The University of Toronto

Faculty of Arts & Science

and
Rotman School of Management

Sample Exam 2 solution

Total points: 125

PLEASE DO NOT WRITE ON THIS EXAM PAPER.

PLEASE HAND IN THESE QUESTIONS TOGETHER WITH YOUR EXAM
BOOKLETS INCLUDING BLANK ONES.

Part A. Multiple Choice and short questions (45 points)

Select a right answer to the following problems, please write your answers in the exam
booklets by choosing from a. to d. or e. of each multiple choice question. For example, if
you select a. as your answer to question 1, write: 1. a.

1. The solution to the LP Relaxation of a minimization integer linear program provides

a. an upper bound for the value of the objective function.
*b. a lower bound for the value of the objective function.
c. an upper bound for the value of the decision variables
d. a lower bound for the value of the decision variables
2. Sensitivity analysis for integer linear programming
a. can be provided only by computer.
b. has precisely the same interpretation as that from linear programming.
*c. does not have the same interpretation and should be disregarded.
d. is most useful for 0 - 1 models.
3. What is the constraint that ensures that if x3, x4 and x5 are equal to 0 then x1and x2 should
be equal to 0 as well All decision variables are binary)?

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 a. x1 + x2 < x3 + x4 + x5
b. x1 + x2 > x3 + x4 + x5
*c. x1 + x2 < 2(x3 + x4 + x5)
d. x1 + x2 > 3(x3 + x4 + x5)

4. Let x1, x2 , and x3 be 0 - 1 variables whose values indicate whether the projects are not
done or are done. Which answer below indicates that at most one of the projects must
be done?
a. x1 + x2 + x3 > 1
*b. x1 + x2 + x3 < 1
c. x1 + x2 + x3 = 1
d. x1 + x2 = 0

5. The utility function of an investor is where m is an amount of dollars. The decision

m
make is indifferent with getting $X and the lottery that give him $36 with probability of
1/3 and $144 with probability of 2/3. X is:
a. 10
b. 108
c.
108
*d.  100

6. Rounded solutions to linear programs must be evaluated for

*a. feasibility and optimality.
b. sensitivity.
c. relaxation and boundedness.
d. each of the above is true.

7. In which of the following situations is preemptive goal programming more appropriate

than weighted goal programming?
*a. When there are major differences in the importance of the goals.
b. When all of the goals are roughly equal in importance.
c. When there is a single objective or goal.
d. None of the above.
e. b and c only.

8. Consider the soft constraint . In Goal programming formulation the

3x1  2 x 2  x3 7
constraint is

*a. 3 x  2 x  x  d  7
1 2 3

b.
3x1  2 x 2  x3  d  7

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 c. 3x  2x  x  d  d  7
1 2 3

d. 3x  2 x  x  d  7
1 2 3

9. In goal programming the decision variables representing deviations for soft constraints
a. Can be negative
*b. Are non-negative
c. Positive ones cancel negatives ones
d. Must be equal to 0 in the optimal solution

Questions 10, 11 and 12 refer to the following payoff table (in profits):

State of Nature
Alternative S1 S2
A1 75 -40
A2 0 100
Prior Probability 0.6 0.4

There is an option of paying $100 to have research done to better predict which state of nature
will occur. When the true state of nature is S1, the research will accurately predict S1 60% of
the time. When the true state of nature is S2, the research will accurately predict S2 80% of
the time.
10. What is the posterior probability of S1 given that the research predicts S1?
a. 0.18.
b. 0.44.
c. 0.57.
d. 0.65.
*e. 0.82

11. What is the posterior probability of S2 given that the research predicts S1?
*a. 0.18.
b. 0.44.
c. 0.57.
d. 0.65.
e. 0.82.

12. Given that the research is done and the information the research predicts S1, what is the
expected payoff using the EV decision rule?
a. -82.
*b. -46.
c. 0.

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 d. 54.
e. 40.
13. A decision maker has chosen .4 as the probability for which he cannot choose between
a certain loss of 10,000 and the lottery p(-25000) + (1-p)(5000). If the utility of
-25,000 is 0 and of 5000 is 1, then the utility of -10,000 is
a. .5
*b. .6
c. .4
d. 4

14. Which of the following statements is INCORRECT regarding the advantages of

simulation?
a. Simulation is relatively easy to explain and understand.
*b. Simulation guarantees an optimal solution.
c. Simulation models are flexible.
d. A simulation model provides a convenient experimental laboratory for the real
system.

Refer to the following frequency distribution

Demand Frequency
1 0.15
2 0.30
3 0.25
4 0.15
5 0.15

15. The simulation begins with the random number 0.6246. The simulated value would be:
a. 0.
b. 1.
*c. 2.
d. 3.
e. 4.

Part B. Problem Solving (80 points)

1. (25 points)
Simplon Manufacturing must decide on the processes to use to produce 1650 units. If
machine 1 is used, its production will be between 300 and 1500 units. Machine 2
and/or machine 3 can be used only if machine 1's production is at least 1000 units.
Machine 4 can be used with no restrictions.

Fixed Variable Minimum Maximum

Machin cost cost Production Production
e
1 500 2.00 300 1500

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 2 800 0.50 500 1200
3 200 3.00 100 800
4 50 5.00 any any

(HINT: Use an additional 0 - 1 variable to indicate when machines 2 and 3 can be

used.)
Formulate an integer programming model to help Simplon solve its decision problem.

SOLUTION:
Define the following variables.

Si – Indicator for whether or not to use machine i, i.e., S i=1 if machine i is used, and Si=0
otherwise; i = 1, 2, 3.
Ui – The production quantity by machine i; i=1,2,3.
K – Indicator for whether or not machines 2 and 3 are used

Formulation as follows:

(Minimize total fixed & variable

Min. 500S1  2U1  800S2  5U2  200S3  3U3  50S4  5U4
costs)
(If use machine 1, must produce at least 300)
S.t. U1  300S1
(If use machine 1, must not produce more than 1500; otherwise produce 0)
U1  1500S1
(K=1 implies that machine 1 produces at least 1000)
U1  1000K
S2  K
(Machine 2&3 can only be used when K=1)
S3  K
(if machine 2 is used, it produces at least 500)
U2  500S2
(if machine 2 is used, it produces at most 1200; otherwise it produces 0)
U2  1200S2
(If machine 3 is used, it produces at least 100)
U3 100S3
(If machine 3 is used, it produces at most 800; otherwise it produces 0)
U3  800S3
(If machine 4 is not used, it produces 0)
U 4  1650S4
(Total production quantity is 1650)
U1 U2 U3 U4  1650
Ui  0 for i 1, 2,3, 4
K, Si  0,1; for i 1, 2,3, 4;

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 2. (25 Points)
Sharp Outfits is trying to decide whether to ship some customer orders now via UPS or
wait until after the threat of another UPS strike is over. If Sharp Outfits decides to
ship the requested merchandise now and the UPS strike takes place, the company will
incur $60,000 in delay and shipping costs. If Sharp Outfits decides to ship the
customer orders via UPS and no strike occurs, the company will incur $4,000 in
shipping costs. If sharp Outfits decides to postpone shipping its customer orders via
UPS, the company will incur $10,000 in delay costs regardless of whether UPS goes
on strike. Let p represent the probability that UPS will go on strike and impact Sharp
Outfits’ shipments.

a. For which values of p, if any, does Sharp Outfits minimize its expected total cost
by choosing to postpone shipping its customer orders via UPS?
b. Suppose now that, at a cost of $1,000, Sharp Outfits can purchase information
regarding the likelihood of a UPS strike in the near future. Based on similar strike
threats in the past, the probability that this information indicates the occurrence of
a UPS strike is 27.5%. If the purchased information indicates the occurrence of a
UPS strike, the chance of a strike actually occurring is 0.105/0.275. If the
purchased information does not indicate the occurrence of a UPS strike, the chance
of a strike actually not occurring is 0.680/0.725. Provided that p = 0.15, what
strategy should Sharp Outfits pursue to minimize its expected total cost?
c. Continuing part b. compute and interpret EVSI when p = 0.15.
d. Continuing part b. compute and interpret the EVPI when p = 0.15.

SOLUTION:
a.

S1 = Strike S2 = No strike
D1 = Now 60000 4000
D2 = Wait 10000 10000
p 1-p

If choose to postpone shipping, the expected cost is 10000;

If choose to ship now, the expected cost is 60000p + (1-p)4000.
It is optimal to choose to ship now if and only if 60000p + (1-p)4000  10000, i.e., p 6/56=
0.1071.

b.

When p = 0.15, the expected cost for shipping now is (0.15)(60000) + (0.85)(4000) = 12400. So
wait is optimal with cost of 10000 without buying the information.
Decision tree:

RSM 470H1F Final Exam Page 6 of 6

 , where I1 means the purchased information suggests a strike, and I2 means the
information suggests no strike. P(I1)=0.275, P(I2)=0.725.

.105
P  S1 | I1   .381, P(S2 | I1)  .619
.275

.68 .68
P  S1 | I 2   .062, P( S 2 | I 2)  .938
.275 .725

From the decision tree, the optimal policy will first buy information, and wait if the
information suggests a strike, or ship now if the information suggests no strike.

c. EVSI = 10000-8170 = 1830

d. EVPI = 10000 – [(0.15) 10000 + (0.85) 4000] = 5100.

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 3. (15 points)
Garry is indifferent between receiving $100 with certainty and a lottery where he can
win $200 with probability .6 and $40 with probability .4. Garry is indifferent between
receiving $50 with certainty and a lottery where he can win $200 with probability .2
and $40 with probability .8. Gary is offered two lotteries. In one he can win $200 with
probability .5 and $40 with probability .5. In the other one he can win $100 with
probability .7 and $50 with probability .3. Which lottery will Gary prefer?

SOLUTION:

We can infer from the description that:

U  100   0.6U  200   0.4U  40

U  50   0.2U  200  0.8U  40 

Then, the lottery “win $100 with probability .7 and $50 with probability .3” leads to
the expected utility
0.7U  100   0.3U  50   0.7 0.6U  200   0.4U  40    0.30.2U  200   0.8U  40  
 0.48U  200   0.52U  40
 0.48U  200   0.02U  40  0.5U  40 
 0.48U  200   0.02U  200   0.5U  40
 0.5U  200   0.5U  40 

Thus Gary will prefer the lottery that win $200 with probability .5 and $40 with
probability .5.

Another way. Assume

U(200)=1, U(40)=0
So U(100)=.6 and U(50)=.2
Lottery 1: ,7U(100)+(.3)U(50)=.7*.6+.3*(.2)=..48
Lottery 2: .5*U(200)+.5U(0)=.5
So Lottery 2

4. (15 points)
Min 3x1 + x2
s.t. x1 + x2  4
2x1  x2  6
x1, x2  0 and integers

Below is the branch and bound tree for the problem. The nodes numbers reflect the
order by which the linear programming problems were solved. What are the values (or
fathoming information) of all boxes A to S?

RSM 470H1F Final Exam Page 8 of 6

 1
z= A
LB = D
x1 = B
UB = ∞
x2 = C

x2 E x2 1

2 3
F z = 12 z = 11.5
LB = I
LB =
x1 = 4 x1 = 3.5
UB = G UB = J
x2 = 0 x2 = 1

H
x1 K x1 M
4 5
z= N LB = Q

Infeasible x1 = O
UB = R
x2 = P

L S

First solve the relaxation problem in node 1. Use the graphic method to get the optimal solution
(x1*,x2*) = (10/3, 2/3) and z* = 3*(10/3)+2/3 = 32/3. Then, A = 32/3, B=10/3, C=2/3, D=32/3;

Continue the branch & bound process and solve all the related relaxation problems, we have:

2 1 2 2
A  10 , B  3 , C  , D  10
3 3 3 3

E  " x2  0"

F 12, G  12

H Fathom

I  11.5, J 12

RSM 470H1F Final Exam Page 9 of 6

 K 3
L Fayhom

M 4
N  13, O  4, P  1, Q  13, R  12

S Fathom

RSM 470H1F Final Exam Page 10 of 6