QUANTITATIVE METHODS

CHAPTER 3

Sensitivity Analysis

Determine how the optimal solution is affected by changes both in the objective function
coefficients and the RHS values.

Graphical Sensitivity Analysis (just see notes)

Objective function coefficients

The range of optimality for each objective function coefficient provides the range of values
over which the current solution will remain optimal.

See from book graphical representation range of optimality (+ class notes)

+ Simultaneous changes

Dual value: The change in the value of the optimal solution per unit increase in the right-hand
side of the constraint.

If the right-hand side of this binding constraint is increased by one unit, we expect the optimal
objective function value to get better.

In the case of a minimization problem, this means that the optimal objective function value
gets smaller. If an increase in the righthand side makes the optimal objective function value
smaller, the dual value is negative – the objective function value will not improve if the RHS is
increased.

The dual value of a non-binding constraint is 0

Sensitivity Analysis: Computer solution

The reduced cost associated with a variable is equal to the dual value for the nonnegativity
constraint associated with the variable. In general, if a variable has a nonzero value in the
optimal solution, then it will have a reduced cost equal to zero.

Allowable increase and decrease in the objective function … new range of optimality
according to the (new) values

Allowable increase and allowable decrease in the right-hand sides of the constraints relative
to the dual values holding. As long as the constraint right-hand side is not increased
(decreased) by more than the allowable increase (decrease), the associated dual value gives
the exact change in the value of the optimal solution per unit increase in the right-hand side.

The right-hand-side ranges provide limits within which the dual values give the exact change in
the optimal objective function value. The range over which the dual value is applicable the
range of feasibility.

Cautionary Note on the Interpretation of Dual Values

When the right-hand side of the constraint represents the amount of a resource available, the
associated dual value is often interpreted as the maximum amount one should be willing to

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pay for one additional unit of the resource. However, such an interpretation is not always
correct.

A sunk cost is one that is not affected by the decision made. It will be incurred no matter what
values the decision variables assume. Sunk: not reflected in the objective function coefficient.

A relevant cost is one that depends on the decision made. The amount of a relevant cost will
vary depending on the values of the decision variables.

When the cost of a resource is sunk, the dual value can be interpreted as the maximum
amount the company should be willing to pay for one additional unit of the resource. When
the cost of a resource used is relevant, the dual value can be interpreted as the amount by
which the value of the resource exceeds its cost. Thus, when the resource cost is relevant, the
dual value can be interpreted as the maximum premium over the normal cost that the
company should be willing to pay for one unit of the resource.

Interpretations in examples:

Recall that the reduced costs are the dual values of the corresponding nonnegativity
constraints. As the computer output shows, the reduced costs for S and L are zero because
these decision variables already have positive values in the optimal solution.

However, the reduced cost for decision variable D is –1.15. The interpretation of this number is
that if the production of deluxe bags is increased from the current level of 0 to 1, then the
optimal objective function value will decrease by 1.15. Another interpretation is that if we
“reduce the cost” of deluxe bags by 1.15 (i.e., increase the contribution margin by 1.15), then
there is an optimal solution where we produce a nonzero number of deluxe bags.

Limitations of classical sensitivity analysis

Simultaneous changes: assumption that only one coefficient changes … we should resolve the
model with the new coefficient values.

Changes in constraint coefficients: no information about changes resulting from a change in a

coefficient of a variable in a constraint … we must change the coefficient and rerun the model.

Nonintuitive Dual Values: constraints with variables naturally on both the left-hand and right-
hand sides often lead to dual values that have a nonintuitve explanation. This is usual in
constraints that involve % ... the model should be resolved with the new %

Computer solution ¨The Electronics Communications Problem¨ (book p.116 chapter 3)

Reduced cost:

Recall that the reduced cost of a variable is the dual value of the corresponding nonnegativity
constraint. As the computer output shows, the first three reduced costs are zero because the
corresponding decision variables already have positive values in the optimal solution.
However, the reduced cost of –45 for decision variable D tells us that profit will decrease by
$45 for every unit produced for the direct mail channel. Stated another way, the profit for the
new radios distributed via the direct mail channel would have to increase from its current
value of $60 per unit, by $45 per unit, to at least $60+$45=$105 per unit before it would be
profitable to use the direct mail distribution channel.

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Slack/surplus variables and dual values:

The advertising budget constraint has a slack of zero, indicating that the entire budget of
$5000 has been used. The corresponding dual value of 3 tells us that an additional dollar
added to the advertising budget will increase the objective function (increase the profit) by $3.
Thus, the possibility of increasing the advertising budget should be seriously considered by the
firm.

The slack of 25 hours for the salesforce availability constraint shows that the allocated 1800
hours of sales time are adequate to distribute the radios produced and that 25 hours of sales
time will remain unused.

Because the production level constraint is an equality constraint, the zero slack/surplus shown
on the output is expected. However, the dual value of 60 associated with this constraint shows
that if the firm were to consider increasing the production level for the radios, the value of the
objective function, or profit, would improve at the rate of $60 per radio produced.

Finally, the surplus of zero associated with the retail store distribution channel commitment is
a result of this constraint being binding. The negative dual value indicates that increasing the
commitment from 150 to 151 units will actually decrease the profit by $17. A decrease in the
commitment will actually improve profit at the rate of $17 per unit.

MULTIPLE CHOICE

1. To solve a linear programming problem with thousands of variables and constraints

a. a personal computer can be used.

b. a mainframe computer is required.

c. the problem must be partitioned into subparts.

d. unique software would need to be developed.

2. A negative dual price for a constraint in a minimization problem means

a. as the right-hand side increases, the objective function value will increase.

b. as the right-hand side decreases, the objective function value will increase.

c. as the right-hand side increases, the objective function value will decrease.

d. as the right-hand side decreases, the objective function value will decrease.

3. If a decision variable is not positive in the optimal solution, its reduced cost is

a. what its objective function value would need to be before it could become positive.

b. the amount its objective function value would need to improve before it could become

positive.

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c. zero.

d. its dual price.

4. A constraint with a positive slack value

a. will have a positive dual price.

b. will have a negative dual price.

c. will have a dual price of zero.

d. has no restrictions for its dual price.

5. The amount by which an objective function coefficient can change before a different set of
values for

the decision variables becomes optimal is the

a. optimal solution.

b. dual solution.

c. range of optimality.

d. range of feasibility.

6. The range of feasibility measures

a. the right-hand side values for which the objective function value will not change.

b. the right-hand side values for which the values of the decision variables will not change.

c. the right-hand side values for which the dual prices will not change.

d. each of the above is true.

7. The 100% Rule compares

a. proposed changes to allowed changes.

b. new values to original values.

c. objective function changes to right-hand side changes.

d. dual prices to reduced costs.

8. An objective function reflects the relevant cost of labor hours used in production rather than
treating them as a sunk cost. The correct interpretation of the dual price associated with the
labor hours constraint is

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a. the maximum premium (say for overtime) over the normal price that the company would

be willing to pay.

b. the upper limit on the total hourly wage the company would pay.

c. the reduction in hours that could be sustained before the solution would change.

d. the number of hours by which the right-hand side can change before there is a change in

the solution point.

11. The amount that the objective function coefficient of a decision variable would have to
improve before that variable would have a positive value in the solution is the

a. dual price.

b. surplus variable.

c. reduced cost.

d. upper limit.

12. The dual price measures, per unit increase in the right hand side,

a. the increase in the value of the optimal solution.

b. the decrease in the value of the optimal solution.

c. the improvement in the value of the optimal solution.

d. the change in the value of the optimal solution.

13. Sensitivity analysis information in computer output is based on the assumption of

a. no coefficient change.

b. one coefficient change.

c. two coefficient change.

d. all coefficients change.

14. When the cost of a resource is sunk, then the dual price can be interpreted as the

a. minimum amount the firm should be willing to pay for one additional unit of the resource.

b. maximum amount the firm should be willing to pay for one additional unit of the
resource.

c. minimum amount the firm should be willing to pay for multiple additional units of the

resource.

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d. maximum amount the firm should be willing to pay for multiple additional units of the

resource.

15. The amount by which an objective function coefficient would have to improve before it
would be possible for the corresponding variable to assume a positive value in the optimal
solution is called the

a. reduced cost.

b. relevant cost.

c. sunk cost.

d. dual price.

16. Which of the following is not a question answered by sensitivity analysis?

a. If the right-hand side value of a constraint changes, will the objective function value

change?

b. Over what range can a constraint's right-hand side value without the constraint's dual price

possibly changing?

c. By how much will the objective function value change if the right-hand side value of a

constraint changes beyond the range of feasibility?

d. By how much will the objective function value change if a decision variable's coefficient in
the objective function changes within the range of optimality?

1. Output from a computer package is precise and answers should never be rounded. FALSE

2. The reduced cost for a positive decision variable is 0. TRUE

3. When the right-hand sides of two constraints are each increased by one unit, the objective
function value will be adjusted by the sum of the constraints' dual prices. FALSE

4. If the range of feasibility indicates that the original amount of a resource, which was 20, can
increase by 5, then the amount of the resource can increase to 25. TRUE

5. The 100% Rule does not imply that the optimal solution will necessarily change if the
percentage exceeds 100%. TRUE

6. For any constraint, either its slack/surplus value must be zero or its dual price must be zero.
TRUE

7. A negative dual price indicates that increasing the right-hand side of the associated
constraint would be detrimental to the objective. TRUE

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8. Decision variables must be clearly defined before constraints can be written. TRUE

9. Decreasing the objective function coefficient of a variable to its lower limit will create a
revised problem that is unbounded. FALSE

10. The dual price for a percentage constraint provides a direct answer to questions about the
effect of increases or decreases in that percentage. FALSE

11. The dual price associated with a constraint is the improvement in the value of the solution
per unit decrease in the right-hand side of the constraint. FALSE

12. For a minimization problem, a positive dual price indicates the value of the objective
function will increase. FALSE

13. There is a dual price for every decision variable in a model. FALSE

14. The amount of a sunk cost will vary depending on the values of the decision variables.
FALSE

15. If the optimal value of a decision variable is zero and its reduced cost is zero, this indicates
that alternative optimal solutions exist. TRUE