AGEC 622 (Spring 2012)

ANSWERS for LP Homework 2

Due Date: February 4th by noon
Turn in to: Fabian or TA (Alexander M.)
Late Assignments: -10 points per day late
Total Points Possible: 200
1. (70 pts) The ABC lumber company has three sources of wood and five markets where wood is demanded. The annual quantity of wood available in
the supply source 1, 2, and 3 are 15, 20, and 15 million board feet, respectively. The amount that can be sold at market 1, 2, 3, 4, and 5 is 11, 12, 9,
10, and 8 million board feet, respectively. The company currently transports all of the wood by train. It wishes to evaluate its transportation schedule,
possibly shifting some or all of its transportation to ships. The unit cost of shipment (in $10,000 along the various routes using both methods is
described in the table below.
Table A. Cost per unit of truck transportation
Supply source Market 1 Market 2 Market 3 Market 4 Market 5
Supply 1 51 62 35 45 56
Supply 2 59 68 50 39 46
Supply 3 49 56 53 51 37

Table B. Cost per unit of train transportation

Supply source Market 1 Market 2 Market 3 Market 4 Market 5
Supply 1 48 68 48 none 54
Supply 2 66 75 55 49 57
Supply 3 none 61 64 59 50

The management needs to decide to what extent to continue to rely on truck transportation.
 Truck
Transportation
Wood Source 1
Supply = 1.5E7 board feet
Demand = 1.1E7 board feet

Demand = 1.2E7 board feet

Truck
Transportation
Wood Source 2 Demand = 9E6 board feet
Supply = 2.0E7 board feet

Demand = 1.0E7 board feet

Truck
Transportation Demand = 8.0E6 board feet
Wood Source 3
Supply = 1.5E7 board feet

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a) (10 pts) Formulate a linear programming model for the ABC lumber company for the case that this company uses only rail transport including the
math formulation and the corresponding tableau.

Answer:

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b) (10 pts) Solve the problem in (a) using Excel. Print out the excel spreadsheet that contains your LP model, the answer report and the sensitivity
report. If you make any additional assumptions in setting up your model, please state them explicitly.
Answer:

Answer Report:

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Sensitivity Report:

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c) (10 pts) Write down and interpret the optimal values for the objective function, shadow prices, decision variables, and reduced costs.
Answer:
 The minimum cost to distribute the wood from the three sources by truck transportation is $23,160 Billions of Dollars
 The reduced cost of the variable (Amount supplied from source 1 to market 2) is telling that if we force to move 1 unit of into the
optimal system, then we will increase the total cost by $40,000.
 The shadow price of constraint 1 (source 1 annual supply) is telling that at the optimal solution, if it is increased by one unit the supply at this
point (source 1), the total cost (objective function) will have a decrement of $80,000.
 The shadow price of constraint 8 (Required demand from market 5) is telling that at the optimal solution, if it is increased by one unit the RHS of
the constraint, then the total cost (objective function) will have an increment of $460,000.
Variable Optimal Value (board feet)
X11 6,000,000
X12 0
X13 9,000,000
X14 0
X15 0
X21 2,000,000
X22 0
X23 0
X24 10,000,000
X25 8,000,000
X31 3,000,000
X32 12,000,000
X33 0
X34 0
X35 0

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d) (10 pts) How much does it cost if the company use only train transport? Also write down the optimal values of decision variables. Hint: plugging the
large number in the objective function for the routes that have no ship transport. You do not need to turn in the associated Sensitivity Reports for this
question.
Answer:

The total cost to the company using only train transport is $26,520 Billions of Dollars, so it looks a better deal to use truck transport instead of only train
transport.
Variable Optimal Value (board feet)
Y11 11,000,000
Y12 0
Y13 4,000,000
Y14 0
Y15 0
Y21 0
Y22 0
Y23 5,000,000
Y24 10,000,000
Y25 5,000,000
Y31 0
Y32 12,000,000
Y33 0
Y34 0
Y35 3,000,000

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e) (10 pts) How much does it cost to use the cheapest available mode of transportation on each route? Also write down the optimal values of decision
variables. You do not need to turn in the associated Sensitivity Reports for this question.

Train
Transportation
Wood Source 1
Supply = 1.5E7 board feet
Truck Demand = 1.1E7 board feet
Transportation

Demand = 1.2E7 board feet

Train
Transportation
Wood Source 2 Demand = 9E6 board feet
Supply = 2.0E7 board feet Truck
Transportation

Demand = 1.0E7 board feet

Train
Transportation Demand = 8.0E6 board feet
Wood Source 3
Supply = 1.5E7 board feet
Truck
Transportation

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Answer:

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Thus, Mixing Train and Truck Transportation, the total cost can be reduced to $22,980 Billions of Dollars
Variable Optimal Value (board feet)
X11 0
X12 0
X13 9,000,000
X14 0
X15 0
X21 2,000,000
X22 0
X23 0
X24 10,000,000
X25 8,000,000
X31 3,000,000
X32 12,000,000
X33 0
X34 0
X35 0
Y11 6,000,000
Y12 0
Y13 0
Y14 0
Y15 0
Y21 0
Y22 0
Y23 0
Y24 0
Y25 0
Y31 0
Y32 0
Y33 0
Y34 0
Y35 0

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f) (10 pts) How would your answer in part (a) change if you learned that the supply source 2 and the demand at market 3 were both expected to increase
by 10 million board feet? You do not need to turn in the associated Sensitivity Reports for this question.
Answer:
At f) the objective function (total cost) is minimized at $27,740 Billions of Dollars.
However at a) the total cost was minimized at $23,160 Billions of Dollars.
SOLUTION f) Variable Optimal Value (board feet) SOLUTION a) Variable Optimal Value (board feet)
Supply1 to Market1 X11 0 Supply1 to Market1 X11 6,000,000
Supply1 to Market2 X12 0 Supply1 to Market2 X12 0
Supply1 to Market3 X13 15,000,000 Supply1 to Market3 X13 9,000,000
Supply1 to Market4 X14 0 Supply1 to Market4 X14 0
Supply1 to Market5 X15 0.00E+00 Supply1 to Market5 X15 0.00E+00
Supply2 to Market1 X21 8,000,000 Supply2 to Market1 X21 2,000,000
Supply2 to Market2 X22 0 Supply2 to Market2 X22 0
Supply2 to Market3 X23 4,000,000 Supply2 to Market3 X23 0
Supply2 to Market4 X24 10,000,000 Supply2 to Market4 X24 10,000,000
Supply2 to Market5 X25 8,000,000 Supply2 to Market5 X25 8,000,000
Supply3 to Market1 X31 3,000,000 Supply3 to Market1 X31 3,000,000
Supply3 to Market2 X32 12,000,000 Supply3 to Market2 X32 12,000,000
Supply3 to Market3 X33 0 Supply3 to Market3 X33 0
Supply3 to Market4 X34 0 Supply3 to Market4 X34 0
Supply3 to Market5 X35 0 Supply3 to Market5 X35 0

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2. (60 points) A dairy processes milk using capacity, labor, and refrigerator space and sells low fat milk, high fat milk, and butter milk. In addition, the
dairy has the option of using butterfat to make butter, which is then sold. The process of converting butterfat to butter is constrained by churn time.
Essentially, the dairy must choice between 3 different production processes. The first process uses raw milk to produce low fat milk, the second
process uses raw milk to produce high fat milk, and the third process uses butterfat from the first two processes to produce butter.

Process 1 Process 2 Process 3

Use raw milk Use raw milk Use butterfat
to make low fat to make high to make
milk fat milk butter
500 500
Low fat milk yield (gal) 450
High fat milk yield (gal) 491
Butterfat yield (gal) 50 9
Butterfat used (gal) 3000
Butter yield (pounds) 8000
Labor used (hours) 3.2 2.2 2.4
Refrigerator space (cu ft) 2700 2700 1000
Churn use (hours) 1.5
Processing cost ($) .15 per gal .16 per gal .45 per gal
Packaging cost ($) .15 per gal .15 per gal .30 per gal

The dairy has raw milk costs of $0.50 per gallon. The company has a contract to sell the high fat milk to one of its customers equal to 200,000
gallons and the company is able to sell the dairy products for the following prices:
Sales price
Low fat milk ($/gal) 2.00
High fat milk ($/gal) 1.20
Butterfat ($/gal) 2.20
Butter ($/pound) 2.50

The resources used in production are constrained to the following:

Availability
Labor available (hours) 2,300
Raw milk capacity (gal) 1,500,000
Refrigerator space (cu ft) 2,000,000
Churn time (hours) 12
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 a) (10 pts) Should this problem be set up as a profit maximization model or a cost minimization model? Why?
Answer:
In this case the amount of product you make it unknown and the volume you make influences your profits so profit maximization is appropriate, we
would only minimize cost if you specified the volume of products to make.

b) (20 pts) Set up a linear programming model to determine the optimal production pattern for this dairy. Provide a discussion verifying that the
model you have set up satisfies the homogeneity of units criteria.

Answer: “ ” means units

Initial Input:

Input Processes:



Final Outputs:





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 A Dairy Problem

(Low Fat Milk to be sold)

Process 1
(Input: Raw
Milk for Low
Fat Milk)

(Input: Butterfat Process 3

Milk to be used on (Butter to be sold)
process 3)

Blender of
(Raw Material) Butterfat

(Butterfat Milk from

Process 1& 2 to be sold)
Process 2

(Input: Raw
Milk for High
Fat Milk)
(High Fat Milk to be sold)

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Thus the problem can be stated as:

Raw Capacity
Labor available
Refrigeration Space
Churn Space
High Fat Milk Contract
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Balances:
Low Fat Milk Balance
High Fat Milk Balance
Butterfat Milk Balance
Butter Balance
Raw-Milk Balance
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Non-negativity constraints.

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 c) (20 pts) Provide a solved version of the LP model you have set up and interpret the results.
Answer:

Thus, it looks that the global optimum is achieved with a profit of $472,620 dollars.

The optimal values of the variables are:

The constraint results:

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 d) (10 pts) You should have used at least 3 different types of constraints in your model. Describe the different types of constraints and their purpose
in the model.
Answer:
As mentioned, this is a disassembly problem, so, it can be identified:
 1 upper bound on sales:
 1 upper bound on disassembly:
 Non-negativity constraints: , , etc.
 3 Resource limitation (availability) constraints:
Labor available
Refrigeration Space
Churn Space
 Balance constraints.

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3. (40 pts) Suppose you are consulting with an investor to determine how much of 4 stocks to buy. From previous years' experience, the investor has
observed the following data on returns per five hundred dollars invested from each of the four stocks:

Obs Stock 1 Stock 2 Stock 3 Stock 4

1 55 45 35 20
2 60 70 28 20
3 18 28 30 22
4 -30 42 12 19
5 50 15 40 21
6 60 40 22 18
7 41 30 35 20
8 16 19 36 20
The investor has 500,000 to invest.
a. Formulate the investor's problem using the E-V criterion.
Answer:

Where:

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Check that the problem can be explicitly stated as:

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b. Solve it for the following five risk aversion coefficients and explain in a basic fashion why the solutions change. 0.01, 0.001, 0.0001, 0.00001,
0.00

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4. (20 points) Suppose you have the mixed integer model

Max 3 X 1  2 X 2  8Y1  5Y2  3Y3

s.t. X1  9Y1  9Y3  0
X2  5Y2  0
Y1  Y3 = 2
X1 , X 2  0
Y1 , Y2 , Y3 = 0 or 1

Explain the coefficients and relationship of the variable Y1 , Y2 , and Y3 in this problem along with constraints relating X 1 , X 2 and Y1 , Y2 , Y3 .
Answer:
Check that the constraint implies that these variables have always the value of one: and
The constraint thus, if and
The constraint implies that
So, the maximum is achieved with value of 48

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*************************Thank You************************

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