.

a. How would the solution change if the plant in Clermont is constraint are not the same. The company has just received orders of 10 b. 15 tons for Orlando. 𝑥2 ≥ 0 Allowable increase or decrease of constraint constant is zero Example 1 May cause circling phenomenon The CitruSun Corporation ships frozen orange juice concentrate for Consequences: processing plants in Eustis and Clermont to distributors in Miami.) Allowable increases and decreases for the tons from Miami for the coming week. then you have a Degenrate I forced to shut for one day resulting in a loss of 4 tons of problem.) Slope of constraint 2: -1/2 Miami. Each plant can produce 20 tons of unique concentrate each week. decrease of zero b. Two or more quotients share the distinction of being the b. 𝑀𝑎𝑥 𝑥1 + 2𝑥2 Subject to Degeneracy I 2𝑥1 + 4𝑥2 ≤ 12 Tie in minimum coefficient or minimum ratio 4𝑥1 + 3𝑥2 ≤ 24 𝑥1 .) Add a constraint that holds the objective the problem is degenerate: function at the current optimal solution a. Is the optimal solution degenerate? Notes: 3. so that two or more rows are eligible as pivot decision variables with an allowable increase or rows. 𝑥1 + 4𝑥2 ≤ 8 𝑥1 + 2𝑥2 ≤ 4 𝑥1 .) Maximize or minimize the value of one of the smallest. production capacity? Problem above: 5. Interpret the reduced cost for shipping from Eustis to c. decrease limits before the optimal solution changes Miami Orlando Tallahassee c. Is the optimal solution unique? If not. Each pivot step fails to improve the value of the objective function. Each product requires the following processing times (in hours) on each of 3 machines.) Slope of constraint 1: -1/4 6. open 40 hours per week. 4. and 10 objective function coefficients still hold. identify an alternate If slope of objective function and slope of at least 1 optimal solution to the problem. and in tons for Tallahassee. What would the optimal objective function value be if the a. Complementary slackness does not apply because surplus Example 2 of dual problem is 0.Difficulties encountered in employing the simplex method when a. 𝑥2 ≥ 0 1.) Reduced costs for the variable cells may not be Orlando and Tallahassee.) Slope of OF: -1/3 processing capacity in Eustis was reduced by 5 tons? b. the coefficients may have to changed distributors from each of the processing plants is shown in the substantially beyond the allowable increase and following table.) Shadow prices and their ranges may not be Eustis 260 220 290 unique Clermont 230 240 310 𝑀𝑎𝑥 3𝑥1 + 9𝑥2 The company wants to determine the least costly plan for filling Subject to their orders for the coming week. but value of solutions in primal Incline Electronics produces 3 different products in a plant that is problem is also 0. The cost per ton for supplying each of the fact. Degeneracy II: Infinite Number of Solutions Allowable increase or allowable decrease in one of the Product 1 Product 2 Product 3 coefficients of the objective function is zero Machine 1 2 2 1 Alternative solution can be generated: Machine 2 3 4 6 . What is the optimal solution? 2.

C 300 W 200 1. If you could get more C 7 8 12 accurate profit estimates for these products. . and 8 type 3 A 100 U 150 machines available. Develop a LPP to determine optimal production. 22. 𝐵.) What is the minimum transportation counts? cost per hour of overtime is 18. respectively. 𝑥𝐵𝑈 + 𝑥𝐵𝑉 + 𝑥𝐵𝑊 ≤ 150 b.30 0. 𝐶 𝑗 = 𝑈. are each available 34 hours per week.20 0. 𝑊 recommend scheduling for overtime? How much would you be willing to pay per hour of overtime in each James is preparing a shipment schedule to meet the demands at department? the least cost possible. labor utilization and product profitability. $120 and B 150 V 200 $150. Suppose that 10. would you recommend the company do so? Why? A 10 7 8 4. Suppose that the marginal profit for each product was B 15 12 9 computed using estimated costs. and C.50 and 12 in departments A.50 50 𝑀𝑖𝑛 𝐶 = 10𝑥𝐴𝑈 + 7𝑥𝐴𝑉 + 8𝑥𝐴𝑊 + 15𝑥𝐵𝑈 + 12𝑥𝐵𝑉 + 9𝑥𝐵𝑊 + 7𝑥𝐶𝑈 + Profit per 8𝑥𝐶𝑉 + 12𝑥𝐶𝑊 30 15 unit subject to 𝑥𝐴𝑈 + 𝑥𝐴𝑉 + 𝑥𝐴𝑊 ≤ 100 a.20 36 C 0.00 0. Bond doesn’t deduct labor 𝑥𝐶𝑈 + 𝑥𝐶𝑉 + 𝑥𝐶𝑊 ≤ 300 𝑥𝐴𝑈 + 𝑥𝐵𝑈 + 𝑥𝐶𝑈 ≥ 150 costs because they are considered fixed for the period. The plant has 10 type 1 Plant Capacity Warehouse Demand machines available. How much overtime James is contemplating of opening a new plant D that would have do you recommend using in each department? a capacity of 200 units. It would cost Php8 per unit for this plant to service each warehouse. 𝑥𝐴𝑉 + 𝑥𝐵𝑉 + 𝑥𝐶𝑉 ≥ 200 However. 𝑖 = 𝐴. 2 and 3 contribute $90. The b. Is the solution degenerate? Unit shipping costs are 2. Shipping Cost to Destination Source U V W 3. respectively. respectively.) How much will be shipped from C to warehouse W? scheduled in departments A. B.35 100 𝑥𝐶𝑊 shipping from C to W B 0. The following information concerns labor availability. 𝑉. 6 and 8 hours of overtime may be a. Which department would you 𝑥𝑖𝑗 ≥ 0. Products 1. in marginal profit per unit produced. 𝑥𝐵𝑉 shipping from A to V 𝑥𝐵𝑊 shipping from A to W Labor hours Product (hours/unit) 𝑥𝐶𝑈 shipping from C to U available Department 1 2 𝑥𝐶𝑉 shipping from C to V A 1. which one(s) would be of greatest interest to you? Why? Variables: Application of Linear Programming Problem 𝑥𝐴𝑈 shipping from A to U 𝑥𝐴𝑉 shipping from A to V Production and Cost Analysis 𝑥𝐴𝑊 shipping from A to W Bond Company is trying to determine the amount of each of two 𝑥𝐵𝑈 shipping from B to U products to produce. c. Machine 3 4 6 5 Transportation Problem James Bond operates a distribution system that must meet the Each machine must be run by one of 19 cross-trained workers who following requirements. 6 type 2 machines available. suppose that overtime can be scheduled in 𝑥𝐴𝑊 + 𝑥𝐵𝑊 + 𝑥𝐶𝑊 ≥ 200 some of the departments. Explain the value of the shadow price associated with Machine 1. Formulate a LPP to determine the optimal production. If the plant could hire another cross-trained worker. B. and C. In computing profit per unit.

6 j = time of shifts = 1. 4am 12nn 𝑥61 𝑥66 1. …. Blending Problem Jason Bourne manufactures a coffee product by blending 3 types Employee Scheduling of coffee beans.000)𝑥2 + 0.50 500 varies depending on the time of day. 8pm.70(1. 2. The beginning times each bean are as follows: for shifts are 8am. The staffing guidelines 2 0.g.000)𝑥3 Subject to 𝑀𝑖𝑛 𝑥11 + 𝑥12 + ⋯ .50(1. …. the number of officers needed 1 0. What is the minimum-cost blend that will meet the quality 5 6 10 7 4 6 standards and provide 1. first period of the day) 𝑥1 Percentage of bean 1 𝑥2 Percentage of bean 2 Determine the number of police officers that should be scheduled 𝑥3 Percentage of bean 3 to begin the 8-hour shifts at each of the six times (8am.000𝑥1 ≤ 500 𝑥11 + 𝑥61 ≥ 5 1. 8pm. 4pm. 2.45 400 Time of Day Minimum officers on duty Consumer tests with coffee products were used to provide ratings (1) 8am – 12nn 5 on a scale of 0 to 100.000𝑥3 ≤ 400 .000𝑥2 ≤ 600 𝑥12 + 𝑥22 ≥ 6 1. with higher ratings indicating higher quality.000)𝑥1 + 0. The cost per pound and the available pounds of UP police schedules officers for 8-hour shifts. 4pm) to minimize the total number of officers required. 12mn. 𝑀𝑖𝑛 𝐶 = 0. 12nn. x11 is the first shift.) Should James push through with the plan? Explain why or 𝑥56 + 𝑥66 ≥ 6 why not. Bean Cost per Pound Available Pounds During normal weekday operations. 12mn and 4am. An officer beginning a shift at one of these times work for the next 8 hours.) How much will be shipped from plant D to warehouse U if 𝑥23 + 𝑥43 ≥ 10 𝑥34 + 𝑥44 ≥ 7 the plan pushes through? 𝑥35 + 𝑥55 ≥ 4 d. 6 Variables: (e.70 600 require the following minimum umber of officers on duty: 3 0. + 𝑥66 73𝑥1 + 85𝑥2 + 60𝑥3 ≥ 75 86𝑥1 + 88𝑥2 + 75𝑥3 ≥ 80 subject to 1. (2) 12nn – 4pm 6 Product quality standards for the blended coffee require a (3) 4pm – 8pm 10 consumer rating for aroma to be at least 75 and a consumer rating (4) 8pm – 12mn 7 for taste to be at least 80. The individual ratings of the aroma and (5) 12nn – 4am 4 taste for coffee made from 100% of each bean are as follows: (6) 4am – 8pm 6 Bean Aroma Taste Time 1 73 86 Start End 1 2 3 4 5 6 2 85 88 8am 4pm 𝑥11 𝑥12 3 60 75 12nn 8pm 𝑥22 𝑥23 4pm 12mn 𝑥34 𝑥35 Assume that the aroma and taste attributes of the coffee blend will 8pm 4am 𝑥43 𝑥44 be weighted average of the attributes of the beans used in the 12nn 8pm 𝑥55 𝑥56 blend.45(1. c. 4pm. 12nn.000 pounds of the blended coffee product? i = shifts = 1.

4.012𝐴1 = 𝐴2 + 0 .92 investments he can use to establish the construction fund. The expected demand for one of Notes: these appliances during the next 4 months is shown in the What you have at the beginning of the month.56 bowling alley is expected to take 6 months and cost $300. 6 1 1. you use to following table along with the expected production costs and the pay or invest.30 pounds 𝑥3 = 0 𝑜𝑟 0% 0 pounds JR wants to minimize the amount of money he must invest in Production and Inventory Problem month 1 to meet the required payments for this project. Production 500 520 450 550 Capacity 1.16 𝑜𝑟 16% 160 pounds appliances to manufacture during each of the next 4 months to meet the expected demand at the lowest possible total cost.000 at the end of the second and fourth months. What is the cost per pound for the coffee blend? Cash Flow Problem 500(0.33% 583.70) + 160(0.50) + 340(0. 5 2 3.67% 416. Construction of the 560 1000 = 0.70 pounds D 1 6 11. 1. To maintain a level workforce. what would be investments are summarized in the following table: the expected cost per pound? 0. you’ll have money maturing $49 $45 $46 $47 Cost from some investment (A). 2. 2. Acme Manufacturing makes a variety of household appliances at a single manufacturing facility.0% 𝑥2 = 0.5% C 1.5 𝑜𝑟 50% 500 pounds 400 units per month. Available in Months to Yield at Investment month maturity maturity what is the minimum-cost blend that will meet the new A 1.8% 𝑥1 = 0. JR has identified 4 Taste Rating = 84. the company wants to produce at least 𝑥1 = 0. JR’s contract with the construction company requires him to make 3. Acme wants to determine how many 𝑥3 = 0. you have not invested Demand 420 580 310 540 anything yet so nothing has matured.5833 𝑜𝑟 58. If the minimum required aroma rating is increased to 80. these 4.2% quality standards? B 1. 3. 𝑥1 + 𝑥2 + 𝑥3 = 1 Acme has 120 units in inventory on hand for this product.000.012A1 What is available to me at the beginning of the 2nd month and can be used to invest in A again (A2) Acme estimates that it costs $1.56 5. It also wants to maintain a safety stock of at 𝑥2 = 0. expected capacity for producing these items. Production At the beginning of month 2. 3.45) = 560 JR wants to establish a construction fund (or sinking fund) to pay for a new bowling alley he is having built.50 per month for each unit of this appliance carried in inventory (estimated by averaging the Beginning of 2nd Month: beginning and ending inventory levels each month). 4 3 5. 5.000 at the end of the sixth month Aroma Rating = 75 when the bowling alley is completed. Determine the aroma and taste ratings for the coffee payments of $50. and a final payment of $200. If additional coffee were to be produced.34 𝑜𝑟 34% 340 pounds least 50 units per month.4166 𝑜𝑟 41. 1 2 3 4 At the beginning of month 1. What is available to me at the beginning of the month is the money I have invested in previous periods that have Month become mature. blend. Currently.

000 1.012𝐴3 + 1.012𝐴4 + 1.012𝐴6 + 1.50 15.000 1.012𝐴1 − 𝐴2 ≥ 0 1.000 month) The company makes its electric trimmer in-house for $55 and its Questions gas trimmer for $85.000 in the 2nd constraint.058𝐶4 + 1. What you need to do is get the net Explain. 1. 2. Weedmacker’s production capability is limited in 3 departments: Beginning of 7th Month production.40 10. How much investment in A will JR make in month 2? from another source for $67 and $95.000 trimmers: an electric model and a gas model.012𝐴6 + 1. Suppose the hours of production capacity available are uncertain and could vary from 9. If the cost to make gas trimmers increased to $90 per For #5: unit. How many gas and electric trimmers should Weedmacker 4.000 Beginning of 3rd Month: 1. D) Production 0.012𝐴4 + 1.012𝐴5 − 𝐴6 ≥ 0 1. Assembly 0. Objective Function: 𝑀𝑖𝑛 𝐴1 + 𝐵1 + 𝐶1 + 𝐷1 Hours Required per Trimmer A4 is a function of A1 so you can express all constraints in Electric Gas Hours Available terms of A1 (same goes for B. The following table 1. assembly. how would the optimal solution change? (Dual price of Php50.000 summarizes the hours of processing time available and the processing time required by each department. Buy Problem Beginning of 5th Month The Weedmacker Company manufactures 2 types of lawn 1.000 4.035𝐵3 = 𝐴5 + 𝐵5 + 50. C.000 Beginning of 4th Month: 1.058𝐶1 − 𝐴4 − 𝐶4 ≥ 0 1.012𝐴2 + 1. and packaging. How much should the company be willing to pay to going to increase 0 in the 3rd constraint. reduce the value of the objective function.000 Only decision JR has to make is how much to invest in A. How much would electric trimmers have to cost in order should be willing to pay to delay the payment due at the for the company to consider purchasing these items end of the second month to the end of the third month. D at the beginning of the period (beginning of first Packaging 0. C. The company has contracted to supply a national discount retail chain with a total of Beginning of 6th Month: 1.058𝐶4 + 1.000 gas trimmers.500.035𝐵1 = 𝐴3 + 𝐵3 + 50.000 B. Use the dual price to determine how much more JR 2. 6.012𝐴2 + 1. respectively. How much should the company be willing to pay to If you reduce Php50.000 electric trimmers and 15. This will increase acquire additional capacity in the production area? the objective function.10 5. However.500 to 10.035𝐵3 − 𝐴5 − 𝐵5 ≥ 50.11𝐷1 = 200. of the changes in the objective function. How much investment in B will JR make in month 3? 3.20 0.012𝐴3 + 1.058𝐶1 = 𝐴4 + 𝐶4 Make vs. How much investment in C will JR make in month 4? 1.30 0. Alternatively.035𝐵1 − 𝐴3 − 𝐵3 ≥ 50.012𝐴5 = 𝐴6 30.10 0. How does 𝑀𝑖𝑛 𝐴1 + 𝐵1 + 𝐶1 + 𝐷1 Subject to . for both types of Notes: trimmers: All equations above are your constraints.035𝐵5 + 1. How much investment in D will JR make in month 1? make and buy? 5. it can buy electric gas trimmers 1. it will acquire additional capacity in the assembly area? Explain.035𝐵5 + 1.11𝐷1 ≥ 200. rather than making them? 3.000) x Php50. But you’re also 5.

75 10 4.49 7. inputs and outputs both differ. amount of inputs. rather than Paste column of shadow prices beside difference column. … .) Producing on the frontier is efficient.09 8.43 ∑ 𝐼𝑖𝑗 𝑣𝑗 𝑗=1 3 4.04 6.) both branches were given the same input and branch 1 A branch is inefficient if it is using more inputs than produced more. prices. which units are efficient. satisfaction rating Results of each solver equation only pertains to 1 branch. almost 0 difference (negative number with many decimal b. points.69 𝑀𝑎𝑥 𝑂1 𝑤1 + 𝑂2 𝑤2 + 𝑂3 𝑤3 6 2. The officers of FS&L ∑𝑛𝑗=1 𝑜 𝑂𝑖𝑗 𝑤𝑗 want to analyze the efficiency of the various branch offices using 𝐸𝑖 = ∑𝑛𝑗=1 𝐼 𝐼𝑖𝑗 𝑣𝑗 DEA. expected or producing less output than is expected.46 3.) Producing outside frontier is not possible.A. 2E-15).23 subject to 𝑂11 𝑤1 + 𝑂12 𝑤2 + 𝑂13 𝑤3 − 𝐼11 𝑣1 − 𝐼12 𝑣2 ≤ 0 7 6.89 860 90 3.36 9. The data below has been selected to represent appropriate input and output measures of each banking facility.18 970 99 6. the optimal solution change for every 100-hour change in production capacity within this range? The efficiency of unit i: Data Envelopment Analysis 𝑤𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑠𝑢𝑚 𝑜𝑓 𝑢𝑛𝑖𝑡 𝑖 ′ 𝑠 𝑜𝑢𝑡𝑝𝑢𝑡𝑠 𝐸𝑖 = Fidelity Savings & Loss operates several banking facilities 𝑤𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑠𝑢𝑚 𝑜𝑓 𝑢𝑛𝑖𝑡 𝑖 ′ 𝑠 𝑖𝑛𝑝𝑢𝑡𝑠 throughout the Southeastern United States. Compare the different branches in terms of where they Use results in sensitivity report to determine how to make are in relation to their production possibility frontier.28 5 6.31 𝑘 = 1. However.38 7. Production Possibility Frontier: When you look at Solver results. 𝑗=1 Subject to New Satisfaction Labor Operation 𝑛0 𝑛1 Branch R. Compute the 𝑛 𝑀𝑎𝑥 ∑ 𝑂𝑖𝑗 𝑤𝑗 DEA efficiency for each branch office.g. you think about expressed in the same unit.42 ⋮ 𝐼11 𝑣1 − 𝐼12 𝑣2 = 1 9 5. loans. These also have positive shadow c. You can compare costs and income if all variables were If you want to make a branch efficient.49 4.01 730 82 6.32 770 92 3.95 790 93 5. that branch is inefficient. return on assets. branches efficient. (E.98 6.07 𝑂21 𝑤1 + 𝑂22 𝑤2 + 𝑂23 𝑤3 − 𝐼21 𝑣1 − 𝐼22 𝑣2 ≤ 0 8 7. e.) Producing inside frontier is inefficient. you find branches with a. 𝑛 4 6.94 880 89 7.O.40 910 98 7. Loans Rating Hours Costs ∑ 𝑂𝑖𝑗 𝑤𝑗 − ∑ 𝐼𝑖𝑗 𝑣𝑗 ≤ 0 1 5.98 770 94 4.g. that branch is inefficient.39 780 94 3.74 6. Our concern is which units are inefficient. you need to use DEA.34 𝑗=1 𝑗=1 𝑛𝐼 2 5.97 930 91 5. but because that’s not the how to increase the amount of output using the same case.73 6. .35 Notes: If efficiency ratio < 1. Cost of operations: Labor hours and operation costs If difference between weighted output and weighted Income sources (not necessarily in monetary terms): New input is negative. 3E-15. Disregard values for branch 1 and all other values You can only say branch 1 does better than branch 2 if that don’t pertain to branch 2. you solved for branch 2 and got values for branch 1 Notes: also.

rating and shadow price. Do the same for the other columns.g. You’ll find that combined inputs will be lower than that of branch 3.) From the sumproduct. if emulated by branch 3. Do the thing 5 times. but composite branch will use less inputs. because the combined operations/characteristics. reference branch and composite branch will have the same inputs. would make branch 3 efficient because it will allow branch 3 to produce more output with less input. Shadow * input . (e. you get the combined inputs and outputs of branches 6 and 8. Inefficient branches: Branch 3. branch 10 For branch 10. 8 DOSS 1. Weights * output of composite 3. 2. Sometimes. it should emulate branches 1. etc. Sometimes. reference branch and composite branch will have the same output. 6. and that output would be higher. new loans and shadow price. Branches 6 and 8 serve as models for branch 3. but composite will have more output. Get the sumproduct of ROA column and shadow price column.

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