Lesson 1-7

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Contents
PAGE
Lesson 1: Linear Programming
1.1 Learning Objectives 1
1.2 Introduction 2
1.3 Linear Programming Problem 2
1.4 Formulation of Linear Programming Problem 3
1.5 Graphical Method 7
1.6 Special Cases in Graphical Method 10
1.7 Simplex Method 12
1.8 Duality 19
1.9 Sensitivity Analysis 21
1.10 Summary 26
1.11 Answers to In-Text Questions 26
1.12 Self-Assessment Questions 27
1.13 References 30
1.14 Suggested Reading 30
Lesson 2: Application of LP Marketing, Finance, Operations Management

2.2 Linear Programming 32
2.3 Application of LP in Marketing 37
2.4 Application of LP in Finance 41
2.5 Application of LP in Operations Management 43
2.6 Summary 53
2.9 References and Suggested Readings 56
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Quantitative Technique SLM_Content.indd 1 15-03-2024 18:02:06

PAGE
Lesson 3: Transportation Problem
3.2 Introduction 58
3.3 Transportation Problem 58
3.4 Some Special Codes of TP 75
3.5 Summary 83
3.8 References 87
3.9 Suggested Readings 87
Lesson 4: Assignment Problem

4.2 Introduction 90
4.3 Assignment Problems 90
4.4 Hungarian Method 92
4.5 Some Special Cases 98
4.6 Solved Illustrations (For Practical Subject) 112
4.7 Summary 117
4.10 Reference 119
Lesson 5: Project Scheduling

5.2 Introduction: Project Scheduling 121
5.3 Construction of AOA Network Diagram 121
5.4 Scheduling with Known Activity Times 124
5.5 Scheduling with Uncertain Activity Times 131
5.6 7LPH&RVW 7UDGH2൵V
ii PAGE

CONTENTS
PAGE
5.7 Summary 141
5.10 References 142
Lesson 6: Decision Theory

6.2 Introduction 144
6.3 'H¿QLWLRQ RI 'HFLVLRQ 7KHRU\
6.4 'H¿QLWLRQ RI 'HFLVLRQ 0DNLQJ (QYLURQPHQW
6.5 Statistical Decision Theory 146
6.6 Elements and Steps of a Decision 146
6.7 The Principles and Approach of Decision Theory 147
6.8 3D\R൵ 7DEOH DQG ([SHFWHG 3D\R൵
6.9 Opportunity Loss 151
6.10 Importance of Accurate Information 153
6.11 Sensitivity Analysis and Decision Trees 155
6.14 References 161
/HVVRQ 'HFLVLRQ 8QGHU &RQÀLFW

7.2 Introduction 164
7.3 Types of Games 165
7.4 Strategy 167
7.5 3D\R൵V 0DWUL[
7.6 Saddle Point, Optimal Strategies and Value of the Game 168
7.7 Minimax (Maximin) Principle 169
PAGE iii

PAGE
7.8 Game without Saddle Point 171
7.9 Solution of 2 × 2 Games without Saddle Point 174
7.10 Dominance Rule 177
7.11 Graphical Method to Solve 2 × n, m × 2 and 2 × 2 Games 180
7.12 Applications of Game Theory 184
7.13 Limitations of Game Theory 184
7.14 Summary 185
7.17 References 186
Glossary 187
iv PAGE

L E S S O N
1
Linear Programming
Dr. Mona Verma
Assistant Professor
Shaheed Sukhdev College of Business Studies
University of Delhi
Email-Id: monavermag@sscbsdu.ac.in
STRUCTURE
1.1 Learning Objectives
1.2 Introduction
1.3 Linear Programming Problem
1.4 Formulation of Linear Programming Problem
1.5 Graphical Method
1.6 Special Cases in Graphical Method
1.7 Simplex Method
1.8 Duality
1.9 Sensitivity Analysis
1.10 Summary
1.11 Answers to In-Text Questions
1.12 Self-Assessment Questions
1.13 References
1.14 Suggested Reading

To understand the applications of linear programming problem (LPP).
To understand the basics of linear programming problem.
To understand the method of finding feasible and optimal solution for real life
problems.
To understand various techniques for solving different types of LPP.
PAGE 1
Quantitative Technique SLM.indd 1 15-03-2024 18:00:24

Notes
1.2 Introduction
Linear Programming problem is a mathematical technique to optimise
the performance in terms of profit or cost under a set of constraints like
man power, machine hours, raw materials etc. specified by the company.
The technique is very powerful and found especially useful because
of its application to many different types of real business problems in
areas like finance, production, sales and distribution, personnel, mar-
keting and many more areas of management. These will be explained
in the next chapter.
As the name suggests, linear programming model consists of linear
objectives and linear constraints, which means that the variables in a
model have a proportionate relationship. For example, an increase in
manpower resource will result in an increase in work output.
1.3 Linear Programming Problem
1.3.1 Assumptions for Linear Programming Problem

LPP is based on following assumptions:
1. Limited Resources: Limited number of labour, material equipment
and finance
2. Objective: Refers to the aim to optimize (maximize the profits or
minimize the costs).
3. Linearity: Increase in labour input will have a proportionate increase
in output.
4. Homogeneity: The products, workers’ efficiency, and machines are
assumed to be identical.
5. Divisibility: It is assumed that resources and products can be divided
into fractions.
2 PAGE

LINEAR PROGRAMMING
Notes
Figure 1.1: Application of LPP
1.3.2 Properties of Linear Programming Problem

A linear programming problem has the following properties:
1. Relationship among decision variables must be linear in nature.
2. A model must have an objective function.
3. Resource constraints are essential.
4. A model must have a non-negativity constraint.
1.4 Formulation of Linear Programming Problem

Formulation of linear programming is the representation of problem situ-
ation in a mathematical form. It involves well defined decision variables,
with an objective function and set of constraints. Each of the component
may consist of one or more of the following:
Decision variables
Objective function coefficients
Technological coefficients
Availability of resources
PAGE 3

Notes
1.4.1 Defining the Decision Variable and Constraints
In a given problem situation, defining the key decision variables is
important. Identifying these variables help us to develop the model.
For example, consider a manufacturer who is manufacturing three prod-
ucts A, B and C using two machines, I and II. Each unit of product A
takes 2 minutes on machine I and 5 minutes on machine II. Product B
takes 1 minute on machine I and 3 minutes on machine II. Similarly,
product C takes 4 minutes and 6 minutes on machine I and machine II,
respectively. The total available time on machine I and machine II are
200 hours and 420 hours, respectively. Each unit of A yields a profit of
Rs. 3.00, B yields Rs. 4.00 and C yields Rs. 5.00. What should be level
of production of products A, B and C that should be manufactured by
the company so as to maximize the profit?
The decision variables, objectives and constraints are identified from the
problem.
The company is manufacturing three products A, B and C. Let A be x1,
B be x2 and C be x3. x1, x2 and x3 are the three decision variables in the
problem. The objective is to maximize the profits. Therefore, the problem
is to maximize the profit, i.e., to know how many units of x1, x2 and x3
are to be manufactured.
There are two machines available, machine I and machine II with total
machine hours available as 200 hours and 420 hours. The machine hours
are the resource constraints, i.e., the machines cannot be used more than
the given number of hours.
To summarize,
Key decision: How many units of x1, x2 and x3 are to be manufactured
Decision variables: x1, x2 and x3
Objective: To maximize profit
Constraint: Machine hours
Feasibility Condition: All decision variables are non-negative.
Formulation of linear programming is the representation of problem sit-
uation in mathematical form. It involves well defined decision variables,
with an objective function and set of constraints.
4 PAGE

LINEAR PROGRAMMING
To formulate the above problem, we convert the word problem into the Notes
tabular form as below:
Machine Processing Time (Min.)

Available
Product A Product B Product C Machine Hours
I 2 1 4 200
II 5 3 6 420
Profit/unit (Rs.) 3 4 5
Objective Function Coefficient: These are some constants that represent

the profit per unit or cost per unit. For the above problem let C1, C2,
C3 be the profit per unit of products A, B and C respectively which are
given as Rs. 3, Rs. 4 and Rs. 5.
Objective Function: It is an
expression that represents the total profit
or cost of carrying out some
activities. The objective function will be
either maximisation type (for
profit) or minimisation type (for cost). A
general form of the objective
function can be written as:
Maximise or Minimise Z = C1X1 + C2X2 + C3X3 + + CnXn
Maximise Z = 3X1 + 4X2 + 5X3
Technological Coefficient (aij ): The technological coefficient is the amount
of resource I required for activity j, where I varies from 1 to m and j varies
from 1 to n. A generalised format of technological coefficient matrix is:
ª ª a11 a1n º º
«« »»
«« »»
«¬ «¬ am1 amn »¼ »¼
For the above example the technological coefficient matrix can be written as
ª2 1 4º
«5 3 4»
¬ ¼
Resource Availability (bi ): The constant bi is the amount of resource i
available during the given period. A generalised format of the resource
availability matrix is:
PAGE 5

Notes ª b1 º
«b »
« 2»
«#»
« »
¬bm ¼
For the above question we have b1 = 200 hours and b2 = 420 hours
Set of Constraints: A constraint is a restriction on the total amount of
particular resource required to carry out different activities
A generalised form of constraints can be written as:
a x + a x + ... + a x d (t, =) b
11 1 12 2 1n n 1
a21x1 + a22x2 + ... + a2nxn d (t, =) b2

…………………………………………….
…………………………………………….
am1x1 + am2x2 + ... + amnxn d (t, =) bm
For the above problem, the constraints may be written as
2X1 + X2 + X3 d 200
5X1 + 3X2 + 4X3 d 420
Non-negativity Constraints: All variables in L.P.P. have to satisfy
non-negativity restrictions.
The condition is represented as:
X1, X2, ... Xn t 0
For the above problem,
X1, X2 and X3 t 0
1.4.2 Properties of Linear Programming Solution

The Feasible solution is a solution for which all the constraints are
satisfied.
The Feasible region is the collection of all feasible solutions.
An infeasible solution is a solution for which at least one constraint is
violated.
An optimal solution is a feasible solution that has the most favourable
value of the objective function.
6 PAGE

LINEAR PROGRAMMING
Any linear programming problem having multiple optimal solutions will Notes
have an infinite number of solutions, each with the same optimal value
of the objective function.
For any LPP, the objective function value can be increased or decreased
infinitely without any limitations. Such solution is known as unbounded
solution.
1.5 Graphical Method

Linear programming problems with two variables can be represented
and solved graphically with ease. Though in real-life, the two variable
problems are practiced very little, the interpretation of this method will
help to understand the solution process for n variables.
Illustration 1: A company manufactures two types of boxes, corrugated
and ordinary cartons. The boxes undergo two major processes: cutting
and pinning operations. The profits per unit are Rs. 6 and Rs. 4 respec-
tively. Each corrugated box requires 2 minutes for cutting and 3 minutes
for pinning operation, whereas each carton box requires 2 minutes for
cutting and 1 minute for pinning. The available operating time is 120
minutes and 60 minutes for cutting and pinning machines. Determine the
optimum quantities of the two boxes to maximize the profits.
Solution:
Key Decision: To determine how many (number of) corrugated and carton
boxes are to be manufactured.
Decision Variables:
Let xl be the number of corrugated boxes to be manufactured.
x2 be the number of carton boxes to be manufactured.
Objective Function: The objective is to maximize the profits. Given
profits on corrugated box and carton box are Rs. 6 and Rs. 4 respectively.
The objective function is,
Maximise Z = 6x1 + 4x2
Constraints: The available machine-hours for each machine and the time
consumed by each product are given.
PAGE 7

Notes Therefore, the constraints are,

2x1 + 3x2 L
2x1+ x2 LL
where x1, x2
Graphical Solution: As a first step, the inequality constraints are removed
by replacing ‘equal to’ sign to give the following equations:
2x1 + 3x2 = 120 (i)
2x1 + x2 = 60 (ii)
Find the co-ordinates of the lines by substituting x1 = 0 and x2 = 0 in
each equation. In equation (1), put x1 = 0 to get x2 and vice versa
2x1 + 3x2 = 120
2(0) + 3x2 = 120, x2 = 40
Similarly, put x2 = 0,
2x1 + 3x2 = 120
2x1 + 3(0) = 120, x1 = 60
The line 2x1 + 3x2 = 120 passes through co-ordinates (0, 40)(60, 0).
The line 2x1 + x2 = 60 passes through co-ordinates (0,60)(30,0).
The lines are drawn on a graph with horizontal and vertical axis repre-
senting boxes x1 and x2 respectively.
8 PAGE

LINEAR PROGRAMMING
7KH LQHTXDOLW\ FRQVWUDLQW RI WKH ILUVW OLQH LV OHVV WKDQ RU HTXDO WR Notes
type which means the feasible solution zone lies towards the origin.
The no-shaded portion can be seen is the feasible area shown in Figure
1RWH ,I WKH FRQVWUDLQW W\SH LV WKHQ WKH VROXWLRQ ]RQH DUHD OLHV DZD\
from the origin in the opposite direction). Now the second constraints
line is drawn. When the second constraint is drawn, you may notice that
a portion of feasible area is cut. This indicates that while considering
both the constraints, the feasible region gets reduced further. Now any
point in the shaded portion will satisfy the constraint equations.
For example, let the solution point be (15, 20) which lies in the feasible region.
If the points re substituted in all the equations, it should satisfy the conditions.
2x1 + 3x2
2x1 + x2
Now, the objective is to maximize the profit. The point that lies at the
furthermost point of the feasible area will give the maximum profit. To
locate the point, we need to plot the objective function (profit) line.
Equate the objective function for any specific profit value Z,
Consider a Z-value of 60, i.e.,
6x1 + 4x2 = 60
Substituting x1 = 0, we get x2 = 15 and if x2 = 0, then x1 = 10
Therefore, the co-ordinates for the objective function line are (0, 15),
(10, 0) as indicated by dotted line L1 in Figure. The objective function
line contains all possible combinations of values of xl and x2.
The line L1 does not give the maximum profit because the furthermost
point of the feasible area lies above the line L1. Move the line (parallel
to line L1) away from the origin to locate the furthermost point. The
point P, is the furthermost point, since no area is seen further. Take the
corresponding values of x1 and x2 from point P, which are 15 and 30
respectively, and are the optimum feasible values of x1 and x2.
Therefore, we conclude that to maximize profit, 15 numbers of corru-
gated boxes and 30 numbers of carton boxes should be produced to get
a maximum profit.
Zmax = 6x1 + 4x2
= 6(15) + 4(30)
Maximum profit: Rs. 210.00
PAGE 9

Notes
1.6 Special Cases in Graphical Method
1.6.1 Unbounded Solution

Illustration 2: Solve the following LPP using graphical method:
Maximize Z = 12X1 + 25X2
Subject to 12X1 + 3X2
15X1 – 5X2
X1 and X2
Solution: From the first constraint in equation form
12X1 + 3X2 = 36
We get X2 = 12 when X1 = 0; and X1 = 3 when X2 = 0.
Also from the second constraint in equation form,
15X1 – 5X2 = 30
We get X2 = –6, when X1 = 0; and X1 = 2 when X2 = 0.
Now plot the constraints 1 and 2 as shown in the figure. The solution
space is denoted by A, B, C and D. One of the sides of the shaded region
is not closed. This indicates that the given problem has the unbounded
solution. The objective function can be increased infinitely.
10 PAGE

LINEAR PROGRAMMING
Notes
1.6.2 Multiple Solution
Maximize Z = 5x1 + 3x2
Subject to: 3x1 + 5x2 = 15
10x1 + 6x2 = 10
x 1, x 2 ! = 0
Solution: For the above problem it can be seen that second constraint is
the multiple of objective function. If we plot the second constraint and
the objective function then two lines will be parallel to each other. In
such situation, there are more than one optimal solution of the problem
though the value of objective function remains same.
1.6.3 Infeasible Solution

Maximize Z = x1 + x2
Subject to: x1 + x2 = 1
–3x1 + x2 ! = 3
x 1, x 2 ! = 0
Solution: In this case, the two lines corresponding two constraints do
not intersect and thus have no common point in the feasible region. Thus
there doesn’t exist any feasible solution of the problem.
PAGE 11

Notes
1.7 Simplex Method
The Graphical Method is applicable only to solve two variable linear
programming problem. For handling more than two variables we have
to use simplex method. However, a two-variable problem can also be
handled by simplex method.
Before proceeding with the algorithm of simplex method, we will discuss
some results that are being used to derive simplex method.
(i) If there is a feasible solution then there is a basic feasible solution
as well.
(ii) An optimal solution is at least one of the basic feasible solution.
(iii) If we have a basic feasible solution which is not optimal, then there
is a procedure to get a new basic feasible solution from it with an
improved value of objective function.
(iv) The improved basic feasible solution is
(a) Optimal, if (zj cj IRUDOOMIRUPD[LPLVDWLRQSUREOHPDQG
(zj cj IRU DOO M IRU PLQLPLVDWLRQ SUREOHP
(b) Unbounded, if for at least one j for which
yij L « P ]j cj) 0
§ m ·
where (zj cj ௗ ¨ ¦cBi yij c j ¸
©i1 ¹
1.7.1 The Simplex Algorithm

For the solution of any LPP by simplex algorithm, the existence of an
initial basic feasible solution is always assumed. To compute the optimum
solution the following steps have to be followed:
Step 1: The simplex method is usually applied for maximisation problem.
If the objective function of the given LPP is to be minimised then we
convert it to a problem of maximisation by using the result
Minimum Z = – Maximum (–Z)
Step 2: Check whether all bi (I = 1, 2, … m) are non-negative. If any
one of bi is negative, then multiply the corresponding inequation of the
FRQVWUDLQWV E\ í VR DV WR JHW DOO Ei (i = 1, 2, … m) non-negative.
12 PAGE

LINEAR PROGRAMMING
Step 3: Convert all the inequations of the constraints into equations by Notes
introducing slack and/or surplus variables in the constraints. Put the costs
of these variables equal to zero.
Step 4: Obtain an initial basic feasible solution to the problem on the
form XB = B–1b
And put it in the first column of the simplex table.
¦
m
Step 5: Compute the net evaluation (zj cj) = c yij c j for all j =
i 1 Bi
1, 2, ... n
Examine the sign of zj cj
(i) If all (zj cj WKHQ WKH LQLWLDO EDVLF IHDVLEOH VROXWLRQ ;B is
an optimum basic feasible solution.
(ii) If at least one (zj cj) 0 proceed on to next step.
Step 6: If there are more than one negative (zj – cj), then choose the most
negative of them. Let it be zr – cr, for some j = r. Examine the following:
(i) If all yir i = 1, 2, … m), then there is an unbounded
solution to the given problem.
(ii) If at least one yir ! 0 (i = 1, 2, … m), then the corresponding
vector yr enters the basis yB.
Step 7: Compute the ratios
X Bi ½
® , yir ! 0, i 1, 2, ... m ¾ and select the minimum of them.
¯ yir ¿
X
Let the minimum of these ratios be Bk , then the vector yk will leave
ykr
the basis yB. The common element ykr is known as leading element or
pivotal element of the table.
Step 8: Convert the leading element to unity by dividing its row by the
leading element itself and all other element in its column to zeros by
using the relations:
y ykj
kj
, j 1, 2, ... n
ykr
ykj
And y ij yij yir , I = 1, 2, …. m, i k
ykr
PAGE 13

Notes The above changes can be easily done using elementary row operations:
Step 9: Go to step 5 and repeat the algorithm until we get an optimum

solution or there is a sign of an unbounded solution.
Illustration 5: Solve the following LPP using Simplex method.
Maximize Z = 10x1+ 15x2+ 20x3
Subject to: 2x1 + 4x2 + 6x3
3x1 x2 + 6x3
x1, x2 and x3
Solution: By introducing slack variables S1 DQG 62 UHVSHFWLYHO\
the set of constraints of the given LPP are converted into system of
equations. The standard form can be written as
Maximize Z = 10x1 + 15x2+ 20x3+ 0S1+ 0S2
Subject to: 2x1 + 4x2 + 6x3 + S1 = 24
3x1 x2 + 6x3 + S2 = 30
x1, x2 and x3
An initial basic feasible solution to the given problem is S1 = 24 and
S2 = 30, Z = 0.
The initial Simplex table for the problem will be
Cj 10 15 20 0 0
Basic
CBi Variables X1 X2 X3 S1 S2 Solution B Ratios
0 S1 2 4 6* 1 0 24 24/4
0 S2 3 6 0 1 30 30/6
Zj – Cj –10 –15 – 20 0 0 0
Since all the values of Zj – Cj are not greater than equal to zero. Hence
the initial solution is not optimal. The most negative Zj – Cj corresponds
to X3. Therefore the column vector X3 enters the basis. Further the mini-
mum ratio is 4 which corresponds to the variable S1. Thus, S1 will leave
the basis and the element y13 is the leading element for the first iteration.
14 PAGE

LINEAR PROGRAMMING
First Iteration Notes

Introduce the column vector X3 and drop the slack variable S1 from the
basis. Converting the leading element y13 to unity and other elements of
X3 to zero. The iterated simplex table is
Cj 10 15 20 0 0
Basic
CBi Variables X1 X2 X3 S1 S2 Solution B Ratios
20 X3 1/3 2/3 1 1/6 0 4 12
0 S2 1* 5 0 –1 1 6 6
Zj – Cj –10/3 5/3 0 –10/3 0 80
Since one Zj – Cj is negative, the variable X1 is entering variable. The
slack variable S2 is leaving variable since it has least ratio. The leading
element is y21.
Second Iteration
Introduce the column vector X1 and drop the slack variable S2 from the
basis. Here the leading element y21 is unity. Make other elements of X1
to zero. The next table is
Cj 10 15 20 0 0
CBi Basic Variables X1 X2 X3 S1 S2 Solution B
20 X3 0 –1 1 1/2 –1/3 2
10 X1 1* 5 0 –1 1 6
Zj – Cj 0 15 0 0 10/3 100
Since all Z j – C j WKH RSWLPDOLW\ UHDFKHG DQG WKH FRUUHVSRQGLQJ
optimal solution is X1 = 6, X2 = 0 and X3 = 2 and Max Z = 100.
1.7.2 The Big M Method

,I VRPH RI WKH FRQVWUDLQWV DUH RI µ ¶ RU µ¶ W\SH WKHQ ZH FDQ¶W ILQG WKH
basic variables after subtracting surplus variables. Just to have a basic
variable in the constraints, a new variable called artificial variable is
introduced in each of such constraints with a positive unit coefficient.
If the objective function is a maximisation type, then the coefficients of
artificial variable in the objective function should be –M otherwise +M,
where M is a very large value.
PAGE 15

Notes The algorithm will remain same as simplex method except at the last iteration
of simplex method there can arise any one of the following three cases:
(i) There is no vector corresponding to some artificial variable, in the
basis yB. In such a case we continue simplex method until optimality
reached.
(ii) There is at least one vector corresponding to artificial variable in
the basis with zero value. Also the coefficient of M in each net
evaluation Zj – Cj is nonnegative. In such a case the current basic
feasible solution is a degenerate. In this case an optimum solution
to the given LPP includes an artificial variable and an optimum
basic feasible solution does exist.
(iii) At least one artificial variable is present in the basis with positive
value and the net evaluation are all non-negative. In this case, the
LPP does not possess any feasible solution.
Note that while applying simplex method, whenever a vector corresponding
to some artificial variable leave the basis, we drop the column of that
vector from simplex table.
Illustration 6: Solve the following LPP using Big M method.
Minimize Z = 2x1 + x2
Subject to 3x1 + x2 = 3
4x1 + 3x2 t 6
x1 + 2x2 d 3
x 1, x 2 ! 0
Solution: Since the problem is of minimising the objective function, we
first convert it into that of maximisation, using the relation.
Min Z = –Max (–Z) = –2x1 – x2
Introducing Artificial variables xA1 ! 0, xA2 ! 0 and surplus variable S1 ! 0,
slack variable S2 ! 0. Thus the given LPP can be rewritten as
Maximize Z 2 x1 x2 0 S1 0 S 2 Mx A1 Mx A 2
Subject to 3 x1 x2 x A1 3
4 x1 3 x2 S1 x A 2 6
x1 2 x2 S 2 3
x1 , x2 , S1, S 2, x A1 , x A 2 t 0
16 PAGE

LINEAR PROGRAMMING
An initial basic feasible solution to the given problem is xA1 = 3 and xA1 = 6, Notes
S2 = ± 0
The initial Simplex table for the problem will be
Cj –2 –1 –M 0 –M 0
Basic Solution
CBi Variables X1 X2 XA1 S1 XA2 S2 B Ratios
–M XA1 3* 1 1 0 0 0 3 3/3
–M XA2 4 3 0 –1 1 0 6 6/4
0 S2 1 2 0 0 0 1 3 3/1
Zj – Cj –7M + 2 –4M + 1 0 M 0 0 ±0
First Iteration: X1 is entering variable and XA1 is departing variable.

Delete the column of XA1 from the table.
Cj –2 –1 0 –M 0
Basic Solution
CBi Variables X1 X2 S1 XA2 S2 B Ratios
–2 X1 1 1/3 0 0 0 1 3
–M XA2 0 5/3* –1 1 0 2 6/5
0 S2 0 5/3 0 0 1 2 6/5
Zj – Cj 0 (–5M + 1)/3 M 0 0 –2M – 2
Second Iteration: X2 is entering variable and XA2 is departing variable

Cj –2 –1 0 0
CBi Basic Variables X1 X2 S1 S2 Solution B Ratios
–2 X1 1 0 1/5 0 3/5
–1 X2 0 1 –3/5 0 6/5
0 S2 0 0 1 1 0
Zj – Cj 0 0 1/5 0 –12/5
Now, since all the net evaluation are non-negative, therefore an optimum
basic feasible solution to the given LPP has been attained. Thus the
optimum basic feasible solution is:
X1 = 3/5, X2 = 6/5 and Max Z* = –12/5
Thus Min Z = 12/5.
PAGE 17

Notes
1.7.3 Two-Phase Simplex Method
Two-Phase simplex method is an alternative procedure to solve LPP
involving artificial variables. It applies simplex algorithm in two phases.
In Phase I, the simplex algorithm tests the feasibility (consistency) of
the problem. If the LPP is feasible then it determines the starting basic
feasible solution. Phase II then leads from the starting basic feasible
solution determined at the end of Phase I and uses simplex algorithm to
arrive at an optimal feasible solution, if any.
Algorithm for Two-Phase method:
Phase I
Step 1: Form a modified problem for phase I from the canonical form
of the original problem by replacing the objective function with the sum
of only the artificial variables along with the same set of constraints of
the canonical form of the original problem.
Minimize Z * A1 A2 }}} An
Step 2: Prepare the initial table for phase I.

Step 3: Apply the usual simplex method till the optimality is reached.
Step 4: Check whether the objective function value is zero in the optimal
table of phase one. If yes, go to phase two, otherwise conclude that the
original problem has no feasible solution and stop.
Phase II
Step 5: Obtain a modified table using the following steps:
(i) Drop the columns in the optimal table of phase I corresponding to
the artificial variables which are currently non-basic.
(ii) If some artificial variable(s) is(are) present at zero level in the basic
solution of the optimal table of phase one substitute its objective
function coefficient with zero.
(iii) Substitute the coefficients of the original objective function in the
optimal table of the phase one for the remaining variables and make
necessary changes in the basis matrix.
Step 6: Continue with the simplex method for further iterations till the
optimality is reached.
18 PAGE

LINEAR PROGRAMMING
Notes
1.7.4 Identification of Special Cases from Simplex Table
Infeasible Solution: In the optimal simplex table, if the set of basic
variables contains at least one artificial variable, then the given problem
is said to have infeasible solution.
Unbounded Solution: If the constraints coefficients of the entering
variable in this simplex table are either less than or equal to 0 then the
solution space is unbounded and has no finite optimum solution.
Alternate Optimum Solution: In the optimum simplex table if the net
evaluation Zj Cj value for at least one non-basic variable is equal to 0,
then the problem is said to have alternate optimum solution.
1.8 Duality
The term duality implies that every linear programming problem whether
of maximization or minimization has related with it another linear pro-
gramming problem based on the same data. The original (given) problem
is called the primal problem while the other i.e. the converted form, is
called its dual problem. In general, either problem can be considered as
primal and the other as its dual. Thus, the two problems constitute the
pair of dual problems.
1.8.1 Rules for Writing Dual

There are certain rules that to be followed to constitute a primal dual pair.
1. Convert the given problem into canonical form i.e. Maximization
with less than equal to type constraints or Minimization with greater
than equal to type constraints.
2. Change the inequality sign by multiplying by (–1) to convert in
canonical form.
3. If the constraints are ‘=’ type then replace it by two constraints
LQYROYLQJ WZR LQHTXDOLWLHV DV µ¶ DQG µ¶ )RU H[DPSOH
x1 + 4x2 = 15 can be written as x1 + 4x2 DQG [1 + 4x2
4. ,IWKHREMHFWLYHIXQFWLRQRIDSULPDOSUREOHPLVD PD[LPL]DWLRQ
type then the objective function for the dual problem will be a
PLQLPL]DWLRQ W\SH DQG YLFH YHUVD
PAGE 19

Notes 5. The number of variables in the dual problem is equal to the number
of constraints in the primal problem.
6. The number of constraints in the dual problem is equal to the
number of variables in the primal problem.
7. If ‘C’ is the cost vector of the primal problem then its transpose
becomes the resource vector for the dual problem.
8. If ‘B’ is the resource of the primal problem then its transpose
becomes the cost vector for the dual problem.
9. If ‘A’ is the coefficient matrix in the constraints of primal problem
then its transpose becomes the coefficient matrix for constraints in
the dual problem.
Illustration 7: Form the dual of the following primal problem.
Maximize Z = 4x1+ 10x2 + 20x3
Subject to: 2x1 + 4x2 + 8x3
4x1 x2 + 8x3
6x1 + 8x2 + 2x3
x1, x2 and x3
Solution:
The given problem is termed as a primal problem. Let Yi be dual variable
associated with the ith constraint of the primal problem. Let’s write the
Coefficient matrix A, Cost Vector C and resource vector B.
ª2 4 8º ª 25º
A «« 4 9 8 »» , B «30 » , C
« » >4 10 20@
«¬ 6 8 2 »¼ «¬ 40 »¼
The corresponding dual problem can be written as:

Minimize Y = 25y1+ 30y2+ 40y3
Subject to: 2y1 + 4y2 + 6y3
4y1 y2 + 8y3
6y1 + 8y2 + 2y3
y1, y2 and y3 ! = 0
20 PAGE

LINEAR PROGRAMMING
Notes
1.8.2 Characteristics of Duality
1. Dual of dual is primal.
2. If either the primal or dual problem has a solution, then the other
also has a solution and their optimal values are equal
3. If any of the two problems has an infeasible solution, then the value
of the objective function of the other is unbounded.
4. The value of the objective function for any feasible solution of
the primal is less than the value of the objective function for any
feasible solution of the dual.
5. If either the primal or dual has an unbounded solution, then the
solution to the other problem is infeasible.
6. If the primal has a feasible solution, but the dual does not then the
primal will not have a finite optimal solution and vice versa.
1.9 Sensitivity Analysis

In many situations, the parameters and characteristics of a linear pro-
gramming model may change over a period of time. Under such sce-
nario, the current optimal solution may change due to change in the
parameters. This kind of sensitivity analysis can be carried out in the
following ways:
Making changes in the objective function coefficients.
Making changes in the right hand side constants i.e. resource vector
of the constraints
1.9.1 Changes in the Objective Function

In reality, the profit coefficients or cost coefficients of the objective
function undergo changes over a period of time. Under such situation,
one can obtain the revised optimum solution from the optimal table of
the original problem by following certain steps. Also, one will be inter-
ested to know the range of the coefficient of a variable in the objective
function over which the optimality is unaffected.
PAGE 21

Notes There may be two cases that arise:

(i) The changed cost coefficient C ji associated with the non-basic
variable.
(ii) The changed cost coefficient Cji associated with the basic variable.
In both cases, feasibility of new problem remains unchanged but the
optimality may change.
For case (i) If changed net evaluation i.e. zk – ck IRU VRPH k then
¨ck ]k – ck
If zj – cj 0, for some j, then make a new simplex table for the changed
problem with new entries. Apply the simplex method till the optimality
conditions are satisfied. Write the solution of the changed problem from
the optimal table thus obtained.
For Case (ii), Calculate the range
° ( z j c j ) °½ ° ( z j c j ) °½
Max ® ¾ d 'Ck d Min ® ¾
°̄ Ykj ! 0 °¿ °̄ Ykj 0 °¿
Where, k indicates the rows corresponding to basic variables

7KH QHZ EDVLF IHDVLEOH VROXWLRQ VKDOO UHPDLQ RSWLPDO VR ORQJ DV ¨ck
satisfies the above range.
Illustration 8: Discuss the effect of discrete changes in C1, C2 and C3
on the optimality of the LPP give below:
Maximize Z = 10x1+ 15x2+ 20x3
Subject to: 2x1 + 4x2 + 6x3 = 24
3x1 x2 + 6x3 = 30
x1, x2 and x3 ! = 0
Solution: The optimal table for the above problem is given below:
Cj 10 15 20 0 0
20 X3 0 –1 1 1/2 –1/3 2
10 X1 1 5 0 –1 1 6
Zj – Cj 0 15 0 0 10/3 100
22 PAGE

LINEAR PROGRAMMING
Here, C1 and C3 are the cost coefficient of basic variable and C2 is Notes
associated with non-basic variable in the optimal table.
Range for C2 ¨F2 z2 – c2 ¨ c2
15 10 / 3 ½
Range for C1: Max ® , ¾ d 'ck ± d 'ck
¯ 5 1 ¿
15 10 / 3 ½
Range for C3: 'ck d Min ® , ¾ c1
¯ 1 1 / 3 ¿
1.9.2 Changes in Resource vector bi

The right hand side constant that is resource vector of 1 or more con-
straints of a linear programming model may change over a period of
time so one may be interested in knowing the revised optimum solution
based on the optimum table of the original problem after incorporating
the new changes in the right hand side constants. The changes bring in
the following results.
Same set of basic variables with modified right inside constants in
the optimal table.
Different set of basic variables in the optimal table.
7KH UDQJH IRU GLVFUHWH FKDQJHV RI ¨bk that will maintain the feasibility
is given as
xBi ½ xBi ½
Max ® ¾ d 'bk d Min ® ¾
¯ bik ! 0 ¿ ¯ bik 0 ¿
Where bik is the (i, k)th element of B-1 (It is the sub-matrix related to
slack variables in the optimal table)
Illustration 9: For the Illustration 8, find the changes in b1, b2 and b3
that will maintain the feasibility of the given LPP.
Solution: From the optimal table,
Cj 10 15 20 0 0
20 X3 0 –1 1 1/2 –1/3 2
10 X1 1 5 0 –1 1 6
Zj – Cj 0 15 0 0 10/3 100
PAGE 23

Notes §1 / 2 1 / 3 ·
B-1 = (S1 S2) = ¨ ¸ Also XB = [2, 6]
© 1 1 ¹
2 ½ 6 ½
Range for b1: Max ® ¾ d 'b1 d Min ® ¾ = !–4 d 'b1 d 6
¯1 / 2 ¿ ¯ 1 ¿
6 ½ 6 ½
Range for b2: Max ® ¾ d 'b2 d Min ® ¾ = !–6 d 'b2 d 18
¯1 ¿ ¯ 1 / 3 ¿
IN-TEXT QUESTIONS
1. What is the primary focus of linear programming in management?
(a) Maximizing profits
(b) Optimizing resources allocation
(c) Minimizing risks
(d) Enhancing customer satisfaction
2. In linear programming, what are the assumptions typically made
about the decision-making environment?
(a) Perfect competition
(b) Unlimited resources
(c) Certainty in parameters
(d) No constraints
3. What is the purpose of the graphical method in linear programming?
(a) To visualize data
(b) To identify optimal solutions
(c) To solve nonlinear problems
(d) To analyze financial statements
4. Which method is commonly used to solve large-scale linear
programming problems iteratively?
(a) Graphical method
(b) Simplex method
(c) Sensitivity analysis
(d) Duality method
24 PAGE

LINEAR PROGRAMMING
5. What does duality in linear programming refer to? Notes
(a) Existence of multiple optimal solutions

(b) Relationship between primal and dual problems
(c) Non-linearity in constraints
(d) Uncertainty in decision variables
6. What aspect of linear programming does sensitivity analysis
primarily focus on?
(a) Changes in resource availability
(b) Impacts of external factors
(c) Stability of optimal solutions
(d) Flexibility of decision variables
7. Which section of linear programming deals with the formulation
of decision variables and constraints?
(a) Graphical method
(b) Sensitivity analysis
(c) Formulation of LPP
(d) Special cases
8. What is the main objective of the Big M method in linear
programming?
(b) Minimizing costs
(c) Handling inequality constraints
(d) Balancing resources
9. How does the simplex method differ from the graphical method
in solving linear programming problems?
(a) It can handle non-linear functions
(b) It is computationally more efficient
(c) It requires fewer assumptions
(d) It is easier to implement
PAGE 25

Notes 10. In linear programming, what does an infeasible solution indicate?

(a) No solution exists within the feasible region
(b) Multiple optimal solutions exist
(c) The problem is unbounded
(d) The objective function is non-linear
1.10 Summary
The basic theme of the lesson is to make learner understand the concept
of linear programming problem and the tools to get the solution of the
same. To solve an LPP for two variables one may use graphical method
but for more than two variables simplex method has to be used. For
special type of constraints, Big M method and two-phase method may
be used. In the later part of the lesson concept of duality and sensitivity
analysis has been introduced.

1. (b) Optimizing resources allocation
2. (c) Certainty in parameters
3. (b) To identify optimal solutions
4. (b) Simplex method
5. (b) Relationship between primal and dual problems
6. (c) Stability of optimal solutions
7. (c) Formulation of LPP
8. (c) Handling inequality constraints
9. (b) It is computationally more efficient
10. (a) No solution exists within the feasible region
26 PAGE

LINEAR PROGRAMMING
Notes
1. A firm manufacturing two types of electrical items A and B, can
make a profit of Rs. 120 per unit of A and Rs. 200 per unit of B.
Both A and B make use of two necessary components, a resistor
and a capacitor. Each unit of A requires 3 resistors and 2 capacitors
and each unit of B requires 2 resistors and 4 capacitors. The total
supply of components per month is restricted to 210 resistors and
300 capacitors. Type B is an export model requiring a transistor,
which has a supply restricted to 65 units per month. How many each
of A and B should the firm manufacture per month to maximize its
profit? How much is this profit?
2. A company produces two types of belts. Belt X is of good quality
and belt Y is of a lower quality. Profits on the two types of belts are
Rs. 4 and Rs. 3 per belt respectively. Each belt of type X requires
twice as much time as required by a belt of type Y. If all belts are
of Type Y, then the company could produce 1000 belts per day. But
the supply of raw material is sufficient only for 800 belts per day.
Belt X requires a fancy buckle and only 400 buckles are available
per day. For belt of Type Y only 700 buckles are available per
day. How should the company manufacture the two types of belts
in order to have a maximum overall profit?
3. A publisher sells a hard cover edition of a text book for Rs. 72
and a paperback edition of the same text for Rs. 40. Costs to the
publisher are Rs. 56 and Rs. 28 per book respectively in addition
WRZHHNO\FRVWVRI5V%RWKW\SHVRIERRNVUHTXLUHPLQXWHV
of printing time, although hard cover requires 10 minutes binding
time and the paperback requires only 2 minutes. Both the binding
and printing operations have 4800 minutes available each week.
How many of each type of book should be produced in order to
maximize profit?
4. List and explain the assumptions of linear programming problem.
5. A small manufacturer employs 5 skilled men and 10 semi-skilled
men for making a product in two qualities: a deluxe model and an
ordinary model. The production of a deluxe model requires 2-hour
work by a skilled man and 4-hour work by semi-skilled man. The
PAGE 27

Notes ordinary model requires 1-hour work by a skilled man and 3-hour
work by semi-skilled man. According to worker union’s rule, no
man can work more than 8 hours per day. The profit of the deluxe
model is Rs. 1000 per unit and that of the ordinary model is Rs. 800
per unit. Formulate a linear programming model for this problem
to determine the production volume of each model such that profit
is maximised.
6. Solve the following LPP:
Maximize Z = x1 + 4x2
Subject to: 2x1 + 4x2
5x1+3x2
x1, x2
7. Use graphical method to solve the following LPP:
Maximise Z = 2x1 + x2
Subject to x1 + 2x2
x1 + x2
x1 – x2
x1 – 2x2
x1, x2
8. Use Big M method to solve the following LPP
Minimize Z = 2x1 + 3x2
Subject to x1 + x2 = 6
7x1 + x2
x1, x2
)LQG DQ\ WKUHH DOWHUQDWH RSWLPDO VROXWLRQ LI WKH\ H[LVW IRU WKH
following LPP:
Subject to x1 + 2x2
x1 + x2
x1, x2
28 PAGE

LINEAR PROGRAMMING
10. Consider the following LPP Notes

Maximize Z = –x1 + 2x2 – x3
Subject to 3x1 + x2 – x3 JULQGLQJ
–x1 + 4x2 + x3 GULOOLQJ
x2 + x3 SDFNDJLQJ
x1, x2, x3
Its associated optimal simplex table is given as:
Basic x1 x2 x3 x4 x5 x6 x7 Solution
Z 1 0 3 0 0 2 M 8
x4 3 0 2 1 0 1 0 6
x2 0 1 1 0 0 1 0 4
x5 1 0 3 0 1 4 1 10
Determine the ranges for discrete changes in the resource vectors

for drilling and packaging so as to maintain the feasibility of the
current optimum solution.
11. Obtain the dual for the following primal problem:
Minimize Z = 5x1 + 6x2 + x3
Subject to x1 + 2x2 + x3 = 15
–x1 + 5x2
4x1 + 7x2
x1, x2, x3
12. Solve the following LPP by Two-Phase method:
Subject to 2x1 + x2
3x1 + 4x2
x1, x2
PAGE 29

Notes
1.13 References
Hamdy A. Taha. Operation Research An Introduction, Pearson
Publication, 10th Edition.
Panneerselvam R. Operations Research, PHI learning, Second edition.

Kanti Swarup, P. K. Gupta, & Man Mohan. Operation Research,
Sultan Chand Publication, 4th Edition.
30 PAGE

L E S S O N
2
Application of LP
Marketing, Finance,
Operations Management
Dr. Abhishek Kumar Singh
Assistant Professor
PGDAV(E) College
University of Delhi
Email-Id: abhishekbhu008@gmail.com
STRUCTURE
2.2 Linear Programming
2.3 Application of LP in Marketing
2.4 Application of LP in Finance
2.5 Application of LP in Operations Management
2.6 Summary
2.9 References and Suggested Readings

Imparting the learning about linear programming applications encountered in practise.
Familiarity with the wide range of problems that can be modelled as linear programmes.
Experiencing and developing linear programming models to solve a problem or
improve a business process including media portfolio selection, production scheduling
and operations management.
PAGE 31

Notes
2.2 Linear Programming
Linear programming is a mathematical technique for allocating scarce
resources. The technique is frequently used to maximise the value of a
goal, such as minimising costs or increasing profits while dealing with
constraints. In layman’s terms, this means that the technique is intended
to assist marketers or managers in planning and making better resource
allocation decisions. In fact, linear programmes enable marketers to make
the best use of limited resources, such as money, manpower, materials,
time, or skills, to name a few.
Marketers must convert the given problem into a linear programming
model, using the appropriate variables and standard techniques to solve
the real-world problem. The model includes the following components:
1. Variables representing the available options.
2. The mathematical expression relating to the variables and conditions
at hand.
According to Bazaraa, Jarvis, and Sherali (2011), linear programming is
a mathematical model with a goal function and constraints that can be
used to help a business decide how to best utilise its current market and
generate sustainable profits.
Linear programming generates solutions based on the characteristics and
characteristics of the actual situation or problem. As a result, the appli-
cation of linear programming is very broad, and it can find solutions in
a variety of fields such as marketing. In fact, this technique has proven
to be extremely effective in marketing and distribution management,
among other areas. A marketing manager, for example, can use linear
programming to distribute a fixed advertising budget across multiple
media channels in order to maximise audience exposure.
Thousands of decision variables and constraints are used in the model
to solve practical problems in marketing research. The underpinning
strength is the use of the extreme point of a function to satisfy certain
constraints (Bazaraa et al., 2011). In this situation, the constraints on the
problem are linear, and the function in the linear equation that is used
to optimise solutions for the marketing research problem is known as
the objective function.
32 PAGE

APPLICATION OF LP MARKETING, FINANCE, OPERATIONS MANAGEMENT
Canonical Nature of LP Notes

The linear programming problem typically has a canonical form that
involves maximisation and minimization. Decisions involving certainty,
uncertainty, and risk can be made using the model. Maxima criteria,
which offer the suitable optimistic decision criterion, can be used to make
decisions in uncertain situations. Given the unpredictable nature of the
situation, the payoffs must be taken into account. This same value can
be calculated as follows:
D(maximum reward) + (1 D) (minimum payoff)
2.2.1 Components of Linear Programming

The basic components of the LP are as follows:
2.2.2 Characteristics of Linear Programming

Linear programming problems share four key characteristics:
1. The goal of linear programming is to find an expression that minimises
or maximises some quantity, such as cost to profit, known as the
objective function.
2. The constraints or restrictions limit the extent to which the goal
can be pursued and achieved.
PAGE 33

Notes 3. When it comes to linear programming, there must be more than

one alternative course of action to take because it is a tool that
determines which decision is the best course of action for allocating
resources.
4. Finally, both the objective and the constraints must be expressed
in terms of linear equation inequalities.
Linear Programming Problems (LPP) are problems that are concerned
with determining the best value for a given linear function. The optimal
value can be either the maximum or the minimum. The given linear func-
tion is regarded as an objective function in this context. The objective
function can have multiple variables that are subject to conditions, and
it must satisfy a set of linear inequalities known as linear constraints.
Linear programming problems can be used to find the best solution for
a variety of scenarios, including manufacturing problems, diet problems,
transportation problems, allocation problems, and so on.
2.2.3 History of Linear Programming

The problem of solving a system of linear inequalities dates back at least
as far as Fourier, after whom the method of Fourier-Motzkin elimination
is named. Linear a mathematical planning model created during World
War II gave rise to programming to plan expenditures and returns to
decrease army costs and increase enemy losses enemy. It wasn’t made
SXEOLFXQWLO)ROORZLQJWKHZDUQXPHURXVLQGXVWULHVXVHGLWLQWKHLU
daily planning.
Russian mathematician Leonid Kantorovich, who created linear programming
SUREOHPVLQ*HRUJH%'DQW]LJZKRSXEOLVKHGWKHVLPSOH[PHWKRG
LQ DQG -RKQ YRQ 1HXPDQQ ZKR FUHDWHG WKH WKHRU\ RI GXDOLW\ LQ
the same year, are the subject’s creators. Leonid Khachiyan demonstrated
that the linear programming problem could be solved in polynomial time
IRU WKH ILUVW WLPH LQ EXW 1DUHQGUD .DUPDUNDU¶V LQWURGXFWLRQ RI D
QHZ LQWHULRU SRLQW PHWKRG LQ PDUNHG D PRUH VLJQLILFDQW WKHRUHWLFDO
and application-based advancement in the field.
The original example by Dantzig of determining the optimal assignment
of 70 individuals to 70 jobs serves as an illustration of the value of
34 PAGE

linear programming. The number of possible configurations exceeds the Notes

number of particles in the universe, so it takes a significant amount of
computing power to test every combination in order to choose the best
assignment. However, by framing the issue as a linear programme and
using the Simplex algorithm, the best answer can be found in a matter of
seconds. The number of potential optimal solutions that must be checked
is drastically reduced by the linear programming theory.
2.2.4 Area of Application of LP

Product Mix
Use to decide which products to include in the production plan and in
what quantities those products should be produced in order to make the
best use of the machines and machine hours that are available while
maximising profit.
Blending Issues
Use for choosing different raw material mixtures to create the best prod-
ucts at the lowest possible cost, such as food, drinks, etc.
Production Schedule
Utilize to create a production schedule that will meet future product
demand while reducing production and inventory costs.
Production Quantity
Use in figuring out how many different grades of petroleum products to
produce, say, in order to make the most money.
Distribution System
Use the distribution system to choose one that will reduce the overall
shipping costs from numerous warehouses to various market locations.
Minimal Advertising
In order to maximise returns on investment, use in allocating a small
advertising budget among radio, TV, and newspaper spots.
Investment
Using a variety of available stocks and bonds to build an investment
portfolio in order to maximise returns on the investment
PAGE 35

Notes Scheduled Work

Use in creating a work schedule that enables a large restaurant to
accommodate staff needs at all times of the day while reducing the
overall staff size.
2.2.5 Prerequisite of Linear Programming

1. A clearly stated goal must be set for either increasing revenue or
reducing expenses.
2. The objective function must be linear, and the number of resources
available for the objective functions must be constrained.
3. To choose the best course of action, alternate options must be
available.
4. It is necessary to express an objective function mathematically.
2.2.6 Formulation of Linear Programming Problem

Linear Programming Problems Typically Consist of Three Components:
1. Decision variables, the value of which is determined by the problem
to be solved.
2. The objective function, which must be maximised or minimised
(e.g. maximisation of profits or minimisation of total costs, as the
case may be).
3. Decision variables-related constraints, limitations, or conditions
A Linear Programming Problem is solved by:
1. First listing the goal in algebraic form, including the decision
variables, but in algebraic expression. This expression is known as
the objective function, and it can be maximised or minimised.
2. Using algebraic notations to express the constraints as algebraic
inequalities involving the decision variables.
3. The above steps complete the development of the Linear Programming
problem.
36 PAGE

Notes
2.2.7 Assumptions
Linear Programming is based on the following assumptions:
1. Purpose All of the relationships between function and constraints are
linear.
This assumption has the following corollaries:
(a) We assume no economies of scale or diseconomies of scale; six
units of product T require six times the amount of raw material as
one unit of T.
(b) We assume that the decision variables do not interact; the total raw
material required for X and T is simply the sum of the individual
requirements for X and K 2.
There is only one goal function. There was only one goal in our product-
mix problem, and that was to maximise profit. However, it is not easy in
practise. An organisation may have a number of objectives for a specific
decision, with possibly some priorities in between, all of which must be
considered together.
2.3 Application of LP in Marketing

Linear programming has numerous advantages as a tried-and-true problem-
solving method that can improve decision-making, from media selection to
market research.
This technique is especially useful when making a decision in certain
marketing applications where there are constraints or restrictions.
Marketing research is a statistical process that businesses use to collect
data and identify customer requirements and wants, along with the finest
ways to satisfy them while ensuring long-term profits (Zopounidis and
Pardalos, 2010). The objectives are to enable the company operations to
fine-tune the marketing mix so as to address the requirements of cus-
tomers through an equitable product supply based on customer demands.
The right decisions can be made by managers through descriptive, diag-
nostic, and predictive research at the strategic, tactical, and operational
levels using the right market research information. Making decisions
PAGE 37

Notes depending on the needs and prerequisites of the target market can be
advantageous for the organisation if management optimises the linear
programming model.
For instance, to carry out a marketing/consumer research programme, a
company might decide to use a variety of techniques to reach the target
audience and decide on the best combination of product characteristics to
address the needs and desires of the customer using the suitable media
outlet (Zopounidis and Pardalos, 2010). The available budget, restrictions,
and total amount of money are what determine which media options are
available. Media outlets include, but are not limited to, magazines, radio,
social media, and other platforms that can be tailored to reach the target
audience. The linear programming method can also be used to choose the
best advertising budget from a variety of advertising channels.
A common example is the use of linear programming to determine the
effectiveness of available advertising alternatives using the formula:
WAA = Adjusted audience (AA) × Exposure factor (E × F) × Evaluation
Factor (E v F)
In the above formula, AA is the target audience, E × F is the fraction
of the audience that reads the advertisement, and (E v F) is a subjective
weight that is based on a scale of 0 1 score. Assume that 4 advertising
vehicles have been considered, the objective function is expressed as:
19
Maximize total WAA = x a

n
= ¦c d
i 2
i i
To determine the best advertising vehicle, enter the formula into Excel
and run an excel solver.
Example: The Dyson Company, which recently launched a new line
of hair appliances, has $282,000 to spend on advertising. The product
will first be tested in the Dallas area. The funds will be used for a TV
advertising blitz over one weekend in November (Friday, Saturday, and
Sunday). Daytime advertising, evening news advertising, and Sunday
game-time advertising are the three options available. A mix of one-
minute TV spots is preferred.
38 PAGE

Ad Type Reached with Each Ad Cost Per Ad Notes

Daytime 3,000 $5,000
Evening News 4,000 $7,000
Sunday Game 75,000 $100,000
Dyson intends to display at least one ad of each type (daytime, eve-
ning-news, and game-time). Furthermore, only two game-time ad spots
are available. Every day, ten daytime and six evening news spots are
available. SMM wants to run at least five ads per day, but only spend
$50,000 on Friday and $75,000 on Saturday.
Define the Decision Variables
DFR = number of daytime ads on Friday
DSA = number of daytime ads on Saturday
DSU = number of daytime ads on Sunday
EFR = number of evening ads on Friday
ESA = number of evening ads on Saturday
ESU = number of evening ads on Sunday
GSU = number of game-time ads on Sunday
Define the Objective Function
Maximize the total audience reached:
Max (audience reached per ad of each type) u (number of ads used
of each type)
Max 3000DFR + 3000DSA + 3000DSU + 4000EFR + 4000ESA +
4000ESU + 75000GSU
Define the Constraints
Take out at least one ad of each type:
(1) DFR + DSA + DSU ! 1
(2) EFR + ESA + ESU ! 1
(3) GSU ! 1
Ten daytime spots available:
(4) DFR 10
(5) DSA 10
(6) DSU 10
PAGE 39

Notes Six evening news spots available:

(7) EFR 6
(8) ESA 6
(68 6
Only two Sunday game-time ad spots available:
(10) GSU 2
At least 5 ads per day:
(11) DFR + EFR ! 5
(12) DSA + ESA ! 5
(13) DSU + ESU + GSU ! 5
Spend no more than $50,000 on Friday:
(14) 5000DFR + 7000EFR 50000
Spend no more than $75,000 on Saturday:
(15) 5000DSA + 7000ESA 75000
Spend no more than $282,000 in total:
(16) 5000DFR + 5000DSA + 5000DSU + 7000EFR + 7000ESA + 7000ESU
+ 100000GSU7 282000
Non-negativity:
DFR, DSA, DSU, EFR, ESA, ESU, GSU ! 0
The Management Scientist Solution
Objective Function Value = 199000.000

Variable Reduced Costs Value
DFR 0.000 8.000
DSA 0.000 5.000
DSU 0.000 2.000
EFR 0.000 0.000
ESA 0.000 0.000
ESU 0.000 1.000
GSU 0.000 2.000
40 PAGE

Solution Summary Notes

7RWDO QHZ DXGLHQFH UHDFKHG
Number of daytime ads on Friday 8
Number of daytime ads on Saturday 5
Number of daytime ads on Sunday 2
Number of evening ads on Friday 0
Number of evening ads on Saturday 0
Number of evening ads on Sunday 1
Number of game-time ads on Sunday 2
2.4 Application of LP in Finance

LP can be used in capital budgeting, make-or-buy, asset allocation, port-
folio selection, financial planning, and other financial decisions. Portfolio
selection problems entail selecting specific investments, such as stocks
and bonds, from a pool of investment options. Managers of banks, mutual
funds, and insurance companies face similar challenges. The goal function
is usually to maximise expected return or minimise risk.
Illustration
Xtrend Savings has $20 million in investment funds available. It plans
to make investments over the following four months to maximise total
interest earned, and at the beginning of the fifth month, it will have at
least $10 million available for a high-rise building project in which it
will be involved. For the time being, Xtrend intends to invest only in
2-month government bonds (earning 2% per month) and 3-month con-
struction loans (earning 6% per month). Each of these is available for
investment each month. Funds not invested in these two investments are
liquid and earn a monthly return of 3/4 of 1% when invested locally.
Construct a linear programme to assist Xtrend Savings in determining how
to invest over the next four months if it does not want to have more than
$8 million in either government bonds or construction loans at any time.
Solution:
Define the Decision Variables
Gi = amount of new investment in government bonds in month i (for i =
1, 2, 3, 4)
PAGE 41

Notes Ci = amount of new investment in construction loans in month i (for i =

1, 2, 3, 4)
Li = amount invested locally in month i, (for i = 1, 2, 3, 4)
Define the Objective Function
Maximize total interest earned in the 4-month period:
Max (interest rate on investment) X (amount invested)
Max .02G1 + .02G2 + .02G3 + .02G4+ .06C1 + .06C2 + .06C3 + .06C4 +
.0075L1 + .0075L2 + .0075L3 + .0075L4
Define the Constraints
Month 1’s total investment limited to $20 million:
(1) G1 + C1 + L1 = 20,000,000
Month 2’s total investment limited to principal and interest invested
locally in Month 1:
* & / / RU * & í / /
Month 3’s total investment amount limited to principal and interest in-
vested in government.
bonds in Month 1 and locally invested in Month 2:
* & / * / RU í* * & í
1.0075L2 + L3 = 0
Month 4’s total investment limited to principal and interest invested in
construction loans in Month 1,
government bonds in Month 2, and locally invested in Month 3:
(4) G4 + C4 + L4 = 1.06C1 + 1.02G2 + 1.0075L3 or * * í
1.06C1 + C4 1.0075L3 + L4 = 0
$10 million must be available at start of Month 5:
(5) 1.06C2 + 1.02G3 + 1.0075L4 ! 10,000,000
No more than $8 million in government bonds at any time:
(6) G1 8,000,000
(7) G1 + G2 8,000,000
(8) G2 + G3 8,000,000
* * 8,000,000
42 PAGE

No more than $8 million in construction loans at any time: Notes

(10) C1 8,000,000
(11) C1 + C2 8,000,000
(12) C1 + C2 + C3 8,000,000
(13) C2 + C3 + C4 8,000,000
Non-negativity:
Gi, Ci, Li ! 0 for i = 1, 2, 3, 4
The Management Scientist Solution
Objective Function Value = 1429213.7987
G1 0.0000 8000000.0000
G2 0.0000 0.0000
G3 0.0000
G4 0.0000
C1 0.0000 8000000.0000
C2 0.0453 0.0000
C3 0.0076 0.0000
C4 0.0000 8000000.0000
L1 0.0000 4000000.0000
L2 0.0000 4030000.0000
L3 0.0000 7111611.0772
L4 0.0000 4753562.0831
2.5 Application of LP in Operations Management
2.5.1 Definition of Operations Management

The management of the department within an organisation tasked with
producing goods and/or services is known as operations management.
Examples of these products and services can be found all around you.
Every publication you read, every film you watch, every email you send,
every phone call you make, and every medical procedure you undergo.
The operations function of one or more organisations are involved in the
treatment you receive.
PAGE 43

Notes One needs to understand “Operating Systems” in order to understand

Operations Management clearly. A configuration of resources combined
for the delivery of goods or services is referred to as an operating system.
Operating systems can be found in businesses like retail stores, hospitals,
bus and taxi companies, tailors, hotels, and dental offices. Any operating
system converts inputs while utilising physical resources to produce out-
puts that serve the purpose of meeting customer demands. The process of
transforming or converting inputs into finished goods or services outputs.
One uses a variety of inputs, including capital, labour, and information,
to create goods and services or additional transformation procedures (e.g.,
storing, transporting, and cutting). To make sure the desired results are
at various stages of the transformation process, an organisation collects
data (feedback) and then determines whether corrective action is required
by comparing them to previously established standards (control).
2.5.2 Objectives of Operations Management

Customer service and resource utilisation are two categories into which
operations management goals can be divided.
1. Customer Service
The first goal is to provide excellent customer service, which is
defined as meeting all of the needs of the client. So, one of operations
management’s main goals is to provide excellent customer service. The
Operations Management must deliver a product that meets the custom-
er’s requirements for quality, cost, and delivery time. Consequently, by
offering the “right thing at the right price at the right time,” the primary
objective can be satisfied.
Typically, an organisation will strive to achieve specific standards, or lev-
els, on these dimensions, and operations managers will have a significant
impact on these efforts. Thus, in order to provide the necessary customer
service, this objective will affect the operations manager’s choices.
2. Resource Utilisation
Utilizing resources effectively to satisfy customer needs is another
important goal. To achieve effective operations through efficient resource
use, customer service must be provided. Operating system failure due to
ineffective resource management or poor customer service.
44 PAGE

Utilizing resources effectively, that is, getting the most out of them or Notes
reducing their loss, underutilization, or waste, is the main focus of oper-
ations management. The percentage of time that is used or occupied, the
amount of space used, the intensity of activity, etc. can all be used as
indicators of how fully the resources are being used. Each metric shows
how much of these resources’ potential or capacity is actually being used.
This is referred to as the resource utilisation objective.
The achievement of both satisfactory customer service and resource util-
isation is a concern of operations management. A change in one will fre-
quently result in a decline in the other. Often, neither can be maximised,
so both must be accomplished with a satisfactory level of performance.
These two goals must be the focus of all operations management activ-
ities, and operations managers will encounter many issues as a result of
this conflict. Therefore, operations managers need to try to balance these
fundamental goals.
2.5.3 Application of Linear Programming

Operations managers use linear programming (LP), a mathematical modelling
technique, to find alternative solutions to decision-making issues. Prior
uses include figuring out the best trucking and airline routes, chemical
and oil blends, staffing plans, and patient case mixtures.
The primary objective of operations management is to increase an organi-
zation’s operational systems’ productivity. The supply chain transformation
process is the main focus of operations management.
The terms variables, constraints, and objective function are used in lin-
ear programming. Additionally, the variables are possible inputs for the
problem.
The limitations are mathematical equations that restrict the values of the
solutions. The objective function is also the equation that stipulates the
performance metric. Processes, operations, and supply chain activities
are terms used in operations management. Processes are actions that both
humans and machines take part in.
Operations are specific actions that convert raw materials into finished
goods. The management of resources, information, and finances between
the supplier and the customer is another aspect of supply chain activities.
PAGE 45

Notes By minimising costs, linear programming seeks to maximise profits.

Additionally, increasing an organization’s operational systems’ productivity
is a goal of operations management. The supply chain transformation
process is the main focus of operations management.
Demand planning is primarily done to reduce overall costs. Demand
planning will also lessen stock-outs and enhance customer service. You
can make sure you have enough inventory to satisfy your customers’
needs by employing this method. In this situation, you will require less
inventory. You must forecast demand, which is the business’s projection
of future consumer demand for a good or service, in order to accomplish
this. The lead time is another important consideration. The lead time is
the amount of time that passes between placing an order and having it
delivered to the customer. We can make a buffer stock if we take into
account these variables. We will be able to manage supply and demand
fluctuations thanks to this buffer stock.
We want to try as hard as we can to cut costs as much as we can. Addi-
tionally, we aim to make the most money possible. Demand planning can
be used in this situation to collaborate with our supply chain partners.
With this approach, we can ensure that we have enough stock while
also lowering costs. We can also ensure that we have the appropriate
amount of inventory by cooperating with our supply chain partners. We
will be able to lower expenses and raise the calibre and customer service
by doing this. Without having too much or too little inventory, we can
accomplish our objectives.
Additionally, the majority of businesses strive for increased operational
efficiency. Reducing the amount of inventory required achieves this. If
this happens, then we can increase our profits.
1. Production Planning Problem
A product is produced in a factory in units of 5 units of part A and 4
units of part B. There are 120 and 240 units, respectively, of different
raw materials, needed for parts A and B. Three different processes can
be used to make these components. The quantity of raw materials needed
for each production run and the number of units produced for each part
are listed below
46 PAGE

Method Input per run (units) Output per run (units) Notes
Raw Raw
material 1 material 2 Part A Part B
1 7 5 6 4
2 4 7 5 8
3 2 7 3
Formulate an L.P. model to determine the number of production run for

each method so as to maximize the total number of complete units of
the final product.
Solution:
Formulation of Linear Programming Model
Let X1, X2, X3 represent the number of production run for methods 1, 2
and 3 respectively. The objective is to maximize the total number of units
of the final product. Now, the total number of units of part A produced
by different method is 6X1, 5X2, 7X3 and for part B is 4X1, 8X2, 3X3. Since
each unit of the final product requires 5 units of part A and 4 units of
part B, it is evident that the maximum number of the final product cannot
exceed the smaller value of
6 X1 5 X 2 7 X 3 4 X1 8 X 2 3 X 3
and
5 4
Thus, the objective is to maximize
Z = Minimum of §¨ 6 X 1 5 X 2 7 X 3 and 4 X 1 8 X 2 3 X 3 ·¸
© 5 4 ¹
Constraints are on the availability of raw materials. They are, for
Raw material 1, 7 X 1 4 X 2 2 X 3 d 120

Raw material 2, 5 X 1 7 X 2 9 X 3 d 240
The above formulation violates the linear programming properties since
the objective function is non-linear. (Linear relationship between two or
more variables is the one in which the variables are directly and precisely
PAGE 47

Notes proportional). However, the above model can be easily traduced to the
generally acceptable linear programming format.
§ 6 X1 5 X 2 7 X 3 4 X1 8 X 2 3 X 3 ·
Let, y = Min ¨ and ¸
© 5 4 ¹
6 X1 5 X 2 7 X 3 4 X1 8 X 2 3 X 3
It follows that \ DQG \
5 4
i.e., 6 X 1 5 X 2 7 X 3 t 0 and 4 X 1 8 X 2 3 X 3 t 0
Thus, mathematical model for the problem is Maximize Z = y

Subject to constraints,
7 X 1 4 X 2 2 X 3 d 120
5 X 1 7 X 2 9 X 3 d 240
6 X1 5 X 2 7 X 3 t 0
4 X1 8 X 2 3 X 3 t 0
Where, X1, X2, X3, y t 0

2. Product Mix Problem
A company produces two things. It buys casting, which is then drilled,
polished, and machined. The cost of casting for items a and b is Rs. 2
and Rs. 3, respectively, and they are sold for Rs. % and Rs. 6 each.
Three machines have hourly operating costs of Rs. 20, Rs. 14, and
Rs. 17.50, respectively. The machine’s capacities are
Part A Part B
Machining Capacity 25/hr 40/hr
Boring Capacity 28/hr 35/hr
Polishing Capacity 35/hr 25/hr
Formulate the L.P. model to determine the product mix that maximizes
the profit.
Solution
Formulation of L.P. Model Let x1 and x2 represent the number of units
of A and b to be manufactured per hour. The objective is to maximize
the profit. Profit per part of items A and B is calculated as:
48 PAGE

Part A (Rs.) Part B (Rs.) Notes

Machining Capacity 20 20
= 0.80 = 0.50
25 40
Boring Capacity 14 14
= 0.50 = 0.40
28 35
Polishing Capacity 17.50 17.50
= 0.50 = 0.70
35 25
Casting Cost 2.00 3.00
? Total Cost 3.80 4.60
Selling Price 5.00 6.00
? Profit 3.00 4.60 6.00 1.40 1.20 1.40
Therefore, objective is to
Maximize z = 1.2X1 + 1.4X2
Constraints are on the capacities of the machine. For one hour running
of each machine, they are
1X1 + 1X2
௑௑
1X1 + 1X2
௑௑
1X1 + 1X2
௑௑
OR 8X1 + 5X2
5X1 + 4X2
5X1 + 7X2
Where, X1 ;2
3. Transportation Problem
Prestige Equipment transports certain refrigerator units from factories
in Dehradun and Ludhiana to distribution centres in Ambala and Noida.
Transportation costs are summarized in the table below:
PAGE 49

Notes Transportation of product from source of production to distribution centre:

Source Destination Transportation Cost (Rs.)
Dehradun Ambala 30
Noida 40
Ludhiana Ambala 60
Noida 50
The supply and demand, in number of units, is shown below:
Capacity of supply and demand of refrigerator:
Supply Demand
Dehradun 200 Ambala 300
Ludhiana 600 Noida 400
How should transportation be made from Dehradun and Ludhiana to
minimize the transporting cost?
Solution
The information of this problem can be summarized by the following
map which is referred as figure:
Figure 2.1: Map of no. of supply and demand of refrigerator

along with transportation cost
Table 2.1: Source of supply to destinations with number and trans-

portation cost
Source Destination Number Transportation Cost (Rs.)
Dehradun Ambala X 30x
Noida Y 40y
Ludhiana Ambala Z 60z
Noida W 50w
50 PAGE

Thus, the LP model is as follows: Notes

Minimize: C = 30x + 40y + 60z + 50w
Subject to:
[ \ >6XSSO\@
] Z >6XSSO\@
[ ] >'HPDQG@
\ Z >'HPDQG@
[ \ ] Z >1RQQHJDWLYLW\@
IN-TEXT QUESTIONS
1. What is the primary focus of linear programming?
(b) Optimizing resource allocation
(c) Minimizing costs
(d) Enhancing customer satisfaction
2. Which of the following is NOT a characteristic of linear
programming?
(a) Linear relationships
(b) Single objective function
(c) Non-integer solutions
(d) Multiple decision variables
3. What aspect of linear programming does the history section
typically cover?
(a) Development of algorithms
(b) Evolution of mathematical models
(c) Applications in various industries
(d) Contributions of key researchers
4. What is a prerequisite for understanding linear programming?
(a) Advanced calculus
(b) Statistical analysis
(c) Knowledge of optimization techniques
(d) Mathematical modelling skills
PAGE 51

Notes 5. In which area of business is linear programming commonly

applied?
(a) Human resources
(b) Supply chain management
(c) Branding and advertising
(d) Product development
6. What is one of the objectives of operations management?
(a) Maximizing shareholder wealth
(b) Minimizing environmental impact
(c) Increasing market share
(d) Optimizing production processes
7. Which section of the lesson typically provides a brief recap of
the key concepts discussed?
(a) Summary
(b) Practice Questions
(c) References and Suggested Readings
(d) Learning Objectives
8. What is one area where linear programming is commonly applied
in finance?
(a) Portfolio optimization
(b) Financial risk assessment
(c) Capital budgeting
(d) Financial forecasting
9. What does the formulation of a linear programming problem
involve?
(a) Solving mathematical equations
(b) Identifying decision variables and constraints
(c) Analyzing historical data
(d) Conducting market research
52 PAGE

10. What is the primary purpose of the practice questions section? Notes
(a) To provide additional reading material

(b) To summarize key concepts
(c) To reinforce learning through application
(d) To introduce advanced topics
2.6 Summary
Marketing Application
Media Selection
Media selection is one application of linear programming in marketing.
LP can assist marketing managers in allocating a set budget to
various advertising media.
The goal is to maximise exposure reach, frequency, and quality.
Restrictions on allowable allocations typically arise as a result of
company policy, contract requirements, and media availability.
Marketing Research
Marketing research is conducted by a company to learn about
consumer characteristics, attitudes, and preferences.
Marketing research services include creating the study, conducting
surveys, analysing the data gathered, and making recommendations
to the client.
Targets or quotas for the number and types of respondents to be
surveyed may be established during the research design phase.
The marketing research firm’s goal is to conduct the survey in
such a way that it meets the client’s needs at the lowest possible
cost.
Financial Application
LP can be used in capital budgeting, make-or-buy, asset allocation,
portfolio selection, financial planning, and other financial decisions.
Portfolio selection problems entail selecting specific investments,
such as stocks and bonds, from a pool of investment options.
PAGE 53

Notes Managers of banks, mutual funds, and insurance companies face

similar challenges.
Typically, the objective function is to maximise expected return or
minimise risk.
Operations Management Applications
In operations management, LP can be used to help make decisions
about product mix, production scheduling, staffing, inventory control,
capacity planning, and other issues.
Multi-period planning, such as production scheduling, is an important
application of LP.
Typically, the goal is to develop an efficient, low-cost production
schedule for one or more products over a number of time periods.
Typical constraints include production capacity, labour capacity,
storage space, and others.

1. (b) Optimizing resource allocation
2. (c) Non-integer solutions
3. (d) Contributions of key researchers
4. (d) Mathematical modelling skills
5. (b) Supply chain management
6. (d) Optimizing production processes
7. (d) Learning Objectives Answer: A) Summary
8. (a) Portfolio optimization
9. (b) Identifying decision variables and constraints
10. (c) To reinforce learning through application

1. What are essential characteristics of linear programming model?
2. Discuss briefly the steps to formulate a linear programming problem.
Explain with an example.
54 PAGE

3. Write short note on the limitations of linear programming. Notes

4. In relation to Linear Programming, explain the implication of the
following assumptions of the model:
(a) Linearity of the objective function and constraints
(b) Certainty and
(c) Decision variables
(d) Non-negativity constraints in LPP
5. Explain the following terms
(a) Linearity
(b) Feasible solution
(c) Objective function
(d) Unbounded solution
(e) Optimal solution
6. Orient Paper Mills produces two grades of paper X and Y. Because
of raw material restrictions not more than 400 tons of grade X and
not more than 300 tons of grade Y can be produced in a week.
There are 160 production hours in a week. It requires 0.2 and
0.4 hours to produce a ton of products X and Y respectively with
corresponding profit of Rs. 20 and Rs. 50 per ton. Formulate an
LPP to optimize the product mix for maximum profit.
7. Vitamin A and B are found in foods F1 and F2. One unit of food
F1 contains 3 units of vitamin A and 4 units of vitamin B and that
of F2 contains 6 units of vitamin A and 3 units of vitamin B. One
unit of vitamin F1 and F2 costs Rs. 4 and Rs. 5 respectively. The
minimum daily need per person of vitamin A and B is 80 and 100
units respectively. Assuming that anything in excess of daily minimum
requirement is harmful. Find out the optimum mixture of F1 and
F2 at the minimum cost which meets the minimum requirement of
vitamin A and B. Formulate this as an LP problem.
8. A transport company has two types of trucks, Type A and Type B.
Type A has a refrigerated capacity of 20 m3 and a non-refrigerated
capacity of 40 m3 while Type B has the same overall volume with
equal sections for refrigerated and non-refrigerated stock. A grocer
needs to hire trucks for the transport of 3,000 m3 of refrigerated
PAGE 55

Notes stock and 4,000 m3 of non-refrigerated stock. The cost per kilometre
of a Type A is $30 and $40 for Type B. How many trucks of each
type should the grocer rent to achieve the minimum total cost?
$ VFKRRO LV SUHSDULQJ D WULS IRU VWXGHQWV 7KH FRPSDQ\ WKDW LV
providing the transportation has 10 buses of 50 seats each and 8 buses
RIVHDWVEXWRQO\KDVGULYHUVDYDLODEOH7KHUHQWDOFRVWIRUDODUJH
bus is $800 and $600 for the small bus. Calculate how many buses
of each type should be used for the trip for the least possible cost.
10. A store wants to liquidate 200 of its shirts and 100 pairs of pants
from last season. They have decided to put together two offers, A
and B. Offer A is a package of one shirt and a pair of pants which
will sell for $30. Offer B is a package of three shirts and a pair
of pants, which will sell for $50. The store does not want to sell
less than 20 packages of offer A and less than 10 of offer B. How
many packages of each do they have to sell to maximize the money
generated from the promotion?
2.9 References and Suggested Readings

Aczel, Amir D., Sounderpandian, J., & Saravanan P. (2012). Complete
Business Statistics (latest ed.). India: McGraw Hill Education India
Private Limited.
Albright, S. C., & Winston, W. L. (2015). Business Analytics: Data
Analysis and Decision Making (Latest ed.). Cengage Publications.
Anderson, D., Sweeney, D., Williams, T., Camm, J., & Cochran,
J. (2014). Statistics for Business &Economics (Latest ed.). India:
Cengage Learning.
Anderson, D., Sweeney, D., Williams, T., & Martin, R. K. (2012).
An Introduction to Management Science: Quantitative Approaches
to Decision Making (13th ed.). India: Cengage Learning.
Balakrishnan, N., Render, B., Stair, R. M., & Munson, C. (2017).
Managerial decision modelling. Upper Saddle River, Pearson Education.
Powell, S. G., & Baker, K. R. (2017). Business analytics: The art
of modelling with spreadsheets. Wiley.
Stine, R. E., & Foster, D. (2013). Statistics for Business: Decision
Making and Analysis (2nd ed.). India: Pearson Education.
56 PAGE

L E S S O N
3
Transportation Problem
Assistant Professor
PGDAV(E) College
University of Delhi
STRUCTURE
3.2 Introduction
3.3 Transportation Problem
3.4 Some Special Codes of TP
3.5 Summary
3.8 References
3.9 Suggested Readings

To impart knowledge about problems related to transportation.
Learn how to use the transportation simplex method to solve transportation problems.
Explain the three models in this chapter (the models for transportation) can each be
written as linear programmes and solved using general-purpose linear programming
tools.
Identify the best solution for each of the three models will be expressed in terms
of integer values for the decision variables if the right-hand side of the linear
programming formulations is all an integer.
PAGE 57

Notes
3.2 Introduction
This chapter facilitates an overview of the notion about transhipment
issue is a special Linear Programming Problem (LLP) because it takes
into account the presumption that all sources and sinks can simultane-
ously accept and distribute shipments (function in both directions). The
goal of the transportation model, a special form of linear programming
issues, is to reduce the overall cost of moving commodities from the
various supply origins to the various demand destinations and the basic
goal of an assignment problem is to reduce the overall amount of time
needed to accomplish a group of activities, or to increase skill ratings,
or to reduce the cost of the assignments.
3.3 Transportation Problem

The main goal of solving a transportation problem is to determine the
most efficient way to use the resources of m supply sites to meet the
needs of n demand places. A variable cost of moving the goods from one
supply point to another or a comparable constraint should be taken into
account while trying to discover this ideal combination.
Figure 3.1: Solving the Transportation Problem

(Source: https://www.imsl.com/blog/solving-transportation-problem)
58 PAGE

TRANSPORTATION PROBLEM
Important Definitions of Transportation Problem are: Notes

The transportation issue was probably one of the earliest significant prob-
lems investigated in the application of linear programming techniques.
The issue can be formulated as a linear model, and the solution can be
found by applying simple algorithm. The linear model can, however, be
solved with a more effective method due to its unique structure, and this
chapter will discuss such way.
The transportation problem involves moving any product from m origins,
O1,..., Om, to n destinations, D1,..., Dn, while attempting to minimise the
overall distribution cost, where:
The origin Oi is supplied with ai units, where i = 1,..., m.
From the origins, j = 1,..., n, the destination Dj requests the delivery
of bj units.
The cost per unit (cij) that is dispersed from the origin (Oi) to the
destination (Dj), where i = 1,..., m, and j = 1,..., n.
The above terms can be represented mathematically as the search for a
collection of xij’s, where i = 1,..., m, and j = 1,..., n, to satisfy supply
and demand constraints at the lowest possible distribution cost. The
associated linear model is as follows:
As a result, the challenge is to calculate xij, the quantity of units to be

transferred from Oi to Dj, to ensure that supply is used up and needs are
met at a price that is as low as possible overall.
PAGE 59

Notes The first m constraints, which are known as the supply limitations, state
that the quantity of commodity units that are readily available at each
origin must not be exceeded. The next n limitations guarantee that the
requirements for commodity units at destinations will be met. Since they
indicate the quantity of transferred commodity units, the decision variables
are characterised as positive.
Here is a common form of the transportation issue.
3.3.1 Types of Transportation Problem

Transportation Issues of Several Kinds
Balanced Transportation Problem: When both supply and demand are
equal, the situation is referred to as a balanced transportation problem.
Unbalanced Transportation Problem: When supply and demand are not
balanced, a transportation issue is said to be unbalanced. Depending on
the requirement, a dummy row or dummy column is added to this sort
of problem to create a balanced problem. The issue can then be handled
similarly to the balanced problem.
3.3.2 Methods of Finding Initial Selection

To find the initial basic feasible solution there are three methods:
1. Northwest Corner Method. 2. Least Cost Method. 3. Vogel’s
Approximation Method (VAM).
60 PAGE

Notes
3.3.3 Northwest Corner Method

The transportation issue was introduced in the section before; in this
section, the Northwest Corner Cell Method will be used to find the first
simple, practical answer.
Destination
D1 D2 D3 D4 Supply
Q1 3 1 7 4 300
Q2 2 6 5 9 400
Source
Q3 8 3 3 2 500
Demand 250 350 400 200 1200
Explanation: Given three origins (O1, O2, and O3) and four destinations
(D1, D2, D3, and D4) For the sources O1, O2, and O3, the supplies are
300, 400, and 500, respectively. Demands are respectively 250, 350, 400,
and 200 for the destinations D1, D2, D3, and D4.
Solution: According to the Northwest Corner approach, the beginning
point must be the north-western corner of the table, or (O1, D1). When
determining the price per transportation, every single value in a cell is
taken into consideration. After evaluating the supply from source O1
and demand for column D1 in the figure, a minimum of two should be
awarded to the cell (O1, D1). Since there is no longer any requirement
for Column D1, the entire Column D1 will be cancelled. The quantity
coming from source O1 is still 300 – 250 = 50.
PAGE 61

Notes Destination
D1 D2 D3 D4 Supply
250
Q1 3 1 7 4 300 50
Q2 2 6 5 9 400
Source
Q3 8 3 3 2 500
250
Demand 0 350 400 200 1200
Examine the northwest quadrant of the table, which is (O1, D2), but leave
off column D1. Then, distribute the bare minimum of supply among the
corresponding column and rows. The source O1 should only allocate 50 to
the cell, which is less than what is required for D2 (i.e., 350). (O1, D2).
Cancel row O1 because the supply from row O1 is finished. Column D2
still has a demand of 350 – 50 = 50.
Destination
D1 D2 D3 D4 Supply
250 50
Q1 3 7 4 30050 0
Q2 2 6 5 9 400
Source
Q3 8 3 3 2 500
250 350
Demand 0 300 400 200 1200
Finding the Northwest corner of the remaining table, O2, D3, now compare
the O2 supply (100) to the D2 demand (400) and assign the smaller (100)
to the cell (O2, D2). Cancel the row O2 since the supply from O2 has been
fully satisfied. 400 – 100 = 300 is the remaining demand for column D3.
Destination
D1 D2 D3 D4 Supply
250 50
Q1 3 7 4 30050 0
300 100
Q2 2 6 5 9 400 100 0
Source
Q3 8 3 3 2 500
350
250 300 400
Demand 0 0 300 200 1200
62 PAGE

Proceeding in the same way, the final values of the cells will be: Notes
Destination
D1 D2 D3 D4 Supply
250 50 100
Q1 3 7 4 30050 0
300 300 300
Q2 2 6 5 9 400 100 0
Source
Q3 8 3 3 2 500 200 0
350 400
250 300 300 200
Demand 0 0 0 0 1200
Note that in the last remaining cell, which was cell, the demand for the
pertinent columns and rows is equal (O3, D4). Since O3 was in supply
and D4 was in demand, the cell in this case received 200. The last item
was that neither a row nor a column contained anything.
Simply multiply the value of each cell by the designated value to obtain
the basic solution, which is (250 * 3) + (50 * 1) + (300 * 6) + (100 * 5) +
(300 * 3) + (200 * 2) = 4400.
3.3.4 Transportation Problem: (Least Cost Cell Method)

The North-West Corner approach was covered at the prior session. The
Least Cost Cell technique will be covered in this session.
Destination
D1 D2 D3 D4 Supply
Q1 3 1 7 4 300
Q2 2 6 5 9 400
Source
Q3 8 3 3 2 500
Demand 250 350 400 200 1200
The Least Cost Cell approach requires that the least expensive cell in
the table be identified, and that cell is 1 (cell (O1, D2)).
Now contrast the supply in row O1 with the demand in column D2 and
assign the cell with the lower number. Give the cell 300 because it is the
lesser value. As the supply from O1 is exhausted, the demand for column
D2 is 350 – 300 = 50, hence this row should be cancelled.
PAGE 63

Notes Destination
D1 D2 D3 D4 Supply
Q1 3 300 1 7 4 300 0
Source Q2 2 6 5 9 400
Q3 8 3 3 2 500
350
Demand 250 50 400 200 1200
Find the cell with the lowest cost among the remaining cells next. Cells
(O2, D1) and (O3, D4) are the two least expensive, both costing 2. Let’s
decide (O2, D1). Next, ascertain the supply and demand for the relevant
cell. Then, allocate the smallest sum between the two to the cell. Finally,
remove the row or column whose supply or demand is now zero as a
result of the allocation
Destination
D1 D2 D3 D4 Supply
300
Q1 3 1 7 4 300 0
2 400
Source 250
Q2 6 5 9 150
Q3 8 3 3 2 500
250 350
Demand 0 50 400 200 1200
Now, (O3, D4), with a cost of 2, is the cell with the lowest cost. As the
supply is greater than the demand, assign 200 to this cell. Therefore, the
column is removed.
Destination
D1 D2 D3 D4 Supply
300 1
Q1 3 7 4 300 0
250 9 400
200
Source Q2 2 6 5 150
500
Q3 8 3 3 2 300
250 350 200
Demand 0 50 400 0 1200
64 PAGE

The two unallocated cells with the lowest costs are the other two. Please Notes
choose any at random (O3, D2). From the supply in the corresponding row
and the demand in the corresponding column, enter the smallest amount
you can into this cell. Remove the row or column with a value of zero.
Destination
D1 D2 D3 D4 Supply
300 1
Q1 3 7 4 300 0
250
Q2 2 6 5 9 400 150
Source 50
200
Q3 8 3 3 2 500300 250
350
250 50 200
Demand 0 0 400 0 1200
Currently, the cheapest cell is (O3, D3). Eliminate the row or column
with a value of zero and distribute the minimum of supply and demand
Destination
D1 D2 D3 D4 Supply
300
Q1 3 1 7 4 300 0
250
Q2 2 6 5 9 400 150
Source 50 250
200
Q3 8 3 3 2 500300250 0
350
250 50 400 200
Demand 0 0 150 0 1200
There is only one cell left, (O2, D3), and it costs $5. Its supply is 150
and demand is 150, hence demand is 150 and both are equal in quantity.
Allocate it to this cell.
PAGE 65

Notes Destination
D1 D2 D3 D4 Supply
300 1
Q1 3 7 4 300 0
250 150
200
9
Q2 2 6 250 5 400150 0
50
200
Q3 8 3 3 2 500300250 0
350 400
250 50 150 200
Demand 0 0 0 0 1200
After computation of the cost by least cost method, simply multiply the
cost of the cell by the values assigned to it, then add the results to get
the fundamental solution, which is (300 * 1) + (25 * 2) + (150 * 5) +
(50 * 3) + (250 * 3) + (200 * 2) = 2400
3.3.5 Transportation Problem: (Vogel’s Approximation Method)

The Least Cost Cell method and the North-West Corner method were
discussed in the prior session. In this section Vogel’s Approximation
method will be discussed.
Destination
D1 D2 D3 D4 Supply
Q1 3 1 7 4 300
Q2 2 6 5 9 400
Source
Q3 8 3 3 2 500
Demand 250 350 400 200 1200
The answer is to first identify the lowest value for each row, then the
next lowest. The corresponding row difference should then be filled in
with the absolute difference between these two lowest values, as seen in
the image below. The second-least value, 3, and the two least values in
row O1 are separated by an absolute difference of 2. Rows O2 and O3
have identical absolute differences of 3 and 1, respectively.
The lowest value should be found for each column, then the next lowest.
The corresponding column difference should then be filled in with the
absolute difference between these two lowest values, as shown in the
66 PAGE

image. Column D1’s least value is 2, followed by its second-least value, Notes
3, and their absolute difference is 1. Columns D2, D3, and D3 all have
absolute differences of 2, 2, and 2, respectively
Destination
Row
D1 D2 D3 D4 Supply difference
Q1 3 1 7 4 300 2
Source Q2 2 6 5 9 400 3
Q3 8 3 3 2 500 1
Demand 250 350 400 200 1200
Column
Difference 1 2 2 2
These numbers for the row and column disparity are also known as
penalties. Pick the most severe penalty right now. Three strikes, or row
O2, is the maximum penalty. Then, by choosing the cell in row O2 with
the lowest cost, divide the minimal amount between the supply of the
corresponding row and the demand of the corresponding column. Since
demand is lower than supply, put 250 in the cell to reflect the desire for
the column. Delete column D1 next.
Destination
Row
Q1 3 1 7 4 300 2
250 400
Source Q2 2 6 5 9 150 3
Q3 8 3 3 2 500 1
250
Demand 0 350 400 200 1200
Column
Difference 1 2 2 2
PAGE 67

Notes From the remaining cells, find out the row difference and column
difference.
Row
Q1 3 1 7 4 300 2 3
250 400
Source Q2 2 6 5 9 150 3 1
Q3 8 3 3 2 500 1 1
250
Demand 0 350 400 200 1200
Column
Difference 1 2 2 2
- 2 2 2
Select row O1 to correlate with the maximum penalty of 3, once more.

The cheapest cell in row O1 is (O1, D2), with a cost of 1. Distribute from
the relevant row and column the least quantity of supply and demand to
the cell. Remove the row or column with a value of zero.
Row
300
Q1 3 1 7 4 300 0 2 3
250 400
Source Q2 2 6 5 9 150 3 1
Q3 8 3 3 2 500 1 1
250 350
Demand 0 50 400 200 1200
Column
Difference 1 2 2 2
- 2 2 2
68 PAGE

Now find the row difference and column difference from the remaining cells. Notes
Destination
Row
D1 D2 D3 D4 Supply
difference
300
Q1 3 1 7 4 300 0 2 3
-
250 400
Q2 2 6 5 9 3 1 1
150
Source
Q3 8 3 3 2 500 1 1 1
250 350
Demand 400 200 1200
0 50
Column
1 2 2 2
Difference
- 2 2 2
- 3 2 7
You should now select the maximum penalty, which is 7 and falls under
column D4. The cheapest cell in column D4 is (O3, D4), which costs 2.
More cell phones are available than are needed (O3, D4).
Remove the column and give the cell $200.
Destination
Row
D1 D2 D3 D4 Supply
difference
300
Q1 3 1 7 4 300 0 2 3
-
250
Q2 2 6 5 9 400 150 3 1 1
Source 200
Q3 8 3 3 2 500 300 1 1 1
250 350 200

Demand 400 1200
0 50 0
Column
1 2 2 2
Difference
- 2 2 2
- 3 2 7
PAGE 69

Notes Find the row difference and the column difference from the remaining cells.
Destination
Row
D1 D2 D3 D4 Supply
difference
300
Q1 3 1 7 4 300 0 2 3
-
250
Q2 2 6 5 9 400 150 3 1 1
Source 200
Q3 8 3 3 2 500 300 1 1 1
250 350 200

Demand 400 1200
0 50 0
Column
1 2 2 2
Difference
- 2 2 2
- 3 2 7
The maximum punishment at this time is three, which corresponds to

column D2. The cell in D2 with the smallest value is (O3, D2). Select
the supply and demand that is least balanced, then remove the column.
70 PAGE

Now there is only one column so select the cell with the least cost Notes
and allocate the value.
Now there is only one cell so allocate the remaining demand or

supply to the cell
PAGE 71

Notes There is no equilibrium left. Therefore, multiply each cell’s assigned value
by its associated cell cost, then sum them all up to get the total cost,
which is (300 * 1) + (250 * 2) + (50 * 3) + (250 * 3) + (200 * 2) +
(150 * 5) = 2850.
3.3.6 Transportation Problem: MoDi Method (Modified

Distribution Method)
We first need to be familiar with optimality tests in order to comprehend
the strategies that will help you optimise your transportation-related
solution. To determine whether the basic feasible solution (BFS) found
using any of the following approaches—Vogel’s Approximation Method
(VAM), Least Cost Method, North West Corner Method, Method to address
Transportation Problem—is optimal or not, an optimization test is run.
Only after meeting the following two prerequisites is this test conducted:
Go to the Modified Distribution Method (MODI) or the Stepping Stone
Method for the best transportation problem solution.
In order to determine whether the basic feasible solution (BFS) found using
any of the following methods—Approximation Vogel’s Method (VAM),
Least Cost Method, North West Corner Method, Method to Solve Trans-
portation Problem—is optimal or not, an optimization test is conducted.
ĺRQO\DIWHUPHHWLQJWKHWZRFRQGLWLRQVOLVWHGEHORZLVWKLVWHVWFRQGXFWHG
(a) There are (m + n 1) non-negative allocations overall.
(b) The assignments are made to separate cells.
Where there are m (rows) and n (columns)
Two alternative approaches are utilised to determine if the transportation
problem’s solution is optimal or not.
1. Stepping Stone Method
2. Modified Distribution Method (MoDi)
Why is the MoDi Approach Recommended?

The total number of vacant cells in the Stepping Stone approach will be
equal to mn (m + n1). This is because there are m rows and n columns.
72 PAGE

As a result, there are more loops overall, which makes calculating more Notes
difficult and time-consuming. Also, in the MoDi technique, only one
closed path is traced for the most negative cell, and cell evaluations
of all vacant cells are calculated simultaneously. In comparison to the
Stepping Stone Method, it thus saves time.
The MoDi method is often referred to as the “u v Method.”
Let us now examine how the Modified Distribution Method (MoDi)
functions. The following numerical explanation can help you grasp it:
Applying Modified Distribution Method (MoDi) Numerical
Question: Verify the optimality of the fundamentally workable solution
provided below using the Modified Distribution Method (MODI) approach.
Solution: Take note that “CYAN” is the only colour used throughout the
discussion. If there are any steps in the exam, you must only write the
items that are shown in this regular colour underneath them; otherwise,
you can simply use this matrix to solve the issue as it is presented here.
ĺ &UHDWH D FRVW PDWUL[ E\ HQWHULQJ FRVW LQIRUPDWLRQ LQ GHVLJQDWHG FHOOV
ĺ ,QWURGXFH GXDO YDULDEOHV X Y WKDW UHSUHVHQW WKH OLPLWDWLRQV RQ
supply and demand now.
Note, the dual variables ui and vj in this case are set up so that ui + vj = cij
(where i = 1, 2, 3,... m & j = 1, 2, 3,... n).
PAGE 73

Notes
According to the note above, we can arrive at the following equation:

u1 + v3u2 + v1u2 + v3u3 + v1u3 + v2 = 1 = 3 = 3 = 6 = 2.
Now, we treat either variable as ‘0. When we calculate the value of the
other dual variable after setting u3 to 0, we get the following equation:
v2 = v1 = u2 = v3 = u1 = 26365.
By changing the dual variable’s values in the matrix, we obtain;
Let us now conduct a Vacant Cell Assessment. With each empty call, a
difference is taken in order to evaluate vacant cells.
?
Analysis of cell = Cij(ui + vj), where Cij = Value of unoccupied cell
Recall that the term “implicit cost” is “(ui + vj)”.
Implicit cost is the total of the dual variables for the row and columns
for each vacant cell.
The following formula should be used to fill in the empty cells:
Notes: In this method, if the values of the cells are/is:

(i) Positive (+), the present basic feasible solution (BFS) is optimal,
and the process should be stopped. The solution will get worse if
we change the current one.
74 PAGE

(ii) Zero (0) – In this case, the fundamental feasible solution (BFS) Notes
is also the best possible option, but different allocations are still
viable at the same transportation cost.
(iii) Negative (-) – If this is true, the obtained solution is not ideal and
room for improvement still exists.
The current answer is the best one since all of the values in the unallo-
cated cells have now been determined to be positive (+) by employing
vacant cell evaluation.
The Stepping Stone Method can also be used to determine the answer
to this numerical problem.
3.4 Some Special Codes of TP
3.4.1 Maximisation Transportation Problem

In some transportation problems, the objective function should be max-
imised rather than minimised. By converting the maximising problem
into the minimization problem, these types of problems can be solved.
By deducting the unit costs from the table’s highest unit cost, maximis-
ation is transformed into minimization.
The problem is illustrated with the following example:
Example: ABC limited has three factories located in three different cities
X, Y, X. These factories supplies consignments to four dealers viz. A,
B, C and D. The dealers are spread all over the country. The production
FDSDFLW\ RI WKHVH IDFWRULHV LV DQG XQLWV SHU PRQWK UHVSHF-
tively. The net return per unit product is given in the following table:
Determine a suitable allocation to maximize the total return.
PAGE 75

Notes Solution: The example is a case of maximization problem. Hence first

we have to convert this into minimization problem. The conversion of
maximization into minimization is done by subtracting the unit cost of
the table from the highest unit cost.
In the above problem the highest value is 8. So subtract 8 from all the
elements, and then we get the revised minimization transportation table
Now we can solve the problem as a minimization problem. First, we have

to find out the basic feasible solution, we will use the (LCM).
The basic feasible solution by (LCM) is: x11 = 150, x12 = 130, x13 = 30,
x23
x24 = 10 and x34
Once the basic feasible solution is found, next we have to determine the
optimum solution. The MoDi (Modified Distribution Method) approach
is used in this case. With this approach, we are able to obtain
u1+ v1 ௑X1 + v2 ௑X1 + v3 ௑X2 + v3 = 4, u2 + v4 = 3, u3 + v4 = 0.
Taking u1 = 0 arbitrarily we obtain
u1 = 0, v1 = 2, v2 DQG௑௑Y3 = 2, u2 = 2, v4 = 1, u3 í
76 PAGE

By verifying the condition of optimality, we get: Notes

Cell (1, 4) = 4 – 0 – 1 = 3
Cell (2, 1) = 4 – 2 – 2 = 0
Cell (2, 2) = 6 – 2 – 2 = 2
Cell (3, 1) = 3 – (–1) – 2 = 2
Cell (3, 2) = 2 – (–1) – 2 = 1
Cell (3, 3) = 1 – (–1) – 2 = 0
So, the optimality condition is satisfied.
x11 = 150, x12 = 130, x13 = 30, x23 [24 = 10 and x34
Thus, the maximum return is:

3.4.2 Degeneracy
When there is less than m + n 1 positive Xij, or occupied cells, in a
basic feasible solution to a transportation problem with m origins and n
destinations, the problem is said to be a degenerate transportation problem.
Although the degeneracy problem may not provide a major challenge, it
can complicate computations when seeking the best minimum solution.
As a result, it is critical to spot degenerate problems early on and take
the appropriate steps to prevent any computational difficulty. The results
show that a degenerate basic viable solution only exists in transportation
problems when some partial sum of supply (row) equals some partial
sum of demand (column).
For example, the transportation issue below is degenerate. Due to the fact
WKDW LQ WKLV LVVXH D E DQG D D E E
PAGE 77

Notes The degenerate problems can be resolved using a method called pertur-
bation.
Perturbation Method:
If we make sure that no partial sum of ai (supply) and bj (demand) is
equal, the degeneracy of the transportation problem can be avoided.
We build up a new problem with the following variables: ai = ai + d,
i = 1, 2,......, m bj = bj, j = 1, 2,......, and n 1, bn = bn + md, d ! 0.
No partial sum of ai can equal bj in this modified problem because of
the way it is built.
When the issue is resolved, we replace d = 0 to achieve the best reso-
lution of the initial issue.
Example:
Now, one of the three methods—North-West Corner, Least Cost, or

VAM—can be used to solve this modified problem.
3.4.3 Unbalanced Transportation Problem

Unbalanced transportation problems occur when the entire supply from
all sources does not match the total demand from all destinations.
Two scenarios are conceivable: 1. If supply is less than demand, a dum-
my supply variable is added to the equation, bringing it to parity with
demand. 2. To make demand equal to supply in the event that it is less
than, a fake demand variable is added to the equation.
78 PAGE

Then, in order to solve, you must balance supply and demand. As no Notes
shipment is really made when a dummy source and dummy destination
are used, the unit transportation cost for the dummy column and dummy
row are given zero values.
3.4.4 Prohibited Routes

There are occasionally transportation problems that prevent one of
the sources from shipping to one or more of the destinations. When
this occurs, it is stated that the issue has a forbidden or unsatisfactory
solution.
Such a forbidden route is given a very high cost in a minimization problem
to ensure that it is never used in the best solution. The very high cost
used in minimization problems is given a negative sign in a maximisation
problem, making it into an extremely poor profit.
In some cases, it may also be inappropriate to travel specific routes
when there is a transportation issue. Road construction, poor road
conditions, strikes, unforeseen floods, local traffic laws, etc. are a
few examples.
Such limitations (or prohibitions) will be addressed inside the transpor-
tation issue by allocating a very high cost (say M or [infinity]) to the
forbidden routes to ensure that routes will not be included within the
optimal solution, after which the problem is solved in the conventional
way.
3.4.5 Alternative Optimal Solutions

When there are many optimal solutions to a linear or integer program-
ming problem, these additional solutions are referred to as alternate
optimal solutions or alternate optima. An ideal solution to a problem is
typically one that satisfies the problem’s constraints and, consequently,
the objective function, which is to maximise or minimise. There may be
more than one ideal answer to a transportation problem.
This occurs when one or more of the development indices reach zero in
the best solution, indicating that routes can be designed to have a same
PAGE 79

Notes total shipping cost. By using a stepping-stone method to transport the

first to the currently vacant square, the other optimal option is frequently
discovered. Alternative optimal solutions in the real world give managers
more freedom in resource allocation and use.
IN-TEXT QUESTIONS
1. In a transportation problem where the demand or requirement is
equal to the available resource is known as
(a) Balanced transportation problem
(b) Regular transportation problem
(c) Resource allocation transportation problem
(d) Simple transportation model
2. An alternative optimal solution to a minimization transportation
problem exists whenever opportunity cost corresponding to
unused route of transportation is:
(a) positive and greater than zero
(b) positive with at least one equal to zero
(c) negative with at least one equal to zero
(d) none of the above
3. One disadvantage of using the North-West Corner Rule to find
initial the solution to the transportation problem is that
(a) it is complicated to use
(b) it does not consider the cost of transportation
(c) it leads to a degenerate initial solution
(d) all of the above
4. When total supply is equal to total demand in a transportation
problem, the problem is said to be:
(a) balanced
(b) unbalanced
(c) degenerate
(d) none of these
80 PAGE

5. Which of the following methods is used to verify the optimality Notes

of the current solution of the transportation problem
(a) Least cost method
(b) Vogel’s approximation method
(c) Modified distribution method
(d) all of these
6. In the optimal solution, more than one empty cell have their
opportunity cost as zero, it indicates
(a) The solution is not optimal
(b) The problem has alternate solution
(c) Something wrong in the solution
(d) The problem will cycle
7. Maximization assignment problem is transformed into a minimization
problem by______.
(a) adding each entry in a column from the maximum value
in that column
(b) subtracting each entry in a column from the maximum
value in that column
(c) subtracting each entry in the table from the maximum value
in that table
(d) adding each entry in the table from the maximum value
in that table
8. What is the primary objective of solving transportation problems
in operations management?
(a) Maximizing transportation time
(b) Minimizing transportation costs
(c) Maximizing excess supply
(d) Minimizing demand
PAGE 81

Notes 9. What are the different types of transportation problems discussed

in the lesson?
(a) North-South and East-West
(b) Linear and Non-linear
(c) Balanced and Unbalanced
(d) Strategic and Tactical
10. Which method is commonly used to solve transportation
problems by starting at the northwest corner of the transportation
matrix?
(a) Least Cost Cell Method
(b) Vogel’s Approximation Method
(c) Northwest Corner Method
(d) Modified Distribution Method
11. What is the objective of the least cost cell method in solving
transportation problems?
(a) Minimize total transportation cost
(b) Maximize total transportation distance
(c) Balance supply and demand
(d) Minimize transportation time
12. Which method in transportation problem solving involves
calculating penalties for each row and column?
(a) Northwest Corner Method
(b) Least Cost Cell Method
(c) Vogel’s Approximation Method
13. What is the purpose of the modified distribution method in
transportation problems?
(a) Minimize excess supply
(b) Maximize total profit
(c) Achieve optimal transportation allocation
(d) Determine transportation routes
82 PAGE

14. Which section of the lesson typically provides a brief explanation Notes
of specialized terms used in transportation problems?
(a) Learning Objectives
(b) Glossary
(c) Self-Assessment Questions
(d) Suggested Readings
15. What is the main purpose of the self-assessment questions
section?
(a) To introduce advanced topics
(b) To summarize key concepts
(c) To reinforce learning through practice
(d) To provide additional reading material
16. In transportation problems, what does an unbalanced situation
refer to?
(a) When supply exceeds demand
(b) When demand exceeds supply
(c) When transportation costs are high
(d) When transportation routes are unavailable
17. Which method in transportation problem solving is known for
its ability to produce more accurate results but may require
more computational effort?
(b) Least Cost Cell Method
(c) Vogel’s Approximation Method
3.5 Summary
Lesson 3 introduced the concept of the Transportation Problem, which
is a classic problem in operations management involving the efficient
allocation of goods from multiple sources to multiple destinations while
PAGE 83

Notes minimizing transportation costs. The lesson outlined various methods to

solve transportation problems, including the Northwest Corner Method,
Least Cost Cell Method, Vogel’s Approximation Method, and Modified
Distribution Method. Each method offers a unique approach to optimiz-
ing transportation routes and minimizing overall costs. By mastering
the techniques presented in this lesson, students can effectively address
real-world logistics challenges and make informed decisions to streamline
transportation processes and reduce operational expenses.

1. (a) Balanced transportation problem
2. (b) Positive with at least one equal to zero
3. (b) It does not consider the cost of transportation
4. (a) Balanced
5. (c) Modified distribution method
6. (b) The problem has alternate solution
7. (c) Subtracting each entry in the table from the maximum value
in that table
8. (b) Minimizing transportation costs
9. (c) Balanced and Unbalanced
10. (c) Northwest Corner Method
11. (a) Minimize total transportation cost
12. (c) Vogel’s Approximation Method
13. (c) Achieve optimal transportation allocation
14. (b) Glossary
15. (c) To reinforce learning through practice
16. (a) When supply exceeds demand
17. (c) Vogel’s Approximation Method
84 PAGE

Notes
(I) Short Answer Questions:
1. What is the transportation problem, and how can it be resolved?
2. Describe the transportation model.
3. What is the most effective way to tackle TP?
4. What method of transportation is used?
5. What distinguishes transhipment from transit?
(II) Long Answer Questions:
1. Compare and contrast the stepping stone method with the MoDi
method for resolving a transportation issue.
2. A factory has four stores, S1, S2, S3, and S4, which are supplied by
three warehouses, W1, W2, and W3. The warehouses have monthly
capacities of W1 = 100 units, W2 = 40 units, and W3 = 60 units.
S1 = 30 units, S2 = 50 units, S3 = 65 units, and S4 = 55 units are
the monthly requests at the stores.
The following table lists the transportation costs from warehouses
to stores in Indian rupees:
Stores
Warehouses S1 S2 S3 S4
W1 14 16 12 20
W2 12 14 10 08
W3 10 16 08 15
The problem here is to determine the optimum distribution for the

factory to minimize shipping costs.
1. Four companies A, B, C, D supply the requirement of three
warehouses X, Y, Z respectively. The companies’ availability,
warehouse requirements and the unit cost of transportation are given
in the following table. Find an initial basic feasible solution using:
(b) Least Cost Method
(c) Vogel Approximation Method (VAM)
PAGE 85

Notes Warehouses
Company A B C Supply
W 10 8 15
X 5 2 3 20
Y 6 7 4 30
Z 7 6 35
Requirement 25 26 100
Solution:
(a) x11 = 15, x21 = 10, x22 = 10, x32 = 16, x33 = 14, x43 = 35
Minimum Cost is: 753
(b) x13 = 15, x22 = 20, x33 = 30, x41 = 25, x42 = 6, x43 = 4
(c) x13 = 15, x22 = 20, x33 = 30, x41 = 25, x42 = 6, x43 = 4
2. Find the optimum solution of the following problem using MoDi

method.
Destination
Source 1 2 3 Capacity
A 42 8 10
B 11 11 30
C 10 12 28
Demand 35 40 25 100
Solution:
x11 = 2, x12 = 40, x21 = 30, x31 = 3, x33 = 25

0LQLPXP 7UDQVSRUWDWLRQ 2SWLPDO &RVW LV
86 PAGE

Notes
3.8 References
Bazaraa, M., & J. Jarvis. Linear Programming and Network Flows.
1HZ <RUN :LOH\
Bradley, S., A. Hax, & T. Magnanti. Applied Mathematical Programming.
5HDGLQJ 0DVV$GGLVRQ:HVOH\
Dantzig, G. Linear Programming and Extensions. Princeton, N.J.:
3ULQFHWRQ 8QLYHUVLW\ 3UHVV
Gass, S. Linear Programming: Methods and Applications, 5th ed.
1HZ <RUN 0F*UDZ +LOO
0XUW\ . /LQHDU 3URJUDPPLQJ 1HZ <RUN :LOH\
Wu, N., & R. Coppins. Linear Programming and Extensions. New
<RUN 0F*UDZ +LOO
Aarvik, O., & P. Randolph. “The Application of Linear Programming
to the Determination of Transmission Line Fees in an Electrical
3RZHU 1HWZRUN´ ,QWHUIDFHV
Denardo, E., U. Roth Blum, & A. Swersey. “Transportation Problem
in Which Costs Depend on Order of Arrival,” Management Science

Evans, J. “The Factored Transportation Problem,” Management Science

Gillett, B. Introduction to Operations Research: A Computer Oriented
$OJRULWKPLF$SSURDFK 1HZ <RUN 0F*UDZ +LOO
Glassey, R., & V. Gupta. “A Linear Programming Analysis of Paper
5HF\FOLQJ´ 0DQDJHPHQW 6FLHQFH
Glover, F., et al. “A Computational Study on Starting Procedures,
Basis Change Criteria and Solution Algorithms for Transportation
3UREOHPV´ 0DQDJHPHQW 6FLHQFH

R. J. Aguilar. Systems Analysis and Design. Prentice Hall, Inc.
(QJOHZRRG &OLIIV 1HZ -HUVH\ SS
H. L. Bhatia, K. Swarup, & M. C. Puri. Indian J. Pure Appl. Math.

PAGE 87

Notes 56*DUWLQNHO055DR1DY5HV/RJ4XDUW

G. Hadley. Linear Programming, Addison-Wesley Publishing Company,
SS ±
3 / +DPPHU 1DY 5HV /RJ 4XDUW
3 / +DPPHU 1DY 5HV /RJ 4XDUW
A. J. Hughes, & D. E. Grawog. Linear Programming: An Emphasis on
Decision Making, Addison-Wesley Publishing Company, pp. 300-312.
+ : .XKQ 1DY 5HV /RJ 4XDUW
$ 2UGHQ 0DQDJHPHQW 6FL
6 3DUNDVK 3URF ,QGLDQ$FDG 6FL 0DWK 6FL
& 6 5DPDNULVKQDQ 236($5&+
C. R. Seshan, & V. G. Tikekar. Proc. Indian Acad. Sci. (Math. Sci.)

J. K. Sharma, & K. Swarup. Proc. Indian Acad. Sci. (Math. Sci.) 86

: 6]ZDUF 1DY 5HV /RJ 4XDUW
Malakooti, B. (2013). Operations and Production Systems with
Multiple Objectives. John Wiley & Sons.
88 PAGE

L E S S O N
4
Assignment Problem
Dr. Jigmet Wangdus
Assistant Professor
SOL/Campus of Open Learning
University of Delhi
Email-Id: jigmet@sol-du.ac.in
STRUCTURE
4.2 Introduction
4.3 Assignment Problems
4.4 Hungarian Method
4.5 Some Special Cases
4.6 Solved Illustrations (For Practical Subject)
4.7 Summary
4.10 Reference

Understand and formulate an assignment problem.
Find the optimal solution by using hungarian method.
Determine the solution for special cases: multiple solutions, maximization case,
unbalance case and restriction of assignment.
PAGE 89

Notes
4.2 Introduction
The assignment problem includes providing various resources (items)
to different activities (receivers) on a one-to-one basis, i.e., assign-
ing the same number of operations to an equal number of operators,
with each operator carrying out just one operation. For example, HR
department has five tasks and five Employees. The employees take
different time to complete each work depending on their efficiency.
An assignment problem is one in which one task must be assigned
to one person while minimizing the overall number of person hours.
While being a particular example of the transportation problem, the
assignment problem is not resolved by the techniques covered in
previous lessons.
To solve an assignment problem, we employ a different technique
known as the Hungarian method. Compared to other methods of deter-
mining the best solution to a transportation problem, it is simpler and
more efficient. This lesson covers a variety of assignment issue types,
including multiple solutions, maximization case, unbalance case and
restriction of assignment.
4.3 Assignment Problems

If there are equal numbers of sources and destinations, an assignment
problem can be thought of as a specific type of transportation problem.
Each source’s capability and each destination’s demand are both taken
as 1. While a transportation problem does not require a square matrix,
an assignment problem does require that the provided matrix be a square
matrix. It is also known as balanced assignment problem. Suppose
there are n individuals and n jobs, and the jobs must be assigned on
a one-to-one basis. This assignment problem may be expressed as a
(n u n) real number matrix (also known as the cost matrix), as shown
in the following table:
90 PAGE

ASSIGNMENT PROBLEM
Job Notes
Person 1 2…. j….. n
1 C11 C11 C1j C1n
2 C21 C22 C2j C2n
.
.
i Ci1 Ci2 Cij Cin
.
.
n Cn1 Cn2 Cnj Cnn
where Cij represents the amount of time taken by ith individual to complete
the jth job. Let xij denote the jth job assigned to the ith individual. Then
the assignment problem can be stated as follows:
m n
Minimize Z = ¦¦c x
i 1 j 1
ij ij ௑ZKHUH L « Q DQG M « P
1, if theith individualis assigned the jth job

Subject to xij ®
¯0, if theith indiviidualis not assigned the jth job
Xi1 + Xi1 +……….+ Xin = 1, i = 1, 2, 3, …, n (one job is done by the
ith individual)
Xij + X21 +……….+ Xnj = 1, j = 1, 2, 3, …, n (one job is done by the
jth individual)
The time/cost is represented by constant cij.
Some of the examples of assignment problems are:
assigning salesperson to different regions/states
assigning drivers and vehicles on different routes
assigning different product to different factories
Assigning jobs to machines
Assigning contract to bidders
Assigning research problems to different teams.
PAGE 91

Notes
4.4 Hungarian Method
One of the easiest and simple method of solving assignment problem is
Hungarian method. Hungarian method is a computer optimization approach
which solves the assignment issue in polynomial time and foreshadows
subsequent primal-dual options. Harold Kuhn coined the phrase “Hun-
JDULDQ PHWKRG´ LQ WR KRQRXU 'pQHV .QLJ DQG -HQ (JHUYiU\ WZR
Hungarian mathematicians.
Hungarian Method steps for obtaining an optimal solution of an assign-
ment problem are:
1. Determine whether the matrices are square. If it isn’t square, add
a sufficient number of dummy rows (or columns) with zero cost
or time elements to make it so.
2. Row reduction. Find the lowest cost element in every row of the
cost matrix. Take the smallest element in each row and deduct it
from each element in that row. Make sure each row has at least
one zero.
3. Column reduction. In the resulting cost matrix, find the smallest
element in each column, and then subtract it from each element in
that column. Again, make sure that each column contains at least
one zero.
4. Assign zeros.
(a) Examine the rows one at a time until you locate a row that
contains exactly one unmarked zero. Give this lone, unmarked
zero a task and encircle or [ ] it. The other zeros in the
circular zero’s column should all be crossed (×) or 0 out since
they won’t be used in any future assignments. Continue in
this way until all of the rows have been examined.
(b) Examine the rows one at a time until you locate a row that
contains exactly one unmarked zero. Give this lone, unmarked
zero a task and encircle it. The other zeros in the circular
zero’s column should all be crossed out since they won’t be
used in any future assignments. Continue in this way until
all of the rows have been reviewed.
92 PAGE

ASSIGNMENT PROBLEM
5. Perform the optimal Test. Notes

(a) If there is precisely one circular zero in each row and column,
the current assignment is optimal.
(b) If at least one assignment is missing from a row or column,
the current assignment is not the best one (i.e., if at least one
row or column is missing one encircled zero). Go on to step
6 now. In the final cost matrix produced in step 2, deduct the
least cost element from each entry in each column, making
sure that each column contains at least one zero.
6. Draw the least number of straight lines to cover all of the zero as
follows:
(a) Highlight the unassigned rows.
(b) If the rows haven’t previously been marked, label the columns
that contain zeros.
(c) If not already highlighted, highlight the rows that have assignments
in the relevant columns.
(d) Repeat steps (b) and (c) until no further marking is required.
(e) Just draw a line through all unmarked rows and columns. The
solution is optimal if the total number of these lines equals
the order of the matrix; otherwise, it is not.
7. Determine the lowest cost factor that the straight lines do not cover.
Add this least-cost component to all the components that are at
the intersection of these straight lines and subtract it from all the
uncovered elements, leaving the rest of the elements alone.
8. Continue with steps 2-7 until you find the highest suitable assignment.
Illustration 4.1: Solve the following assignment problem. Cell values rep-
resent cost of assigning jobs A, B, C and D to the workers I, II, III and IV
Workers
I II III IV
A 10 12 11
B 5 10 7 8
Jobs C 12 14 13 11
D 8 15 11
PAGE 93

Notes Solution:
Step 1: Here the matrix is square as number of rows and columns are equal.
Therefore, the given assignment problem is balanced.
Step 2: Row reduction (Find the lowest cost element in every row and
subtract this from all the elements in its row.)
Workers
I II III IV
A 0 2 1
B 0 5 2 3
Jobs C 1 3 2 0
D 0 7 3 1
Check for at least one zero in each row and each column. Otherwise go
to next step.
Step 3: Column reduction (Find the smallest element in each column and
subtract this from all the elements in its column.)
Workers
I II III IV
A 0 0 7 1
B 0 3 0 3
Jobs C 1 1 0 0
D 0 5 0 1
Since every row and column contains at least one zero, assignments can
be made.
Step 4: (Assignment)
Find the rows with exactly one zero. The first three rows contain more
than one zero. Go to Job D, where there is exactly one zero. Mark that
zero by encircle or [ ] i.e. job D is assigned to worker 1. Mark other
zeros in its column by cross (×) or Strikeout (0).
I II III IV
A 0 0 7 1
B 0 3 0 3
C 1 1 0 0
D [0] 5 1 2
94 PAGE

ASSIGNMENT PROBLEM
Step 5: Now check the columns with exactly on zero. Since there is al- Notes
ready and assignment in column I so move to column II. There is exactly
one zero. Mark the zero by encircle /[ ] and other zeros in the row by
crossed (×) or Strikeout (0).
I II III IV
A 0 [0] 7 1
B 0 3 0 3
C 1 1 0 0
D [0] 5 1 2
In column III there are more than one zero. Therefore we proceed to
column IV where there is exactly one zero. Mark the zero by encircle
/[ ] and other zeros in the row by crossed (×) Strikeout (0).
I II III IV
A 0 [0] 7 1
B 0 3 0 3
C 1 1 0 [0]
D [0] 5 1 2
Step 6: Again, examine the rows. Row B contains exactly one zero, mark
that zero by /[ ].
I II III IV
A 0 [0] 7 1
B 0 3 [0] 3
C 1 1 0 [0]
D [0] 5 1 2
Thus all the four assignments have been completed. The optimal assign-
ment schedule and total cost is:
Job Worker Cost
A II 12
B III 7
C IV 11
D I 8
Total Cost 38
The optimal assignment (minimum) cost = Rs. 38
PAGE 95

Notes Illustration 4.2: Solve the assignment problem. The problem has five
jobs and five machines. The costs of assignments are given below. Find
the optimal assignment schedule.
Machines
1 2 3 4 5
A 8 4 2 6 1
B 0 5 5 4
Jobs C 3 8 2 6
D 4 3 1 0 3
E 5 8 5
Solution:
Step 1: Here the matrix is square as number of rows (5) and columns
(5) are equal.
Therefore, the given assignment problem is balanced.
Step 2. Find the lowest cost element in every row and subtract this from
all the elements in its row.
Machines
1 2 3 4 5
A 7 3 1 5 0
B 0 5 5 4
Jobs C 1 6 7 0 4
D 4 3 1 0 3
E 4 0 3 4 0
Column 3 doesn’t contain zero. Move to step 3.
Step 3: Find the smallest element in each column and subtract this from
all the elements in its column.
Machines
1 2 3 4 5
A 7 3 0 5 0
B 0 4 5 4
Jobs C 1 6 6 0 4
D 4 3 0 0 3
E 4 0 2 4 0
Since every row and column contains at least one zero, assignments can
be made.
96 PAGE

ASSIGNMENT PROBLEM
Step 4: (Assignment) Notes

Find the rows with exactly one zero. The row A contains more than one
zero. Go to Row B, where there is exactly one zero. Mark that zero by
encircle i.e. job B is assigned to machine 1. Mark other zeros in its
column by cross (×) or strikeout (0).
1 2 3 4 5
A 7 3 0 5 0
B [0] 4 5 4
C 1 6 6 0 4
D 4 3 0 0 3
E 4 0 2 4 0
Next, row C contains exactly one zero. So, mark the zero by encircle
and other zeros in the row by cross (×) or strikeout 0
1 2 3 4 5
A 7 3 0 5 0
B [0] 4 5 4
C 1 6 6 [0] 4
D 4 3 0 0 3
E 4 0 2 4 0
Next, Row D contains one zero. So, mark the zero by encircle /[ ] and
other zeros in the row by cross (×) or strikeout 0.
1 2 3 4 5
A 7 3 0 5 0
B [0] 4 5 4
C 1 6 6 [0] 4
D 4 3 [0] 0 3
E 4 0 2 4 0
The last row E contains more than one zero. So move to column wise.
In column 1 there is already an assignment so move to column 2. There
is exactly one zero. So, mark the zero by encircle /[ ] and other zeros
in the row by cross (×) or strikeout 0.
PAGE 97

Notes 1 2 3 4 5
A 7 3 0 5 0
B [0] 4 5 4
C 1 6 6 [0] 4
D 4 3 [0] 0 3
E 4 [0] 2 4 0
In columns 3 and 4 there is an assignment so move to column 5. There
is exactly one zero. So, mark the zero by encircle /[ ] and other zeros
in the row by cross (×) or strikeout 0
1 2 3 4 5
A 7 3 0 5 [0]
B [0] 4 5 4
C 1 6 6 [0] 4
D 4 3 [0] 0 3
E 4 [0] 2 4 0
Thus all the five machines are assigned to different jobs.
The optimal assignment schedule and the total cost are:
Job Machines Cost

A 5 1
B 1 0
C 4 2
D 3 1
E 2 5
Total Cost
7KH RSWLPDO DVVLJQPHQW PLQLPXP FRVW 5V
4.5 Some Special Cases

The maximization problem, unbalanced assignment problem, alternate
optimal solutions, and restrictions on assignments are some of the spe-
cific examples of the assignment problem that are covered in this section
along with the methods for solving them.
98 PAGE

ASSIGNMENT PROBLEM
Notes
4.5.1 Maximization Problem
A maximization problem in the form of an assignment problem could
also exist. In order to maximise the overall performance of the assign-
ment, there are situations where specific facilities must be assigned to
a number of jobs. For instance, instead of cost or times, the cells might
include profits (or any other type of revenue) that needs to be maximised.
In order to solve the problem, we must determine the opportunity loss
matrix by deducting each cell’s value from the largest value determined
from all the available cells. When a cell’s value is deducted from the
greatest value, the losses as a result of passing up an opportunity that
would have produced the highest value is revealed. The opportunity loss
matrix is the resultant matrix, and it is treated in the same way as the
minimization problem.
The maximization problem can also be solved by converting the problem
to minimum problem by multiplying all the elements Cij of the assignment
PDWUL[ E\ QHJDWLYH RQH í
Illustration 4.3: The company has to assign five agents (1, 2, 3, 4, 5)
to five different states (A, B, C, D, E). The expected revenue (in Lakhs)
for each agent is given as follows:
A B C D E
1 5 11 10 12 4
2 2 4 6 3 5
3 3 12 5 14 6
4 6 14 4 11 7
5 7 8 12 8
Since the given problem is maximization,
Step 1: Convert the problem to a minimum problem by multiply all the
elements Cij of the assignment matrix by –1
A B C D E
1 –5 –11 –10 –12 –4
2 –2 –4 –6 –3 –5
3 –3 –12 –5 –14 –6
4 –6 –14 –4 –11 –7
5 –7 ± –8 –12 –8
PAGE 99

Notes Step 2: Find the smallest element and subtract with others elements of
the matrix minx = – (–max Z). In the matrix the smallest value is –14.
Using this value (–14), the matrix is subtracted resulting is the min-
imization matrix. Now we can use the normal procedure to solve the
assignment problem.
A B C D E
1 3 4 2 10
2 12 10 8 11
3 11 2 0 8
4 8 0 10 3 7
5 7 5 6 2 6
Note: C1a ±± ± DQG FRQWLQXHG IRU DOO RWKHU HOHPHQWV
Step 3: Using the above matrix i.e., min Z matrix table and all cost ele-
ments non-ve. The Hungarian method can be applied to find the optimal
assignment problem.
Step 4: Row minimization
A B C D E
1 7 1 2 0 8
2 4 2 0 3 1
3 11 2 0 8
4 8 0 10 3 7
5 5 3 4 0 4
Step 5: Column minimization
A B C D E
1 3 1 2 [0] 7
2 [0] 2 0 3 0
3 7 2 0 7
4 4 [0] 10 3 6
5 1 3 4 0 3
As the number of assigned zero is less than the number of rows, we
apply next step of Hungarian method and draw the minimum number
100 PAGE

ASSIGNMENT PROBLEM
of horizontal/vertical lines that covers all the zeroes as shown in the Notes
following matrix.
A B C D E
1 3 1 2 0 7
2 0 2 0 3 0
3 7 2 0 7
4 4 0 10 3 6
1 4 3
5 3 0
9 9 9
Now select the minimum element form amongst the uncovered elements,
which is 1 and subtract it from each of the uncovered elements and add
it to the elements which lies at the intersection of horizontal and vertical
lines. Reset of covered elements remains constant.
A B C D E
1 2 1 1 [0] 6
2 0 3 0 4 [0]
3 6 2 8 0 6
4 3 [0] 3 5
5 [0] 3 3 0 2
Again, repeat the previous steps as the number of assigned zero is less
than the number of rows.
A B C D E
1 2 1 1 [0] 6
2 0 3 0 4 [0]
3 6 2 8 0 6
4 3 [0] 3 5
3 2
5 [0] 3 0
9 9
Again, select the minimum element form amongst the uncovered elements,
PAGE 101

Notes A B C D E
1 2 1 [0] 0 5
2 1 4 0 5 [0]
3 6 2 7 [0] 5
4 3 [0] 8 3 4
5 [0] 3 2 0 1
Thus all the five agents are assigned to different states.

The optimal assignment schedule and the total cost is:
Agents States Profit

1 C 10
2 E 5
3 D 14
4 B 14
5 A 7
Total Profit 50
Illustration 4.4: ABC Ltd. has 5 jobs to be done on 5 different machines.

The following matrix shows the return in Rs. (in thousands) of assigning
machines to jobs. Assign each job to machines so that expected profit
is maximised.
A B C D E
1 32 38 40 28 40
2 40 24 28 21 36
3 41 27 33 30 37
4 22 38 41 36 36
5 33 40 35
Solution:
Since the given problem is maximization
Step 1: Convert the assignment problem into minimization problem. For
this we obtain the opportunity loss matrix by deducting each element in
the given matrix from the largest element in it. Here the largest element
is 41.
102 PAGE

ASSIGNMENT PROBLEM
Thus, we obtain the opportunity loss matrix: Notes
A B C D E
1 3 1 13 1
2 1 17 13 20 5
3 0 14 8 11 4
4 3 0 5 5
5 12 8 1 6 2
Step 2: Apply Hungarian method (steps) and finally obtain the following
result matrix.
A B C D E
1 8 [0] 0 7 0
2 [0] 14 12 14 4
3 0 12 8 6 4
4 1 [0] 0 5
5 11 5 0 [0] 1

of horizontal/vertical lines that covers all the zeroes as shown in the
following matrix.
A B C D E
1 8 [0] 0 7 0
2 [0] 14 12 14 4 9
3 0 12 8 6 4 9
4 1 [0] 0 5
5 11 5 0 [0] 1
PAGE 103

Notes Now again apply Hungarian method to the resulting matrix we get:
A B C D E
1 14 [0] 0 7 0
2 [0] 10 8 10 0
3 0 8 4 2 [0]
4 23 1 [0] 0 5
5 15 5 0 [0] 1
Thus all the five jobs are assigned to different machines.
Job Machines Profit
1 B 38
2 A 40
3 E 37
4 C 41
5 D 35
Total Profit
4.5.2 The Unbalanced Assignment Problem

Unbalanced assignment problem is the term used to describe the assignment
problem where the number of rows does not equal the number of columns.
It means the number of facilities is not equal to number of jobs. If the
number of rows is fewer than the number of columns, dummy row(s) are
introduced, and dummy column(s) are introduced if the number of columns
is less than the number of rows. Such a dummy row and column are treated
as having zero elements (zero cost or time). The Hungarian approach, as
previously described, is then used to resolve the augmented problem.
Illustration 4.5: ABC Ltd. has five machines that are used for four dif-
ferent jobs. Only one machine can be assigned to each job. The cost on
each job on each machine is given in the matrix below.
A B C D E
1 5 7 11 6 7
2 8 6 5 6 5
3 6 7 10 7 3
4 10 4 8 2 4
104 PAGE

ASSIGNMENT PROBLEM
Solution: Notes
Step 1: Since the matrix is not a balanced square matrix, convert the
above 4 × 5 matrix into a square matrix by adding one dummy row D5.
Machines
A B C D E
1 5 7 11 6 7
Job
2 8 6 5 6 5
3 6 7 10 7 3
4 10 4 8 2 4
D5 0 0 0 0 0
Step 2: Apply Hungarian method

Row reduction (Find the lowest cost element in every row and subtract
this from all the elements in its row.)
A B C D E
1 0 2 6 1 2
2 3 1 0 1 0
3 3 4 7 4 0
4 8 2 6 0 2
D5 0 0 0 0 0
The column wise reduction is not required as each column contains

minimum of one zero.
Step 3: Assignment
A B C D E
1 [0] 2 6 1 2
2 3 1 [0] 1 0
3 3 4 7 4 [0]
4 8 2 6 [0] 2
D5 0 [0] 0 0 0
PAGE 105

Notes Thus all the five jobs are assigned to different machines.
Job Machines Cost

1 A 5
2 C 5
3 E 3
4 D 2
D5 B 0
Total Cost 15
4.5.3 Multiple Solution

Illustration 4.6: A company has 3 jobs and 4 machines. Each job can be
assigned to only one machine. The cost of all job on machines is given
in the matrix below:
Machines
L M N O
A 18 24 28 32
Job
B 8 13 17
C 10 15 22
Solution:
Since the above matrix is not a balanced square matrix,
Step 1: Convert it into square matrix by introducing one dummy row D.
Machines
L M N O
A 18 24 28 32
Job
B 8 13 17
C 10 15 22
D 0 0 0 0
106 PAGE

ASSIGNMENT PROBLEM
Step 2: Row reduction (Find the lowest cost element in every row and Notes
subtract this from all the elements in its row.)
L M N O
A 0 6 10 14
B 0 5 11
C 0 5 12
D 0 0 0 0

Step 3: Modified Matrix
L M N O
A [0] 6 10 14
B 0 5 11
C 0 5 12
D 0 [0] 0 0

of horizontal/vertical lines that covers all the zeroes as shown in the
following matrix.
L M N O
A [0] 6 10 14
B 0 5 11
C 0 5 12
D 0 0 0 0
PAGE 107

L M N O
A [0] 1 5
B 0 [0] 4 6
C 0 0 4 7
D 5 0 [0] 0
Again, as the number of assigned zero is less than the number of rows,
repeat the above steps.
L M N O
A [0] 1 5
B 0 [0] 4 6
C 0 0 4 7
D 0 0 [0] 0
Modified matrix.
L M N O
A 0 1 1 5
B 0 0 0 2
C 0 0 0 3
D 4 0 0
In this problem multiple assignment exists.

Solution 1:
L M N O
A [0] 1 1 5
B 0 [0] 0 2
C 0 0 [0] 3
D 4 0 [0]
108 PAGE

ASSIGNMENT PROBLEM
The optimal assignment schedule and the total cost is: Notes
Job Machines Cost

A L 18
B M 13
C N
D O 0
Total Cost 50
Solution 2:
L M N O
A [0] 1 1 5
B 0 0 [0] 2
C 0 [0] 0 3
D 4 0 [0]
Job Machines Cost

A L 18
B N 17
C M 15
D O 0
Total Cost 50
4.5.4 Restriction on Assignments

There are some occasions in assignment problem when a certain resource,
like a person, cannot be assigned to a specific task (say, a job). To solve
such problem, we assign a very high cost (or time, or anything else that
needs to be) and represent it by or M, where M refers to a very high
cost. To prevent this pair of resource-activity from entering the final
solution, this is done.
PAGE 109

Notes Illustration 4.7: The cost of performing different jobs by different per-
sons is given below. Some individuals cannot perform specific jobs, they
are marked X. Using this information state (i) the optimal assignment of
jobs, and (ii) the cost of such assignment.
Job
1 2 3 4 5
Person A 27 18 X 20 21
B 31 24 21 12 17
C 20 17 20 X 16
D 22 28 20 16 27
Solution
Step 1: Since the above matrix is not a squared (balanced) matrix, covert
it by introducing a dummy row (Z).
We assign M to the cells for which no preference is given.
Job
1 2 3 4 5
A 27 18 M 20 21
B 31 24 21 12 17
Person
C 20 17 20 M 16
D 22 28 20 16 27
Z (Dummy) 0 0 0 0 0
110 PAGE

ASSIGNMENT PROBLEM
Step 2: Row reduction: Notes
1 2 3 4 5
A 0 M 2 3
B 12 0 5
C 4 1 4 M 0
D 6 12 4 0 11
X (Dummy) 0 0 0 0 0

Steps 3: Modified Matrix
draw the minimum number of horizontal/vertical lines that covers all the
zeroes as shown in the following matrix.
1 2 3 4 5
A [0] M 2 3
B 12 [0] 5
C 4 1 4 M [0]
D 6 12 4 0 11
X (Dummy) 0 0 0 0 0
PAGE 111

1 2 3 4 5
A [0] M 6 3
B 15 8 5 [0] 1
C 4 1 4 M [0]
D 2 8 [0] 0 7
X (Dummy) [0] 0 0 4 0
Now each row and column has one and only one assigned zero, the as-
signment with maximum satisfaction is made.
Person Job Cost

A 2 18
B 4 12
C 5 16
D 3 20
X (dummy) 1 0
Total Cost 66
4.6 Solved Illustrations (For Practical Subject)

Illustration 4.8: Solve the following assignment problem. Each man can
assign only one task.
Men
1 2 3
W 26 15
Task X 13 27 6
Y 35 20 15
Z 18 30 20
112 PAGE

ASSIGNMENT PROBLEM
Solution: Notes
Step 1: Since the above matrix is not a square matrix, we introduce a
dummy column d with cost and time equal to zero.
Men
1 2 3 d
W 26 15 0
Task X 13 27 6 0
Y 35 20 15 0
Z 18 30 20 0
Step 2: Row reduction: Since each contains minimum one zero move
to next step.
Step 3: Column reduction:
1 2 3 d
W 0 6 0
X 4 7 0 0
Y 26 0 0
Z 10 14 0
Step 4: Assignment
1 2 3 d
W [0] 6 0
X 4 7 [0] 0
Y 26 [0] 0
Z 10 14 [0]
Task Men Cost
W 1
X 2 6
Y 3 20
Z D 0
Total Cost 35
Illustration 4.9: To generate interest and motivate students towards
the area of finance, the college decides to hold special webinar on four
topics - leasing, portfolio management, private mutual funds, swaps, and
PAGE 113

Notes options. Such webinar would be held only once per week. However, the
scheduling of these webinars has to be done carefully so that the number
of students unable to attend is kept to a minimum. A careful study indi-
cates that the number of students who cannot attend a particular seminar
on a specific day is given below:
Webinar
Portfolio Private Mutual
Leasing Management Funds Swaps
Monday 50 40 60 20
Tuesday 40 30 40 30
Day Wednesday 60 20 30 20
Thursday 30 30 20 30
Friday 10 20 10 30
Find the optimal schedule of the webinar. Also find the total number of
students who will be missing at least one seminar.
Solution:
Step 1: Since the above matrix is not a balanced square matrix, convert
it into balanced matrix by introducing a dummy column D.
Webinar
Portfolio Private
Leasing Management Mutual Funds Swaps D
Monday 50 40 60 20 0
Tuesday 40 30 40 30 0
Day
Wednesday 60 20 30 20 0
Thursday 30 30 20 30 0
Friday 10 20 10 30 0
Step 2: Row reduction

Since the dummy column has cost 0 for each day, row reduction is not
required.
114 PAGE

ASSIGNMENT PROBLEM
Step 3: Column reduction Notes

Portfolio Private
Leasing Swaps D
Management Mutual Funds
Monday 40 20 50 0 0
Tuesday 30 10 30 10 0
Wednesday 50 0 20 0 0
Thursday 20 10 10 10 0
Friday 0 0 0 10 0
Step 4: Assignment
Portfolio Private
Monday 40 20 50 [0] 0
Tuesday 30 10 30 10 [0]
Wednesday 50 [0] 20 0 0
Thursday 20 10 10 10 0
Friday [0] 0 0 10 0
Step 5: Modified Matrix

draw the minimum number of horizontal/vertical lines that covers all the
zeroes as shown in the following matrix.
Portfolio Private
Monday 40 20 50 [0] 0
Tuesday 30 10 30 10 [0]
Wednesday 50 [0] 20 0 0
Thursday 20 10 10 10 0
Friday [0] 0 0 10 0
PAGE 115

Notes Now select the minimum element form amongst the uncovered elements,
Now again apply Hungarian method to the resulting matrix we get:
Portfolio Private
Monday 30 20 40 [0] 0
Tuesday 20 10 20 10 [0]
Wednesday 40 [0] 10 0 0
Thursday 10 10 [0] 10 0
Friday [0] 10 0 20 10
Now each row and column has one and only one assigned zero, the as-
signment with maximum satisfaction is made.
The optimal assignment schedule and the number of students absent is:
Day Webinar Student Absent

Monday Swaps and Options 20
Tuesday No seminar 0
Wednesday Portfolio Management 20
Thursday Private mutual funds 20
Friday Leasing 10
Total students absent 70
IN-TEXT QUESTIONS
1. The cost elements in the matrix of a typical assignment problem
indicate the cost of performing the particular jobs by particular
personnel. (True/False)
2. An assignment problem is said to be balanced when the number
of rows in the given matrix matches with the number of column.
(True/False)
3. An assignment problem is always solved on the assumption that
the assignments are to be done on a one-to-one basis. (True/False)
116 PAGE

ASSIGNMENT PROBLEM
4. A job assignment problem is unbalanced when each of the given Notes

workers cannot do each of the given job. (True/False)
5. Any unbalanced assignment problem can be balanced by
introducing a dummy row or column. (True/False)
6. All dummy rows/columns must have cost element equal to zero.
(True/False)
7. A maximising assignment problem can be converted into an
equivalent minimization problem by subtracting each element
of the given matrix from a constant K. (True/False)
8. In case multiple zeros are obtained in all rows and columns,
multiple optimal solutions are indicated. (True/False)
4.7 Summary
Assignment problem deals with assignment of persons to jobs that
they can perform with varying efficiency.
The solution to an assignment problem can be obtained by complete
enumeration and evaluation of all possible assignments. However the
method becomes impractical for even moderately large values of n.
An unbalanced problem has to be balanced first by introducing the
required number of dummy workers/jobs.
For every prohibited assignment, the given cost element is replaced
by M, which is a very large value.
Multiple zeros in all columns and rows are indicative of multiple
optimal solutions.
1. True 5. True
2. True 6. True
3. True 7. True
4. True 8. True
PAGE 117

Notes
1. What is an assignment problem?
2. What is an unbalanced assignment problem? How is the Hungarian
method applied in respect of such problem?
3. How would you deal with the assumption problems where
(a) Some assignments are prohibited.
(b) The objective function is of maximization type
4. A firm employs five typists on hourly piece-rate basis for their
daily work on five different jobs. The charges of each typist per
job are given below:
Job
A B C D E
1 85 75 65 125 75
2 78 66 132 78
Typist 3 75 66 57 114
4 80 72 60 120 72
5 76 64 56 112 68
Find the least cost allocation. Sol. (75 + 66 + 66 + 80 + 112 = 399)
5. ABC company has four salespersons who are assigned four different sales
territories. The monthly sales increase estimated for each salesperson
for different sales territories are shown in the table given below:
Sales Territories
Salesperson I II III IV
A 200 150 170 220
B 160 120 150 140
C 200
D 180 175 160
(a) Suggest optimal assignment and total maximum sales increase
per month.
(b) If for certain reasons, salesperson B cannot be assigned to sales
territory III will the optimal assignment schedule be different?
If so find that schedule and the effect on total sales.
Sol. (a) (220 + 160 + 190 + 175 = 745)
(b) (220 + 150 + 195 + 180 = 745)
118 PAGE

ASSIGNMENT PROBLEM
6. A firm produces four products. There are four operators who are Notes
capable of producing any of these four products. The profits for
each of the products are given below:
Products
Operators W X Y Z
1 240 300 225 300
2 360 450 250 300
3 144 180 150 200
4 240 300 225 180
Find the optimal assignment of products to operators.
Sol. (Profit 300 + 450 + 150 + 240 = 1,140)
4.10 Reference
Vohra, N. D. 2012. Quantitative Techniques in Management,
4th edition, Tata McGraw Hill Education Private Limited.

Vohra, N. D. 2012. Quantitative Techniques in Management,
4th edition, Tata McGraw Hill Education Private Limited.
PAGE 119

L E S S O N
5
Project Scheduling
Dr. Sandeep Mishra
Assistant Professor
Shaheed Rajguru College of
Applied Sciences for Women
University of Delhi
Email-Id: sandeepstat24@gmail.com
STRUCTURE
5.2 Introduction: Project Scheduling
5.3 Construction of AOA Network Diagram
5.4 Scheduling with Known Activity Times
5.5 Scheduling with Uncertain Activity Times
5.6 7LPH&RVW 7UDGH2ৼV
5.7 Summary
5.10 References

Understand how to plan, monitor, and control projects using PERT/CPM.
Determine earliest start, earliest finish, latest start, latest finish, and slack times for
each activity.
Understand the impact of variability in activity times on the project completion time.
Develop resource loading charts to plan, monitor, and control the use of various
resources during a project.
Understand the time-cost trade-offs procedure.
120 PAGE

PROJECT SCHEDULING
Notes
5.2 Introduction: Project Scheduling
Have you ever overseen a significant event? You might have served as
the prom committee chair or the board chair for the graduation ceremony
in high school. You might have led your team during the introduction of
a new product, the planning of a facility expansion, or the implementa-
tion of enterprise resource planning. Even if you have never managed
people in such circumstances, you have undoubtedly had your own per-
sonal projects to contend with, such as writing a paper, moving to a new
apartment, applying to college, or selling a house. As a volunteer, you
may have overseen the annual function, the elementary school picnic, or
the river clean-up project. How did you plan your day’s events? Most of
your projects, did they finish on time? How did you handle unforeseen
circumstances? Did you finish your work on time and on budget? All of
these are crucial components of project management. Project managers
with expertise are essential assets for organisations since they handle
projects frequently.
A project involves many interrelated activities (or tasks) that must be
completed on or before specified time limit, in a specified sequence (or
order) with specified quality and minimum cost of using resources such
as personnel, money, material, facilities and/or space.
In this lesson we mainly focus on creating and managing schedule. This
covers project scheduling with known activity times using well known
techniques - PERT and CPM, scheduling with uncertain activity and trade
cost trade-offs.
5.3 Construction of AOA Network Diagram

Activities: Project operations (or tasks) that need to be carried out
are represented by activities in the network diagram. As a result, all
activities—aside from fake activities—need resources and take time to
complete. Commonly, an activity is represented by an arrow, the head of
which points in the direction in which the project is moving. Activities
are identified by the numbers of their beginning (tail or initial) event
and ending (head or terminal) event, for instance, an arrow (i, j) between
two events; the tail event (i) represents the start of the activity and the
PAGE 121

Notes head event (j) represents the completion of the activity as shown in Fig..
The activities can be further classified into the following three categories:
(i) Predecessor Activity: A predecessor activity is one that must be
finished before one or more other actions may begin.
(ii) Successor Activity: A successor activity is one that begins right
away after the completion of one or more other activities.
(iii) Dummy Activity: Dummy activity is a term used to describe an
activity that doesn’t use any resources or time.
Only the given precedence relationship between the project’s activities is
added as a fake activity to the network. It is required in situations when
(a) two or more concurrent project activities have the same head and tail
events, or (b) two or more activities share some—but not all—of their
immediate preceding activities. In the network diagram depicted in the
Figure, a dotted line represents a fictitious activity.
To illustrate the order of importance of the project’s activities, network
models use the two precedence networks listed below.
Activity-on-Node (AON) Network: In this kind of precedence network,
each node (or circle) stands for a particular task, and the arcs show the
hierarchy of tasks. The activities are located within the nodes in AON
network diagrams, and the arrows are used to denote the necessary
sequencing. These diagrams typically don’t feature beginning and ending
nodes for the entire project. These diagrams are always simpler to draw
and understand because they don’t include any dummy activity.
Activity-on-Arrow (AOA) Network: In this type of precedence network
at each end of the activity arrow is a node (or circle). These nodes stand
for instants or points in time when an activity begins or ends. The length
of time needed to complete that action is indicated by the arrow itself. In
these diagrams, any actions that have no predecessors may begin at the
same beginning node. The diagram then moves from left to right before
coming to a finish at a single node where all of the unfollowed activities
are gathered. The following are three key benefits of employing AOA:
(i) Many computer programs are based on AOA network.
(ii) AOA diagrams can be superimposed on a time scale with the arrows
drawn, the correct length to indicate the time requirement.
(iii) AOA diagrams give a better sense of the flow of time throughout a
project.
122 PAGE

PROJECT SCHEDULING
Rules for AOA Network Construction Notes

Following are some of the rules that have to be followed while con-
structing a network:
1. In a network diagram, circles represent events and arrows represent

activities. The size of the arrow has no bearing.
2. Each activity should only have one arrow to symbolise it, and it
must begin and stop in an event circle. The beginning and end of
an activity are represented by the tail and head, respectively.
3. The initial event, designated by the number 1, marks the beginning
of the project. No activity or set of activities should come before
any that emerge (or take off) from event 1. The completion event
is the one with the largest number of events. There should be just
one beginning event and one final event per network.
4. The head event should always be numbered bigger than the number
at its tail, according to the usual guideline for numbering the event.
To put it another way, events should be numbered so that (i, j) for
each activity, (i, j).
PAGE 123

Notes 5. As the beginning and end of an activity must be individually

identified, the following is implied:
(a) An event number should not be repeated or duplicated.
(b) No more than two activities may share the same completion
event.
(c) Either the activity’s symbols or the corresponding ordered pair
of starting-completion events must be used to indicate an
activity.
6. The following guidelines must be followed in the logical order (or
correlation) between activities:
(a) Before an event may start, all of its incoming activities must
be finished.
(b) An activity cannot begin until each of the activities that it
depends on have been finished.
(c) Even if a dummy activity doesn’t use any time resources, it
nevertheless needs to abide by rules 6(a) and (b).
5.4 Scheduling with Known Activity Times

Managers usually have to plan, manage, and supervise projects that
involve a variety of separate jobs or tasks completed by several depart-
ments and individuals. These projects are typically so large or intricate
that management frequently struggles to remember every element important
to the plan, schedule, and development of the project. In these situations,
both the critical path method (CPM) and the programme evaluation and
review technique (PERT) have proven to be very helpful.
To aid in the planning and scheduling of the US Navy’s massive Polaris
Nuclear Submarine Missile programme, which involved thousands of
DFWLRQV D UHVHDUFK WHDP FUHDWHG 3(57 LQ ± 7KH WHDP¶V JRDO
was to build and plan the Polaris missile system as efficiently as possible.
&ULWLFDO SDWK PHWKRG &30 ZDV FUHDWHG EHWZHHQ DQG E\ WKH
E.I. DuPont Company and Remington Rand Corporation virtually simul-
taneously. The organisation set out to create a method for keeping track
of chemical plant upkeep.
124 PAGE

PROJECT SCHEDULING
A wide range of projects can be planned, scheduled, and managed using Notes
PERT and CPM:
Research and development of new products and processes
Construction of plants, buildings, and highways
Maintenance of large and complex equipment
Design and installation of new systems
Project managers are responsible for planning and coordinating the numer-
ous tasks or activities in these kinds of projects to ensure that everything
is finished on time.
5.4.1 PERT versus CPM

The primary difference between PERT and CPM is in the way the time
needed for each activity in a project is estimated. In PERT, each activity
has three-time estimates that are combined to determine the expected
activity completion time and its variance.
PERT is considered a probabilistic technique; it allows us to find the
probability that the entire project will be completed by a specific due
date. In PERT analysis emphasis is given on the completion of a task
rather than the activities required to be performed to complete a task.
Thus, PERT is also known as an event-oriented technique. PERT is used
for one-time projects that involve activities of non-repetitive nature (i.e.
activities that may never have been performed before), where completion
times are uncertain.
In contrast, CPM is a deterministic approach. It estimates the comple-
tion time of each activity using a single time estimate. This estimate,
called the standard or normal time, is the time we estimate it will
take under typical conditions to complete the activity. In some cases,
CPM also associates a second time estimate with each activity. This
estimate, called the crash time, is the shortest time it would take to
finish an activity if additional funds and resources were allocated to
the activity. CPM is used for completing projects that involve activ-
ities of repetitive nature.
PAGE 125

Notes
5.4.2 Critical Path Analysis
The objective of critical path analysis is to predict the project’s overall
duration and give starting and finishing durations to every activity
involved. This makes it easier to compare the project’s actual progress
to its projected completion date.
The expected duration of an activity is estimated from the duration of
individual activities, which may be determined uniquely (in the case of
CPM) or may entail three-time estimates (in the case of PERT). The fol-
lowing elements need to be understood in order to establish the project
scheduling.
(i) Total completion time of the project.
(ii) Earlier and latest start time of each activity.
(iii) Critical activities and critical path.
(iv) Float for each activity.
Notations:
Ei Earliest occurrence time of an event, i. This is the latest time for
an event to occur when all the preceding activities have been completed,
without delaying the entire project.
Li Latest allowable time of an event, i. This is the latest time at which
an event can occur without causing a delay in project’s completion time.
ESij Early starting time of an activity (i, j).
LSij Late starting time of an activity (i, j).
EFij Early finishing time of an activity (i, j).
LFij Late finishing time of an activity (i, j).
tij duration of an activity (i, j).
There should only be one start event and one finish event in a project
schedule. The other events are numbered consecutively with integer 1,
2, …, n, such that i j for any two events i and j connected by an
activity, which starts at i and finishes at j.
This schedule for each activity is created using a two-pass approach
that includes a forward pass and a backward pass. The earliest times
126 PAGE

PROJECT SCHEDULING
( ESij and EFij ) are determined during the forward pass. The latest times Notes
( LSij and LFij ) are determined during the backward pass.
5.4.2.1 Forward Pass Method (For Earliest Event Time)

According to this method, calculations start at the first event, let’s say
1, move through the events in increasing order of the event numbers,
and finally stop at the last event, let’s say N. Each event’s earliest oc-
currence time (E), as well as the earliest start and end times for each
activity that starts there, are determined. The project’s earliest probable
completion time is determined by the event N’s earliest occurrence time
when calculations cease at that point.
5.4.2.2 Backward Pass Method (For Latest Allowable Event Time)

The computations in this technique start with the final event N, move
through the events in decreasing sequence of event numbers, and finally
arrive at the first event 1. Each event’s latest occurrence time (L),
as well as the most recent start and completion times for each activity
that is ending there, are determined. Up until the initial occurrence, the
process is repeated.
5.4.2.3 Float (Slack) of an Activity and Event

The amount of time that a non-critical activity or event can be postponed
or prolonged without extending the overall project completion schedule
is known as the float (slack) or free time. Finding the amount of slack
time, or spare time, that each activity has is easy once we have deter-
mined the earliest and latest timings for all activities. Slack is the amount
of time an activity may be postponed without causing the project as a
whole to lag. In a project, there are three different sorts of floats for
each non-critical activity.
(a) Total Float: This is the amount of time that an activity may be put
off until all activities that came before it were finished as soon as
possible and all activities that followed it could be put off until the
latest time that was permitted.
For each non-critical activity (i, j) the total float is equal to the latest
allowable time for the event at the end of activity minus the earliest
PAGE 127

Notes time for an event at the beginning of the activity minus the activity
duration. Mathematically,
Total Float TFij = L j Ei tij = LSij í ESij LFij í EFij
(b) Free Float: This is the amount of time that each non-critical ac-
tivity’s completion time can be pushed back without impacting its
immediately succeeding activities. The amount of free float time for
a non-critical activity (i, j) is computed as follows:
Free Float FFij = E j Ei tij
Min ^ESij , for all immediate successor of activity i, j ` EFij
(c) Independent Float: This is the length of time that any non-critical
activity i j can be delayed without affecting the completion times
of the activities that come before or after it. Each non-critical activ-
ity’s independent float time is calculated mathematically as follows:
Independent Float IFij = E j Li tij = ^ES ij LSij ` tij
Independent float values that are negative are regarded as zero.
5.4.2.4 Critical Path

Certain activities in any project are called critical activities because
delay in their execution will cause further delay in the project completion
time. All activities having zero total float value are identified as critical
activities, i.e., L = E.
The critical path is the sequence of critical activities between the start
event and end event of a project. This is critical in the sense that if
execution of any activity of this sequence is delayed, then completion of
the project will be delayed. A critical path is shown by a thick line or
double lines in the network diagram. The length of the critical path is
the sum of the individual completion times of all the critical activities
and define the longest time to complete the project. The critical path in
a network diagram can be identified as below:
(i) If Ei value and L j value for any tail and head events is equal,
then activity (i, j) between such events is referred as critical, i.e.,
Ei Li and
E j Lj .
(ii) On critical path E j Ei L j Li tij .
128 PAGE

PROJECT SCHEDULING
Example 1: An insurance company has decided to modernize and refit Notes

one of its branch offices. Some of the existing office equipment will be
disposed of but the remaining will be returned to the branch after the
completion of the renovation work. Tenders are invited from a few selected
contractors. The contractors would be responsible for all the activities in
connection with the renovation work excepting the prior removal of the
old equipment and its subsequent replacement.
The major elements of the project have been identified, as follows, along
with their durations and immediately preceding elements.
Duration Immediate
Activity Description
(weeks) Predecessors
A Design new premises 14 -
B Obtain tenders from the contractors 4 A
C Select the contractors 2 B
Arrange details with selected
D 1 C
contractors
E Decide which equipment is to be used 2 A
F Arrange storage of equipment 3 E
G Arrange disposal of other equipment 2 E
H Order new equipment 4 E
I Take delivery of new equipment 3 H, L
J Renovations take place 12 K
Remove old equipment for storage
K 4 D, F, G
or disposal
Cleaning after the contractor has
L 2 J
finished
M Return old equipment for storage 2 H, L
(a) Draw the network diagram showing the interrelations between the
various activities of the project.
(b) Calculate the minimum time that the renovation can take from the
design stage.
PAGE 129

Notes (c) Find the effect on the overall duration of the project if the estimates
or tenders can be obtained in two weeks from the contractors by
reducing their numbers.
(d) Calculated the independent float that is associated with the non-critical
activities in the network diagram.
Solution: (a) The network diagram for the given project, along with
E-values and L-values, is shown in Fig 1.
Figure 5.1: Network Diagram
The critical path in the network diagram (Figure 5.1) has been shown by
bold lines joining all those events where E-values and L-values are equal.
(b) The critical path of the project is: 1 2 3 4 7 8 9 10 12 and
critical activities are A, B, C, D, K, J, L and I. The total project com-
pletion time is 42 weeks. For non-critical activities, the total float, free
float and independent float calculations are shown in Table 5.1.
Table 5.1: Calculation of Floats
(c) The effect on the overall project duration, if the time of activity B is
reduced to 2 weeks instead of 4 weeks, is shown in Table 5.2.
130 PAGE

PROJECT SCHEDULING
Table 5.2 Notes
IN-TEXT QUESTIONS
1. The objective of the project scheduling is to minimize total
project cost. (True/False)
2. The CPM is used for completing the projects that involves
activities of repetitive nature. (True/False)
3. PERT is referred to as an activity-oriented technique. (True/
False)
4. _____________is the time-consuming job or task that is a key
subpart of the total project.
5.5 Scheduling with Uncertain Activity Times

We used the CPM technique, which assumes that all activity times are
known and fixed constants, to find all earliest and latest times to date as
well as the related critical path(s). In other words, activity times are
constant. However, it is possible that other factors will affect how quickly
a task is completed. PERT was developed to handle projects where the
time duration for each activity is not known with certainty but is a
random variable that is characterized by E -distribution. To estimate the
parameters ‘mean and variance’ of the E -distribution three-time estimates
for each activity are required to calculate its expected completion time.
The necessary three-time estimates are listed below.
(i) Optimistic Time to or a : The shortest possible time (duration) in which
an activity can be performed assuming that everything goes well.
PAGE 131

Notes (ii) Pessimistic Time t p or b : The amount of time needed to complete

a task in the worst conceivable circumstances. However, natural
disasters like earthquakes, floods, and the like are not included
under such circumstances.
(iii) Most Likely Time t m or m : The amount of time needed to finish a
task, if it were repeated numerous times under the same circumstances.
Of course, the completion time would happen the most frequently
(i.e. model value).
The E -distribution is not necessarily symmetric; the degree of skewness
to and t p . The range of to and t p is
depends on the location of the tm to
assumed to enclose every possible duration of the activity.
to 4tm t p
Expected time of an activity te =
6
2
§ t p to ·
and variance of activity time, V i2 ¨ ¸ .
© 6 ¹
The variance of the overall critical path’s time is calculated by aggregat-
ing the variances of the various critical activities if the duration of the
activities is a random variable. Suppose V c is the standard deviation of
the critical path. Then
V c2 ¦V i
2
Vc
and ¦V i
2
5.5.1 Estimation of Project Completion Time

There is a potential that the project’s scheduled completion time will
vary because of the unknown activity completion time. As a result, the
decision-maker must be aware of the probability that the specified time
will be achieved. Using the central limit theorem, the normal distribution
can be used to approximate the probability distribution of completion
times for an event. Thus, the probability of completing the project on
the schedule time, Ts is given by:
§ TS Te ·
prob ¨ Z ¸
© Vi ¹
132 PAGE

PROJECT SCHEDULING
where, Te expected completion time of the project Notes

Z number of standard deviations, the scheduled completion time is
away from the mean time.
V i2 V 12 V 2 2 " V n 2 is the sum of variances of critical activities.
The computation of Ts enables a decision-maker to make certain com-
mitments, knowing the degree of risk. The expected completion time Te
of the project is obtained by adding the expected time of each critical
activity.
Example 2: A small project involves 7 activities, and their estimates are
listed in the following table. Activities are identified by their beginning
(i) and ending (j) node numbers.
(a) Draw the network diagram of the activities in the project.

(b) Find the expected duration and variance for each activity. What is
the expected project length?
(c) Calculate the variance and standard deviation of the project length.
What is the probability that the project will be completed at least 4
weeks earlier than expected time?
Solution: The network diagram of activities in the project is shown
in fig 2. The earliest and latest expected time for each event is cal-
culated by considering the expected time of each activity, as shown
in Table 5.3.
PAGE 133

Notes Table 5.3
The E-values and L-values based on expected time te of each activity

are shown in Figure 5.2.
(a) Critical path is: 1 3 5 6 .

(b) The expected duration and variance for each activity is shown in
Table 5.3. The expected project length is the sum of duration of each
critical activity:
Expected project length = 1 3 5 6 4 6 7 17 weeks
(c) Variance of the project length is the sum of the variance of each
critical activity:
Variance of project length = 1 3 5 6 1 4 4 9 weeks
134 PAGE

PROJECT SCHEDULING
Therefore, Standard deviation, V 9 3 Notes
Probability that the project will be completed at least 4 weeks earlier (i.e.
13 weeks) than the expected project duration of 17 weeks is given by
T T 13 17 ½
Prob. ® Z d s e ¾ Prob.^Z d 1.33` 0.5 0.4082 0.09188
¯ V 3 ¿
Thus the probability of completing the project in less than 13 days is

IN-TEXT QUESTIONS
5. Beta probability distribution is often used in computing the
expected activity completion times and variances in networks.
(True/False)
6. The shortest possible time (duration) in which an activity can be
performed assuming that everything goes well is _______________.
7. The amount of time that is expected to complete the activity
is called ____________________.
5.6 Time-Cost Trade-Offs

The initial creators of CPM gave the project manager the choice to allocate
resources to tasks in order to speed up project completion. The option to
shorten activity times must consider the increased expenses involved, as
more resources (such as additional employees, overtime, etc.) typically
raise project costs. In essence, the decision that the project manager must
make entails exchanging decreased activity time for increased project cost.
The first key concept for this approach is that of crashing.
5.6.1 Project Crashing

It is usual for a project manager to encounter one or both of the following
circumstances while overseeing a project: Both the projected project com-
pletion date and the project’s timeline are behind schedule. In either case,
some or all of the ongoing tasks must be expedited in order to complete
the project by the target deadline. Crashing is the process of reducing
PAGE 135

Notes the length of a project in the most affordable way possible. Additionally,
extending an activity’s duration past its usual point (cost-efficient) may
raise the expense of carrying out that action. For the sake of simplicity,
it is assumed that the relationship between an activity’s normal time and
cost as well as crash time and cost is linear. Therefore, by calculating
the relative change in the cost per unit change in time, the crash cost
per unit of time may be determined.
5.6.2 Time-Cost Trade-Off Procedure

When all essential tasks are accomplished in accordance with schedule,
crashing begins, and it ends when all essential tasks have crashed. The
process of determining time-cost trade-offs for project completion can
be summed up as follows:
Step 1: Determine the normal project completion time and associated
critical path.
Step 2: Identify critical activities and compute the cost slope for each
of these by using the relationship
Crash cost Normal cost
Cost slope
Normal time Crash time
The values of cost slope for critical activities indicate the direct extra
cost required to execute an activity per unit of time.
Step 3: For reducing the total project completion time, identify and crash
an activity time on the critical path with lowest cost slope value to the
point where
(i) another path in the network becomes critical, or
(ii) the activity has been crashed to its lowest possible time.
Step 4: If the critical path under crashing is still critical, return to step
3. However, if due to crashing of an activity time in step 3, other path(s)
in the network also become critical, then identify and crash the activity(s)
on the critical path(s) with the minimum joint cost slope.
Step 5: Terminate the procedure when each critical activity has been
crashed to its lowest possible time. Determine total project cost corre-
sponding to different project durations.
136 PAGE

PROJECT SCHEDULING
Example 3: The data on normal time, cost and crash time and cost Notes
associated with a project are shown in the following table.
Indirect cost is Rs. 50 per week.

(a) Draw the network diagram for the project and identify the critical
path.
(b) What are the normal project duration and associated cost?
(c) Find out the total float associated with non-critical activities.
(d) Crash the relevant activities and determine the optimal project
completion time and cost.
Solution: (a) The network for normal activity times is shown in Figure
5.3. The critical path is: 1 2 5 6 7 8 with a project completion time
of 32 weeks.
PAGE 137

Notes (b) The normal total project cost associated with normal project duration
of 32 weeks is as follows:
Total cost = Direct normal cost + Indirect cost for 32 weeks
= 4,220 + 50 × 32 = Rs. 5,820
(c) Calculations for total float associated with non-critical activities are
shown in Table 5.4.
Table 5.4: Total Float
(d) For critical activities, crash cost-slope is given in Table 5.5.
Table 5.5: Crash Cost Slope
The minimum value of crash cost per week is for activity 2 – 5 and
±+HQFHFUDVKLQJDFWLYLW\±E\GD\VIURPZHHNVWRZHHNV
But the time should only be reduced by 1 week otherwise another path
1 2 3 5 6 7 8 becomes a parallel path. Network, as shown in Figure 5.4,
is developed when it is observed that new project time is 31 weeks and
the critical path are 1 2 5 6 7 8 and 1 2 3 5 6 7 8 .
138 PAGE

PROJECT SCHEDULING
With crashing of activity 2 – 5, the crashed total project cost becomes: Notes
Crashed total cost = Total direct normal cost + Increased direct cost
due to crashing of activity (2 – 5) + Indirect cost for 31 weeks
= 4,220 + 1 × 45 + 50 × 31 = 4,265 + 1,550 = Rs. 5,815
For revised network shown in Figure 5.4, new possibilities for crashing
critical activities are listed in Table 5.6.
Since crashed cost slope for activity 5 – 6 is minimum, its time may
be crashed by 2 weeks from 6 weeks to 4 weeks. The updated network
diagram is shown in Figure 5.5.
PAGE 139

Notes
It may be noted in Figure 5.5, that the critical paths shown in Figure
5.4 remain unchanged because activity 5 – 6 is common in both. With
crashing of activity 5 – 6 by 2 weeks, the crashed total cost becomes:
Crashed total cost = Total direct normal cost + Increased direct cost
GXH WR FUDVKLQJ RI DFWLYLW\ ± ,QGLUHFW FRVW IRU ZHHNV
î î î 5V
For revised network given in Figure 5.5, new possibilities for crashing
in the critical paths are listed in Table 5.7.
The further crashing 6 – 7 activity time from 4 weeks to 3 weeks will

result in increased direct cost than the gain due to reduction in project
140 PAGE

PROJECT SCHEDULING
WLPH+HQFHWHUPLQDWHFUDVKLQJ7KHRSWLPDOSURMHFWGXUDWLRQLVZHHNV Notes
with associated cost of Rs. 5,805 as shown in Table 5.8.
Table 5.8: Crashing Schedule of Project

Project Crashing
Duration Activity Direct Cost (Rs) Indirect Total
(weeks) and Weeks Normal Crashing Total Cost (Rs) Cost (Rs)
32 – 4,220 – 4,220 32 × 50 = 1,600 5,820
31 2 – 5(1) 4,220 1 × 45 = 45 4,265 31 × 50 = 1,550 5,815
5 – 6(2) 4,220 45 + 2 × 45 = 135 4,355 î 5,805
28 6 – 7(1) 4,220 135 + 1 × 70 = 205 4,425 28 × 50 = 1,400 5,825
IN-TEXT QUESTIONS
8. The process of shortening the duration of a project in the least
expensive manner possible is called ____________________.
9. In time-cost trade-off function analysis the:
(a) Cost decreases linearly as time increases
(b) Cost at normal time is zero
(c) Cost increases linearly as time decreases
(d) None of the above
5.7 Summary
The principles of project management approaches are covered in this
lesson. We talk about two methods, PERT and CPM, both of which are
very useful for managing big, complicated projects. Project networks
are used to express projects in the beginning. We can then determine
the project schedule and the critical path using a two-pass technique(s).
PERT is probabilistic and provides for three times estimations for each
activity; the expected completion time and variance of the project are
calculated using these estimates. We demonstrate how to use these pa-
rameters to calculate the likelihood that the project will be finished by
a particular date. We go over how to plan, schedule, track, and manage
project expenditures using project management approaches. Finally, we
go over how to “crash” projects, which involves using more resources
and the trade-off method to speed up their completion time.
PAGE 141

Notes
1. False
2. True
3. False
4. Activity
5. True
6. Optimistic time
7. Most likely time
8. Crashing
9. (a) Cost decreases linearly as time increases

1. Explain the following term in PERT/CPM
(i) Earliest time
(ii) Latest time
(iii) Total activity time
2. PERT takes care of uncertain duration. How far is this statement correct?
5.10 References
Balakrishnan, N., Render, B., Stair, R. M., & Munson, C. (2017).
Managerial decision modelling. Upper Saddle River, Pearson
Education.
Hillier, F., & Lieberman, G. J. (2014). Introduction to operations
research (10th ed.). McGraw Hill Education.

Anderson, D., Sweeney, D., Williams, T., Martin, R. K. (2012).
An introduction to management science: quantitative approaches
to decision making (13th ed.). Cengage Learning.
142 PAGE

L E S S O N
6
Decision Theory
Assistant Professor
PGDAV(E) College
University of Delhi
STRUCTURE
6.2 Introduction
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6.4 'H¿QLWLRQ RI 'HFLVLRQ 0DNLQJ (QYLURQPHQW
6.5 Statistical Decision Theory
6.6 Elements and Steps of a Decision
6.7 The Principles and Approach of Decision Theory
6.8 3D\Rৼ 7DEOH DQG ([SHFWHG 3D\Rৼ
6.9 Opportunity Loss
6.10 Importance of Accurate Information
6.11 Sensitivity Analysis and Decision Trees
6.14 References

Explain the meaning of decision theory and decision making environment.
Discuss the need for decision making environment.
Explain the statistical decision theory and element of decision making.
State the principles and approach of decision theory.
Examine the construction of pay-off table.
Classify the opportunity loss table.
Sensitivity analysis and decision trees.
PAGE 143

Notes
6.2 Introduction
This chapter facilitates an overview of decision theory is to support
individuals and organisations in their decision-making. It offers a useful
conceptual framework for making crucial decisions. Making a decision
involves choosing the course of action that, in the opinion of the decision-
maker, is the best under the circumstances from among a variety of
alternatives.
In this lesson, you will be able to understand the situations, options for
making decisions, and outcomes of those actions. You will also learn
about how to arrange data in a decision tree or reward table. Determine
the expected return on the alternative decision, Assess the information’s
forecasted value and the existing and anticipated opportunity losses.
6.3 Definition of Decision Theory

A general approach to decision-making when the outcomes linked to
options are frequently ambiguous is decision theory. Because decisions
about process, capacity, location, and inventory involve an unsure future,
it aids operations managers in making these decisions.
Making a decision involves choosing the course of action that, in the
opinion of the decision-maker, is the best under the circumstances from
among a variety of alternatives.
Phases like planning, organisation, direction, command, and control
must be taken into account by the management. The management must
make decisions in a variety of circumstances while carrying out so many
tasks. Technically speaking, this decision-making is known as “decision
making” or “decision taking.” A choice between two or more options is
a decision. “A process of best choosing from a set of potential courses
of action, that course of action which is meant to achieve objectives till
satisfaction of the decision maker” is one definition of decision making.
The optimum course of action can be chosen with the use of statistical
knowledge. An ideal decision in the face of uncertainty is referred to in
statistical decision theory. Probability theory plays a crucial role in this
situation, thus the decision-making theory under uncertainty and risk will
employ it more frequently. The statistical choice theory aims to show how
144 PAGE

DECISION THEORY
the issue can be broken down into different courses of action, natural states, Notes
potential outcomes, and anticipated rewards from each of these possibilities.
Let’s go over the ideas behind the choice theory method of issue solving.
6.4 Definition of Decision Making Environment

Each choice alternative has more than one potential outcome in the con-
text of decision making under uncertainty, relating to multiple potential
states of nature. Though the decision maker has the option to select the
alternative, the State of Nature that ultimately occurs is determined by
factors beyond his or her control. Regrettably, the choice must be taken
before the Condition of Nature is understood. The probability that any
specific State of Nature will occur in this situation is unknown to the
decision-maker. Each choice alternative has more than one potential
outcome in the context of decision making under uncertainty, relating to
multiple potential states of nature. Though the decision maker has the
option to select the alternative, the State of Nature that ultimately occurs
is determined by factors beyond his or her control.
There are three decision-making environments:
Decision making under certainty.
Decision making under uncertainty.
Decision making under risk.
1. Decision Making under Certainty: There is just one kind of
event that can occur in this type of decision-making environment.
Most business decisions are exceedingly difficult to make with
PAGE 145

Notes absolute confidence. Nonetheless, it is possible to notice that

practically all routine judgments may be made with absolute
certainty. These choices generally have very little bearing on
a company’s ability to succeed.
2. Decision Making under Uncertainty: Several types of events
can occur in an environment of uncertainty, and the decision-
maker is fully unaware of which of these events is most likely
to occur. Even assigning the events’ probabilities of happening
is out of the decision-purview. These circumstances typically
occur when an event’s outcome is determined by outside
forces. Uncertainty-inducing elements include, for instance,
product demand, rival actions, etc.
3. Decision Making under Risk: There are multiple possible
occurrences that could occur under the risk circumstance.
But, the decision-maker has enough information to determine
whether each potential occurrence is likely to occur or not.
Such knowledge is typically based on prior experience.
Almost all decisions made in a modern company enterprise
are based on the interaction of many elements. It is being
created new methods for analysing these decision-making
circumstances. These instruments include decision trees, risk
analysis, and preference theory.
6.5 Statistical Decision Theory

The main goals of traditional statistics are parameter estimation—such
as determining the population means—confidence interval construction,
or hypothesis testing.
Finding the best decision from a range of options is the focus of statis-
tical decision theory (also known as Bayesian statistics).
6.6 Elements and Steps of a Decision

Any circumstance involving decision-making consists of three elements:
The options available (alternatives or acts).
Natural phenomena and unforeseen future events that are outside
of the decision-control maker’s.
146 PAGE

DECISION THEORY
The payoffs required for each decision alternative and natural state Notes
combination.
Six Steps in Decision Making:

List the possible alternatives
Identify the possible outcomes or states of nature
List the payoff or profit of each combination of alternatives and
outcomes
Select one of the mathematical decision theory models
Apply the model and make your decision
6.7 The Principles and Approach of Decision Theory

Logic and an open mind are two traits that will help you make better
decisions while dealing with complicated or large-scale situations. Clear
your thoughts of biases and prior notions before approaching a topic.
Logically compile and learn the relevant information. You can create
solutions that address the underlying issues in a scenario by understand-
ing the cause-and-effect relationships involved. You can creatively create
options from which to choose while making your ultimate decision by
having an open mind.
There are basically four principles for making decisions in life that help
us determine how much power we have in various circumstances. The
given, input, negotiate, and self-principles are these four.
The procedure involved in making decisions logically and objectively is
as follows:
1. Determine and Describe the Issue: Before you can find a solution,
the problem must be precisely defined. Vague issues are difficult
to solve and cause worry. Dealing with hazy, nebulous issues is
impossible since they frequently give rise to a rim of additional
challenges. Clarify the problems so you may address them one at
a time.
2. Assemble and Evaluate Data: Assemble and evaluate data. To
solve problems correctly, you need proper information. If you skip
over this step in your eagerness to find a solution, you risk causing
PAGE 147

Notes unneeded delays and unforeseen outcomes. The more knowledge

you have about a subject, the more likely it is that you can make
an informed choice.
3. Create Alternative Remedies: It’s tempting to just act on a solution
that presents itself soon. Even if it’s a good start, the first answer
you come up with might not be the greatest. Even when you don’t
think you need them, give alternate ideas some thought and be
inventive.
4. Choose the Most Suitable Substitute: Most issues have a number
of workable answers. Determining which is best becomes a matter
of degree. By weighing your options, you can reduce your options
to a few of the finest ones. Take into account how the solutions
fit with your objectives, how it affects prices, how much time is
needed, what the dangers are, what other people you trust say, etc.
Choose the one that best addresses your problem after weighing all
of your options.
5. Make a Move: It’s time to take action now that you have carefully
considered all of your options and determined the best plan of
action.
Analyze the choice. To measure progress and assess ultimate outcomes,
you should arrange ongoing reviews and a final evaluation.
The Approach of Decision Theory: A formal foundation for making
rational decisions in the face of uncertainty is provided by decision the-
ory. Decision theory provides theoretically straightforward methods for
making decisions given a set of choices, a set of consequences, and a
correspondence between those sets.
6.8 Payoff Table and Expected Payoff

All potential combinations of options for making decisions and natural
conditions are listed on a payoff table.
The expected value for each choice is known as the Expected Payoff
(EP) or Expected Monetary Value (EMV). The expected monetary value
(EMV), which is dependent entirely on probability, cannot be calculated
using a simple formula. By comparing the value of our possessions to their
monetary value, we may determine their worth. Risks are probabilistic
148 PAGE

DECISION THEORY
and have a monetary value. In this article, we discover that there are Notes
positive risks (opportunities) and negative risks (threats). By examining
the anticipated monetary value, the decisions to be made are explored.
How much money you will have in the future depends on some of your
decisions. The determinants in this issue are the likelihood of an outcome
occurring and its likelihood of occurring. (Be the expected monetary value
for the decision alternative Ai. In this essay, we cover expected monetary
value, including its definition, the formula, and how to calculate EMV.)
EMV is utilized in the process of performing a quantitative risk
analysis and is a crucial component of risk management.
As this method requires mathematical computations, many PMP
candidates overlook it. I do not recommend avoiding it. There is only
one EMV formula needed for this idea.
EMV(Ai >P(Sj) · V(Ai, Sj)
Assign Ai as the ith possible decision.
Define P(Sj) as the likelihood of the jth natural state.
Define V(Ai, Sj) as the payoff value for the decision option Ai and
natural state Sj pair.
Assume that the decision alternative Ai’s expected monetary value
is EMV (Ai).
Example 1: You recognise a danger connected to the market claim while
managing a software project for an IT company. There is a 20% chance
of risk, and if it materialises, you will lose $8000. We shall now deter-
mine the EMV of this risk.
20% chance of the event occurring
Solution: Impact of risk: – $8000
EMV = P u I
EMV = 0.2 u –8000 = –$1600
Let’s first talk about likelihood and impact since these are factors in the
EMV calculation.
Probability
The probability of any event happening is known as probability. A coin
flip, for instance, has a 50% chance of coming up heads and a 50% chance
PAGE 149

Notes of coming up tails. You, therefore, claim that there is a 50% chance of
seeing heads or tails. We shall now talk about it mathematically.
The probability calculation formula is as follows: The likelihood of an
event occurring is equal to the number of positive events that could take
place (Total number of events). Let’s see how the aforementioned formula
relates to the coin Example.
There were 2 events overall (because the coin can either show heads or
tails).
Total number of favourable circumstances = 1 (assumes heads will show).
The likelihood of a head is given by (the number of favourable events)/1.
(Total number of events) = 1/2 = 50%
Hence, if you flip a coin, there is a 50% chance that it will display heads.
Example 2: Your team has identified three risks with probabilities of
10%, 50%, and 35% throughout the risk management planning process.
The first two risks will cost you 5,000 USD and 8,000 USD, respective-
ly, whilst the third risk will reward you with 10,000 USD. Calculate the
anticipated financial impact of these risk events.
Solution: The expected financial value of the three events is equal to
the EMVs of the first, second, and third occurrences. The first event’s
EMV was 0.10 * (–5,000) = –500.
The second event’s EMV is 0.50 * (–8,000) = –4,000
Third event’s EMV equals 0.35 u 10,000 = 3,500 EMV of all three events
is the sum of the EMVs of the first, second, and third occurrences.
= – 500 – 4,000 + 3,500 = –1,000
All three events have an expected monetary value (EMV) of $1,000.
Advantages from EMV Analysis
It provides you with the average result of all the noted uncertain
events.
It aids in the contingency reserve calculation.
It aids in making the optimal decision in a decision tree analysis.
It merely needs the advice of professionals; it does not need any
expensive resources.
It supports your make-or-buy choice when it comes to plan purchasing.
150 PAGE

DECISION THEORY
Challenges with EMV Analysis Notes

With modest and small-to-medium-sized projects, this strategy is unusual.
Personal bias may have an impact on the outcome of this technique,
which involves expert judgments to determine the probability and
impact of the risk.
When there are considerable dangers involved, this strategy works better.
Missing a good risk will have an impact on the result.
6.9 Opportunity Loss

Loss of Opportunity: Because the precise state of nature is unknown at
the time a decision is made, there is a loss called an opportunity loss, or
regret, which is calculated by comparing the best choice for each state
of nature to all other possible choices.
The discrepancy between the ideal payoff and the actual payoff obtained
is referred to as opportunity loss. Expected opportunity loss (EOL) is a
different strategy for making decisions when faced with risk. Opportu-
nity loss, often known as regret, is the discrepancy between the desired
outcome and the outcome actually got.
A further strategy for increasing monetary worth is to reduce anticipated
loss of opportunity or regret. The difference between the payoff value
of the most advantageous path of action, or the maximum reward, and
the payoff for each is used to calculate the conditional EOL or regret
function for a specific course of action. Action plan for the current sit-
uation of nature. EOL for each course of action is then calculated using
the probability product and the accompanying opportunity loss for the ith
state of nature and the (j)th course of action, similarly to EMV.
Expected Opportunity Loss
Where
EOL (Ai) refers to the expected opportunity loss for a particular decision
alternatives.
P(Sj) refers to the probability associated with the states of nature j.
R(Ai, Sj) refers to the regret or loss for a particular combination of a
state of nature and a decision alternative.
PAGE 151

Notes Calculation of Opportunity Loss – Simply deduct the actual payoff amount
from the ideal payoff amount to determine the probable opportunity loss.
Opportunity Loss
.60 Market .40 Market Expected
Purchase Rise Decline Opportunity loss
Kayser Chemicals $0 $150 $60
Rim Homes 200 50 140
Texas Electronics 500 0 300
(A1) = (.6) ($0) + (.4) ($150) = $60
(A1) = (.6) ($200) + (.4) ($50) = $140
(A1) = (.6) ($500) + (.4) ($0) = $300
Maximin, Maximax, and Minimax Regret Strategies

Payoff Table
Bull Market Bear Market
Purchase (S1) (S2) Maximin Maximax
Kayser Chemicals (A1) $2,400 $1,000 1,000 2,400
Rim homes (A2) 2,200 1,100 1,100 2,200
Texas Electronics (A3) 1,150 1,150
Opportunity Loss Table

Opportunity Loss
Purchase Market Rise Market Decline Minimax regret
Kayser Chemicals $0 $150 150
Rim Homes 200 50 200
Texas Electronics 500 0 500
Minimax, Maximin, and Minimax Techniques for Regret

The smallest gain is maximised by the maxim strategy. It is a
negative tactic.
The maximum gain is maximised by the maxima strategy.
It is an upbeat strategy in contrast to a maximin plan.
The Minimax Remorse Strategy lowers the Maximum Remorse
(opportunity loss). This is yet another negative tactic.
152 PAGE

DECISION THEORY
Notes
6.10 Importance of Accurate Information
What Value does Information that is known before a Strategy is used
have?
The difference between the expected reward if the state of nature were
known and the best choice under the circumstances of ambiguity is known
as the Expected Value of Perfect Information (EVPI).
The price one would be prepared to pay to obtain perfect information is
known as the anticipated value of perfect information (EVPI) in deci-
sion theory. [1] Health economics is one area where the EVPI concept
is frequently used. There is always a degree of uncertainty surrounding
a decision in that situation and while considering whether to adopt a
new treatment method because there is always a chance that the decision
will turn out to be incorrect. The expected value of perfect information
analysis seeks to quantify the anticipated expense of that uncertainty,
which “can be interpreted as the expected value of perfect information
(EVPI), since perfect information can eliminate the possibility of making
the incorrect decision,” at least theoretically.
The effect on decisions when more information is provided so that the
decision-maker can arrive at a point of certainty is referred to as the
expected value of perfect information (EVPI). Decision-makers might
use EVPI as a guide to determine how much to spend on further infor-
mation. The decision-maker can benefit from this additional information
by getting this insight, whether it relates to a better grasp of the market
or the expenses of changing the company. When the decision-makers do
make a choice, they can do so with more confidence in the anticipated
outcomes.
A company that wishes to buy a piece of another company, for instance,
would probably decide to do so without a second thought if the deci-
sion-makers had complete knowledge of the possible outcomes. The firm
can use the expected value of perfect information to select the best option
from the available options in order to boost the certainty of their decision.
Calculate the EVPI Formula
Use the general formula: profit from perfect information x likelihood of
that result to calculate EVPI. We can rely on the equation EVPI = EV
PAGE 153

Notes with PI EV without PI logically (what would we choose if we knew

the outcome with certainty).
An EVPI calculator, or formula, can be used by businesses when making
critical decisions. Before calculating EVPI, it is important to understand
a few fundamental ideas. State of nature refers to results that are caused
by events outside the company’s control but that can nevertheless have
an impact on profitability. Taxes, the economy, and even the weather
are included in this. These may be the outcomes of the decision-making
options. The choices that can be made when making a decision are known
as decision alternatives. For instance, a company may have option alter-
natives with variable amounts for a specific number of managers against
a particular number of part-time colleagues when determining how many
employees to hire for a seasonal period.
The weighted total of a decision alternative across various natural conditions
is the expected value. EV is a common abbreviation for this value. The
expected value may be denoted by the acronym EMV, which stands for
expected monetary value, in the formula. For each of the natural states,
the maximum payoff indicates the ideal outcome or most advantageous
financial condition.
The best-anticipated value amount is subtracted from the sum of the
maximum payoffs for each state of nature to arrive at the EVPI. The
formula appears as follows:
EMV = EPPI – EPPI
Whereas EMV stands for anticipated monetary value, EPPI stands for
expected payback with perfect information. When EMV is deducted
from EPPI, the EVPI is calculated. A payoff table or payoff matrix can
be made to enumerate all of the possibilities in relation to the states of
nature in order to determine EMV. On the basis of the real likelihood
of occurrence, the states of nature are calculated. Investors who are
thinking about buying stock, for instance, can use market competition
and economic conditions to evaluate this value. A sample template for
comparing calculations is shown in the chart below.
Alternatives
First Condition of Nature
Second Condition of Nature
154 PAGE

DECISION THEORY
Value A (Alt. #1) and Value B (Alt. #1) of Alternative #1 Notes

Value A (Alternative #2) and Value B (Alternative #2)
The equation can also be expressed as EVPI = EVwPI EV. Expected
value with perfect information, or EVwPI, still refers to the same idea.
Examples of EVPI
With the aid of example situations, the EVPI formula may be simpler
to comprehend. EVPI computations can be used in numerous commer-
cial contexts. For instance, a brick-and-mortar store that doesn’t already
provide e-commerce alternatives might wish to apply the procedure to
locate EVPI if it wants to start thinking about doing so. The company
can use the formula to calculate the advertising costs required to spread
the word about this new expansion since it must decide how to conduct
its promotion using internet means.
Importance of Accurate Information
What value does information that is known before a strategy is used have?
The gap between the expected pay out and the best choice under uncer-
tain circumstances is known as the Expected Value of Perfect Information
(EVPI).
6.11 Sensitivity Analysis and Decision Trees

Sensitivity analysis looks at how different natural state probability affect
the predicted values for the choice options. Decision trees are helpful for
organising the different options. They paint a picture of the numerous
options and potential natural states.
Decision Tree: A decision tree is a visual representation of all feasible
actions and their potential results. Choices that are appropriate for dis-
play in a decision tree are likewise appropriate for display in a decision
table. As a result, decision trees will be used to examine some decisions.
Many problems have sequential decisions and states of nature, even if
using a decision table is practical when problems only have one set of
decisions and one set of natural states. The decision tree strategy is
appropriate when there are two or more sequential decisions and subsequent
decisions are based on the results of earlier ones. A decision tree is a
visual representation of the decision-making process that shows option
PAGE 155

Notes alternatives, natural state probabilities, and payoffs for any combination
of these variables. The decision-making point is indicated by a box, and
the choices being considered are indicated by the branches coming out of
the box. A decision tree is a visual representation of the decision-making
process that shows option alternatives, natural state probabilities, and
payoffs for any combination of these variables. The decision tree analy-
sis criterion that is most frequently utilised is expected monetary value
(EMV). One of the initial steps in this type of analysis is to graph the
decision tree and to define the financial repercussions of every possible
solution for a certain problem.
IN-TEXT QUESTIONS
1. Which section of the lesson discusses the definition of decision
theory and the decision-making environment?
(a) Introduction
(b) Statistical Decision Theory
(c) Payoff table and expected payoff
(d) Sensitivity analysis and decision trees
2. What is the purpose of statistical decision theory?
(a) To analyze historical data
(b) To predict future outcomes
(c) To evaluate decision-making environments
(d) To minimize decision-making risks
156 PAGE

DECISION THEORY
3. What elements are typically involved in a decision, as discussed Notes

in the lesson?
(a) Goals and objectives
(b) Constraints and resources
(c) Alternatives and consequences
(d) All of the above
4. What is the significance of accurate information in decision-
making?
(a) It minimizes opportunity loss
(b) It maximizes expected payoff
(c) It reduces sensitivity analysis
(d) It eliminates the need for decision trees
5. Which concept in decision theory involves evaluating the
potential loss associated with each decision alternative?
(a) Sensitivity analysis
(b) Decision trees
(c) Opportunity loss
(d) Expected payoff
6. What is the purpose of sensitivity analysis in decision-making?
(a) To evaluate the impact of parameter variations
(b) To identify decision alternatives
(c) To calculate expected payoffs
(d) To construct payoff tables
7. What tool is commonly used to visually represent decision-
making scenarios and their potential outcomes?
(a) Payoff table
(b) Sensitivity analysis
(c) Decision tree
(d) Statistical model
PAGE 157

Notes 8. What principles and approach does decision theory typically

emphasize?
(a) Risk aversion and intuition
(b) Rationality and optimization
(c) Subjectivity and randomness
(d) Impulsiveness and emotion
9. How does sensitivity analysis contribute to decision-making?
(a) It identifies the best decision alternative
(b) It quantifies the impact of uncertain factors on decisions
(c) It calculates the expected payoffs for each decision
(d) It constructs decision trees for visual representation
10. What is the primary function of a payoff table in decision
theory?
(a) To calculate opportunity loss
(b) To visualize decision alternatives
(c) To assess the likelihood of outcomes
(d) To represent the consequences of decisions

1. (c) Payoff table and expected payoff
2. (d) To minimize decision-making risks
3. (d) All of the above
4. (b) It maximizes expected payoff
5. (c) Opportunity loss
6. (a) To evaluate the impact of parameter variations
7. (c) Decision tree
8. (b) Rationality and optimization
9. (b) It quantifies the impact of uncertain factors on decisions
10. (d) To represent the consequences of decisions
158 PAGE

DECISION THEORY
Notes
I. Short Answer Questions:
1. Define Decision Theory and explain with examples.
2. What are the examples of decision-making questions?
3. What are the four elements of decision theory?
4. What are the key issues in decision theory?
5. What are the six steps of Decision Theory?
6. What do understand by the term Decision-making environment?
7. Define Decision Tree.
II. Long Answer Questions:

8. Describe the final decision-making process, which is to “evaluate
your decision and its repercussions.”
7KUHH SRVVLELOLWLHV DUH EHLQJ WKRXJKW DERXW E\ 0LNH¶V %LNH 6KRS
IRU KLV ORFDWLRQ LQ +H KDV WKUHH RSWLRQV HQODUJH KLV FXUUHQW
business, relocate to a bigger location, or stay put. In a favorable
market, the annual payout for expanding, moving, and doing nothing
would each be $56,000. His payout will be $21,000, $35,000, and
$10000, correspondingly, with an average market. His payment
ZLOOEHDQGFRUUHVSRQGLQJO\LQDEHDULVK
market.
PAGE 159

Notes Which alternative, according to the maximax criterion, should

Mike select? Two points. Choosing to Move ($70,000)
Which alternative, according to the maximin criterion, should
Mike select? Two points Decision: (No modification ($5000))
If Mike applies the LaPlace criterion, which choice should he
pick? Three points
If Mike applies the Hurwicz criterion and = 0.6, which alternative
should he pick? Three points
What option should Mike select using a minimax regret
approach? Four points
If there is a 25% chance of a favorable market, a 45% chance
of an average market, and a 30% chance of an unfavorable
market. What choice should Mike pick, and what is the best-
projected value, according to EMV? Four points
10. How many copies of a new hardcover publication should Waldo
Books buy for its shelves? The bookstore must choose whether to
order 50, 100, 150, or 200 books for this time period after assuming
that demand will be for 50, 100, 150, or 200 copies next month.
Waldo spends $20 on each book, which he can sell for $30. Any
unsold books can be returned to the source by Waldo for $4.
(a) Finish the payout table. [Showing work for this point is optional]
(b) How many copies of Waldo Books should the company print
using the most optimistic scenario?
160 PAGE

DECISION THEORY
(c) Based on a pessimistic outlook, how many copies of Waldo Notes

Books should they print?
(d) How many copies of Waldo Books ought to be produced for
a LaPlace decision maker?
(e) What amount of Waldo Books should the Hurwicz decision
maker order if = 0.7?
(f) Which alternative, using a minmax regret method, would you
pick for (f)?
(g) Which quantity will maximize expected profit if the demand
probabilities are 20%, 35%, 25%, and 20%, respectively?
What is the anticipated financial gain from that suggestion?
(h) How much should Waldo Books be willing to spend in order
to have more detailed (perfect) information (EVPI) on the
market’s actual demand?
6.14 References
“Definition and significance of decision theory.” Dictionary.com.
obtained on April 2, 2022.
0U5RJHU%0\HUVRQ ³)RXQGDWLRQDO,GHDVLQ'HFLVLRQ
Theory.” Conflict is analysed using game theory. Harvard University
3UHVV ,6%1 &DPEULGJH 0DVVDFKXVHWWV
Levchenko A., Lipniacki T., Habibi I., Cheong R., Emamian E. S.,
& Abdi A. (April 2017). “Cell decision making error computation
and measurement utilising single cell data.” e1005436. PLOS
&RPSXWDWLRQDO %LRORJ\ 30,' %LEFRGH
PLSCB..13E5436H. doi:10.1371/journal.pcbi.1005436. Obtained on
April 2, 2022.
Decision theory: A basic introduction, Sven Ove Hansson. A truly
trans disciplinary subject, 2005 Section 1.2.

*HRUJH$$NHUORI -DQHW/<HOOHQ 0D\ ,UUDWLRQDO%HKDYLRU
Rational Models. 77 (2): 137-142. The American Economic Review.
JSTOR 1805441.
PAGE 161

Notes 3DXO $QDQG )XQGDPHQWDOV RI 5LVN$GMXVWHG 'HFLVLRQ

0DNLQJ,6%12[IRUG2[IRUG8QLYHUVLW\3UHVV
(a summary of the normative philosophical underpinnings of important
mathematical axioms in subjective expected utility theory).
Creating Economic Agents that Behave Like Human Agents: A
Behavioral Approach to Bounded Rationality, by W. Brian Arthur,
0D\ 3') 7KH$PHULFDQ(FRQRPLF5HYLHZ
0U-DPHV2%HUJHU 'HFLVLRQWKHRUHWLFVWDWLVWLFVDQG%D\HVLDQ
analysis (2nd ed.). Springer-Verlag, New York, MR 0804611, ISBN

-0%HUQDUGR $)6PLWK 7KHRU\RI%D\HV:LOH\05
,6%1
162 PAGE

L E S S O N
7
Decision Under Conflict
Dr. Shubham Agarwal
Associate Professor
New Delhi Institute of Management
GGSIP University
Email-Id: meshubhamagarwal@gmail.com
STRUCTURE
7.2 Introduction
7.3 Types of Games
7.4 Strategy
7.5 3D\RৼV 0DWUL[
7.6 Saddle Point, Optimal Strategies and Value of the Game
7.7 Minimax (Maximin) Principle
7.8 Game without Saddle Point
7.9 Solution of 2 u 2 Games without Saddle Point
7.10 Dominance Rule
7.11 Graphical Method to Solve 2 u n, m u 2 and 2 u 2 Games
7.12 Applications of Game Theory
7.13 Limitations of Game Theory
7.14 Summary
7.17 References
PAGE 163

Notes
Explain the term game theory.
Identify strategic situations and represent them as games.
Solve simple games using various techniques.
Analyse economic situations using game theoretic techniques.
Recommend and prescribe which strategies to implement.
Explain game theory as an abstraction of everyday decision making
in the business world.
7.2 Introduction
The area of decision theory that is concerned with interdependent
decisions is game theory. The challenges of interest involve a number of
parties, each of whom has particular goals connected to a shared system
or resources. The issues are known as games, and the participants are
known as players because game theory was developed via the examination
of competitive scenarios. These methods, however, are not exclusive to
sporting events and can be used in non-competitive settings as well. Game
theory is described as “the mathematical study of strategies for dealing
with competitive situations where the outcome of a participant’s choice of
action vitally depends on the actions of other participants” in the Com-
pact Oxford English Dictionary. A game consists of three components:
A set of players
A set of available strategies for each player
A set of payoffs to each player for each possible configuration of
strategies
Consider the two players in a chess game. The collection of moves that
a player can make at each stage of the game, as specified by the chess
rules, makes up the potential tactics. Pay-outs include the outcomes “Win,
Lose,” “Lose, Win,” and “Draw, Draw,” wherein each brace includes the
game’s outcome for player number 1 and its corresponding outcome for
player 2. The sequences of tactical decisions (moves) made by the two
players over the entire game determine the outcomes once more using
the chess rules.
164 PAGE

DECISION UNDER CONFLICT
The Theory of Game and Economic Behaviour, which Neumann and Notes
0RUJHQVWHUQ LQWURGXFHG LQ XQGHUOLQHG WKH EDVLF WHUPLQRORJLHV DQG
issue formulation. Decisions in which the results depend on the partic-
ipants’ strategies are the focus of game theory. Game theory offers a
method for deriving the basic framework of interaction and representing
it as a tactical game.
7.3 Types of Games
7.3.1 Competitive Game

A competitive situation is called a game if it has the following charac-
teristics:
There are finite number of participants called the players.
Each player has finite number of possible courses of action.
A play occurs when each player chooses one of his courses of action.
Every combination of course of action determines an outcome which
results in a gain to each player.
7.3.2 Symmetric and Asymmetric Game

A symmetric game is one in which the outcomes of one strategy depend
only on the other strategies being used, not on the players. A game is
symmetric if the players’ identities can be altered without changing how
well their strategies work, while asymmetric games have different sets
of strategies for each player.
7.3.3 Zero-sum and Non Zero-sum Games

In zero-sum games, which are a specific example of constant-sum games,
players’ decisions have no effect on the amount of resources that are
accessible, either up or down. For any possible combination of strategies,
the overall benefit to all players in a zero-sum game always adds up to
zero, meaning that one player’s loss is another player’s gain. The term
“non-zero-sum game” refers to a game that is not a zero-sum game.
PAGE 165

Notes
7.3.4 Simultaneous and Sequential Games
A game can either involve sequential moves (or decisions), as in the case
of chess, or simultaneous decisions, as in the case of the kid-friendly game
rock-paper-scissors. As we shall see, the distinction between simultaneous
and sequential games is more about the information accessible to players at
the moment of a move than it is about the timing of the moves (whether
moves are made at the same time or at different times). A player in a
sequential game knows which specific decision his opponent made out
of all the options open to him, whereas in a simultaneous game, players
make decisions before learning about the decision made by the other.
7.3.5 Non Co-operative and Co-operative Games

It is important to take into account how the corporations manage their
strategic dependency in order to forecast the game’s conclusion. Let’s look
into the effects of two possible approaches to dealing with that interde-
pendence. The first strategy is to assume that each company maximises
its own profit, subject to some assumption regarding how the other will
behave, and without cross-border cooperation. This type of behaviour is
referred to as “non-cooperative.” If this results in an equilibrium result,
the result is referred to as a non-cooperative game solution. As an alter-
native, “cooperative behaviour” occurs when the firms work together and
come to decisions on their strategies. If an equilibrium result is reached,
the game has what is known as a cooperative solution.
7.3.6 Game with Perfect Information and Imperfect Information

Games with perfect knowledge are a significant subset of sequential games.
If every player is aware of every other player’s prior moves, the game
is considered to be one of perfect information. As not every participant
in simultaneous games is aware of one another’s actions, only sequen-
tial games can be games of perfect information. Games with incomplete
information make up the majority of game studies. Chess is one of the
perfect-information games. Whole information and perfect information
are related concepts that are sometimes confused. To have complete
information, each player must be aware of the tactics and rewards used
by the other players, but not necessarily their acts.
166 PAGE

Notes
7.3.7 Infinitely Long Games
Games are often completed in a finite number of moves, according to
economists and players of real-world games. Set theorists in particular
investigate games with an endless number of moves, with the winner (or
other payoff) not known until all of those moves have been completed.
Pure mathematicians are not bound in this way.
7.4 Strategy
A strategy is one of the predetermined possible actions of a participant
in a game played strategically. A strategy in a lengthy game is an entire
set of options, one for each choice the player must make.
7.4.1 Pure Strategy

A pure strategy refers to a decision made when playing games with stra-
tegic elements. At least insofar as the concepts of availability and acts
are clearly grasped, this concept is fairly simple. The Nash equilibrium,
in which each player deterministically selects one of his options, does not
necessarily exist in a game of strategic form. Instead, players can choose
at random from a list of these pure tactics with specific probability. This
type of self-selection randomization is referred to as a mixed strategy.
7.4.2 Dominant Strategy

The idea of dominating strategy is a key principle that is frequently
employed in the search for solutions to non-cooperative games. A player
has a dominant strategy when it has one that, regardless of the other
player’s decision, gives a bigger reward than any other. Dominant strat-
egies are chosen in situations where they exist, according to a generally
established principle of non-cooperative game theory.
7.5 Payoffs Matrix

The payoffs for each player for the pair of strategies (row, column)
determining the square in question are represented by the entries in the
PAGE 167

Notes squares of m x n matrices, where m rows and n columns correspond to

the players’ strategies. Tables 7.1 and 7.2 show the payoff matrices for
Player A and Player B, respectively.
Table 7.1: Payoff matrix of player A
Table 7.2: Payoff matrix of player B
7.6 Saddle Point, Optimal Strategies and Value of the Game

Saddle point of a payoff matrix is the position of such an element
in the payoff matrix which is minimum in its row and maximum in
its column. Mathematically, if a payoff matrix [vij] is such that maxi
168 PAGE

[minj (vij)] = minj [maxi (vij)] = vrs, then the matrix is said to have a Notes
saddle point (r, s).
If the payoff matrix [vij] has a saddle point (r, s), then the player A and
B are said to have rth and sth optimal strategies respectively.
The payoff vrs at the saddle point (r, s) is called the value of the game and
it is obviously equal to the minimax and maximum value of the game. A
game is said to be fair if, minimax value = maximum value = 0. A game
is said to be strictly determinable if, minimax value = maximum value = v.
7.6.1 Steps to Determine a Saddle Point

The following are the steps to determine the saddle point of a payoff matrix:
Select the smallest element of each row of the payoff matrix and
mark them by a circle.
Select the greatest element of each row of the payoff matrix and
mark them by a square.
If there appears an element in the payoff matrix marked by a circle
and a square both, the position of that element is a saddle point
of the payoff matrix.
7.7 Minimax (Maximin) Principle

According to the minimax criteria, the player will select the strategy
that corresponds to the best of these worst outcomes if he lists the worst
outcomes of all of his alternative tactics. An ideal approach is one that
achieves this.
Example: Consider a two-person zero-sum game matrix which represents
payoff of player A. Find the optimal strategy, if possible.
Player B
I II III
I 3 2 6
Player A
II 2 0 2
III 5 2 4
PAGE 169

Notes Solution: The player A wishes to obtain the largest possible value vij by
choosing one of his strategies I, II, III, while the player B is determined
to make A gain the minimum possible by choice of his strategies I, II,
III. The player A is called maximizing player and player B is called
minimizing player.
Find the smallest value from each row to get row minimum for player A
and also find the greatest value from each column to get column maxi-
mum for player B.
In first, second and third row the smallest values are 3, 0, 4 respec-
tively and in first, second and third column the greatest values are 5, 0,
6 respectively. Therefore we have,
Player A should try to maximize his least gains or to find maxi [minj
(vij)]. The best choice for player A is to maximize his least gains by
selecting his II strategy which assures at most the gain 0. On the other
hand, player B can argue to keep A’s gain the minimum or to find minj
[maxi (vij)]. Player B then selects the strategy II that minimizes his max-
imum losses to 0.
170 PAGE

Player A’s selection is called maximum strategy and his corresponding Notes
gain is called maximin value or lower value of the game and Player B’s
selection is called minimax strategy and his corresponding loss is called
minimax value or upper value of the game.
In this case minimax and maximin values are equal, the corresponding
pure strategies for player A is II and for player B is II, are called optimal
strategies and the game is said to have a saddle point.
Example: Consider the following game and find the saddle point.
Player B
I II III
I 3 4 8
Player A
II 8 5 6
III 6 7 6
Solution: In this case minimax value is 5 and maximin value is 4, there-

fore the game is said to be the game without saddle point.
7.8 Game without Saddle Point

If a payoff matrix [vij] is such that maxi [minj (vij)] = minj [maxi (vij)] = vrs,
then the matrix is said to have a saddle point (r, s). If the given payoff
matrix has no saddle point, the game has no optimal strategies. The concept
of optimal strategies can be extended to all mixed games by introducing a
probability with choice and mathematical expectation with payoff.
/HWSOD\HU$FKRRVHDSDUWLFXODUDFWLYLW\LVXFKWKDWLPZLWKSURED-
bility xi, then set x = {xiLP`RISUREDELOLWLHVFRQVWLWXWHWKHVWUDWHJ\
of A. Similarly, the set y = {yj M Q` RI SUREDELOLWLHV FRQVWLWXWH WKH
strategy of B. Then, the vector x = {x1, x2, x3, .... xm` RI QRQQHJDWLYH
numbers satisfy x1 + x2 + .... + xm = 1 is called the mixed strategy for A
and similarly, the vector y ={y1, y2, y3, .... yn` RI QRQQHJDWLYH QXPEHUV
satisfy y1 + y2 + .... + yn = 1 is called the mixed strategy for B.
The mathematical expectation of payoff function E(x,y) in a game whose
payoff matrix is [vij] is defined by,
( [ \ ij (xi vij)yj
PAGE 171

Notes IN-TEXT QUESTIONS

1. A ___________ strategy denotes a choice of an available action
in games in strategic form.
(a) Pure (b) Mixed
(c) Dominant (d) None of these
2. Games in which choices by players can neither increase nor
decrease the available resources are called:
(a) Symmetric games (b) Zero-sum games
(c) Co-operative games (d) Simultaneous games
3. Game theory was introduced by Neumann and Morgenstern
in _________.
(a) (b)
(c) (d)
4. ___________ of a payoff matrix is the position of such an
element in the payoff matrix which is minimum in its row and
maximum in its column
(a) Game with perfect information
(b) Infinite long games
(c) Zero-sum games
(d) Saddle point
Example: In a game of matching coins with two players, suppose one player
wins Rs. 2 when there are two heads and wins nothing when there are two
tails; and losses Rs. 1 when there are one head and one tail. Determine the
payoff matrix, the optimal strategy for each player and the value of the game.
Solution: According to the given information, the payoff matrix of player
A is given by,
Player B
H T
Player A H 2 0
T 0 1
172 PAGE

Here in this case the maximin value = 1 and minimax value = 2, so Notes
the matrix is without saddle point.
Now to find the optimal strategy, let us consider that player A plays H
(head) with probability x and T (tails) with probability (1 x), then if
player B plays H all the time, A’s expected gain will be
E(A, H) = x.2 + (1 x).(1) = 3x 1
If player B plays T all the time, A’s expected gain will be
E(A, T) = x.(1) + (1 x).(0) = x
So, if the A chooses x such that, E(A, H) = E(A, T) = E(A), then this
will determine the optimal strategy for A.
So, 3x 1 = x
Or, x = 1/4
And 1 x = 1 (1/4) = 3/4
Therefore, the optimal strategy for player A is to play H and T with
probability 1/4 and 3/4 respectively. Therefore, the mixed strategy for
player A is (1/4, 3/4) and the expected gain for A is,
E(A) = (1/4).2 + (3/4).(1) = 1/4
Similarly, let us consider that player B plays H (head) with probability
y and T (tails) with probability (1 y), then if player A plays H all the
time, B’s expected gain will be
E(B, H) = y.2 + (1 y).(1) = 3y 1
If player A plays T all the time, B’s expected gain will be
E(B, T) = y.(1) + (1 y).(0) = y
So, if the B chooses x such that, E(B, H) = E(B, T) = E(B), then this
will determine the optimal strategy for B.
So, 3y 1 = y
Or, y = 1/4
And 1 y = 1 (1/4) = 3/4
Therefore, the optimal strategy for player B is to play H and T with
probability 1/4 and 3/4 respectively. Therefore, the mixed strategy for
player B is (1/4, 3/4).
and E(B) = (1/4).2 + (3/4).(1) = 1/4
PAGE 173

Notes Here, E(A) = E(B) = 1/4, the complete solution of the game is,
Player A should play H and T with probabilities 1/4 and 3/4
respectively. Thus A’s optimal strategy is x0 = (1/4, 3/4).
Player B should play H and T with probabilities 1/4 and 3/4
respectively. Thus B’s optimal strategy is y0 = (1/4, 3/4).
The expected value of the game is 1/4 to player A. Hence (x0, y0)
is the strategic saddle point of this game.
7.9 Solution of 2 u 2 Games without Saddle Point

For any zero-sum two-person game where optimal strategies are not
pure strategies, i.e., there is no saddle point and for which the player
A’s payoff matrix is,
Player B
y1 y2
Player A x1 v11 v12

x2 v21 v22
Then the optimal strategies (x1, x2) for player A & (y1, y2) for player B
are determined by,
x1/x2 = (v22 v21)/(v11 v12)
and y1/y2 = (v22 v12)/(v11 v21)
and the value of the game v to the player A is given by,
v = (v11v22 v12v21)/[(v11 + v22) (v12 + v21)]
Proof: The given payoff matrix for player A is,
Player B
y1 y2
Player A x1 v11 v12

x2 v21 v22
174 PAGE

Then the equations for strategies of player A and player B are given by, Notes
x1v11 + x2v21 = v (1) y1v11 + y2v12 = v (4)
x1v12 + x2v22 = v (2) y1v21 + y2v22 = v (5)
x1 + x2 = v (3) y1 + y2 = v (6)
Now subtracting equation (2) from equation (1), we get
x1 (v11 v12) + x2 (v21 v22) = 0 (7)
Multiplying equation (3) by (v11 v12), we get
x1 (v11 v12) + x2 (v11 v12) = (v11 v12) (8)
Solving equations (7) and (8), we get
x2 = (v11 v12)/[(v11 + v22) (v12 + v21 @
Using value of x2 in equation (3), we get
x1 = (v22 v21)/[(v11+ v22) (v12 + v21)] (10)
'LYLGLQJ HTXDWLRQ E\ HTXDWLRQ ZH JHW
x1/x2 = (v22 v21)/(v11 v12)
Similarly, subtracting equation (5) from equation (4), we get
y1 (v11 v21) + y2 (v12 v22) = 0 (11)
Multiplying equation (6) by (v11 v21), we get
y1 (v11 v21) + y2 (v11 v21) = (v11 v21) (12)
Solving equations (11) and (12), we get
y2 = (v11 v21)/[(v11 + v22) (v12 + v21)] (13)
Using value of y2 in equation (6), we get
y1 = (v22 v12)/[(v11 + v22) (v12 + v21)] (14)
Dividing equation (14) by equation (13), we get
y1/y1 = (v22 v12)/(v11 v21)
Now using values of x1 and x2 in equation (1), we get
v = (v11v22 v12v21)/[(v11 + v22) (v12 + v21)]
PAGE 175

Notes
7.9.1 Steps to Solve 2 u 2 Games without Saddle Point
The following are the steps to solve 2 u 2 games without saddle point
arithmetically:
Find the difference of two numbers in column I, and put it under
column II (Neglect the negative sign, if exist).
Find the difference of two numbers in column II, and put it under
column I (Neglect the negative sign, if exist).
Repeat the above two steps for two rows also.
The values thus obtained are called the oddments, which are the frequencies
the players must use their courses of action in their optimum strategies.
Example: Two players A and B, without showing each other, put on a
table a coin, with head or tail up. Player A wins Rs. 8 when both the
coins shows head and Rs. 1 when both are tails. Player B wins Rs. 3
when the coins do not match. Given the choice of being matching play-
er A or non-matching player B, which one would you choose and what
would be your strategy?
Solution: According to the given information, the payoff matrix for
player A is given by,
Player B
H T
Player A H 8 3
T 3 1
Here in this case the maximin value = 3 and minimax value = 1, so the
matrix is without saddle point and the optimal strategies will be mixed
strategies.
Step 1: Difference of two numbers in column I is 8(3) = 11, put it
under column II.
Step 2: Difference of two numbers in column II is 31 = 4, and put
it under column I (Neglect the negative sign).
Step 3: Repeat the above two steps for two rows also.
176 PAGE

After performing these steps, we have Notes

Player B
H T Oddments Probability
H 8 3 4 4/15
Player A T 3 1 11 11/15
Oddments 4 11
Probability 4/15 11/15
For optimum gain, player A must use strategy H with probability 4/15
and strategy T with probability 11/15, whereas player B must use strategy
H with probability 4/15 and strategy T with probability 11/15.
The value of the game is given by,
Using B’s oddments:
B plays H, the value of the game = [4.8 + 11.(3)]/(11 + 4) = Rs. (1/15)
B plays T, the value of the game = [4.(3) + 11.(1)]/(11 + 4) = Rs. (1/15)
Using A’s oddments:
A plays H, the value of the game = [4.8 + 11.(3)]/(11 + 4) = Rs. (1/15)
A plays T, the value of the game = [4.(3) + 11.(1)]/(11 + 4) = Rs. (1/15)
Hence the complete solution of the game is,
Optimum strategy for player A is (4/15, 11/15)
Optimum strategy for player B is (4/15, 11/15)
Value of the game to A is Rs. (1/15)
Value of the game to B is Rs. 1/15
7.10 Dominance Rule

A dominated strategy is a strategy that yields a payoff for one of the
players that is less than or equal to the payoff for some other strategy for
all actions of the opponent. Principle of dominance is applicable to both
pure strategies and mixed strategies. Sometimes, it is observed that one
of the pure strategies of either player is always inferior to at least one
of the remaining strategies. The superior strategies are said to dominate
the inferior ones. The player would have no incentive to use inferior
strategies which are dominated by the superior ones. In such cases of
PAGE 177

Notes dominance, the payoff matrix can be resized by deleting those strategies
which are dominated by the others. The concept of dominance is espe-
cially useful for the evaluation of two-person zero-sum games where a
saddle point does not exist.
The dominance properties are as follows:
If all the elements of a row say ith, are less than or equal to the
corresponding elements of any other row, say rth row, then ith row
is dominated by the rth row.
If all the elements of column, say jth, are greater than or equal to
the corresponding elements of any other column, say sth then jth
column is dominated by the sth column.
If Row I is dominated by the average of Row II and Row III then
Row I will be removed from the matrix. For example, if Row
, DYHUDJH RI 5RZ ,, DQG 5RZ ,,, WKHQ 5RZ , ZLOO EH UHPRYHG
If Column I is dominated by the average of Column II and Column
III then Column I will be removed from the matrix. For example,
LI &ROXPQ , DYHUDJH RI &ROXPQ ,, DQG &ROXPQ ,,, WKHQ &ROXPQ
I will be removed.
Let M = [vij] be the payoff matrix of an m x n rectangular game. If the
ith row of M is dominated by rth row of M, then the deletion of ith row of
M does not change the set of optimal strategies of player A. Further, if
the jth column of M is dominated by sth column of M, then deletion of jth
column of M does not change the set of optimal strategies of player B.
Example: Use dominance rule to solve the following rectangular game
whose payoff matrix to A is given by,
Player B
I II III IV V VI
I 0 0 0 0 0 0
II 4 2 0 2 1 1
Player A III 4 3 1 3 2 2
IV 4 3 7 5 1 2
V 4 3 4 1 2 2
VI 4 3 3 2 2 2
178 PAGE

Solution: In the given payoff matrix, the all the elements of I and II Notes
rows are less than or equal to the III row, therefore I and II rows will
be dominated by row III. Hence the reduced matrix is,
Player B
I II III IV V VI
III 4 3 1 3 2 2
Player A IV 4 3 7 5 1 2
V 4 3 4 1 2 2
VI 4 3 3 2 2 2
All the elements of I, II and VI columns are greater than or equal to the
V column, therefore I, II and VI columns will be dominated by column
V. Hence the reduced matrix is,
Player B
III IV V
III 1 3 2
Player A IV 7 5 1
V 4 1 2
VI 3 2 2
All the elements of VI row are less than or equal to the V row, therefore
VI row will be dominated by row V. Hence the reduced matrix is,
Player B
III IV V
III 1 3 2
Player A
IV 7 5 1
V 4 1 2
The V column is superior to the average of III and IV columns; therefore
V column will be dominated. Hence the reduced matrix is,
Player B
III IV
III 1 3
Player A
IV 7 5
V 4 1
PAGE 179

Notes The average of III and IV rows is greater than V row; therefore V row
will be dominated. Hence the reduced matrix is,
Player B
III (y3) IV (y4)
Player A III (x3) 1 3

IV (x4) 7 5
Now, for 2 u 2 game without saddle point, solve the following simulta-
neous equations:
For player A:
1.x3 + 7.x4 Y௑௑௑[3 5.x4 Y௑௑௑[3 + x4 = 1
Solving these equations we have,
x3 ௑௑௑[4 ௑௑௑Y
For player B:
1.y3 +3.y4 Y௑௑௑\3 5.y4 Y௑௑௑\3 + y4 = 1
Solving these equations we have,
y3 ௑௑௑\4 ௑௑௑Y
Therefore the complete solution is,
Optimal strategy for player A (0, 0, 6/7, 1/7, 0, 0)
Optimal strategy for player B (0, 0, 4/7, 3/7, 0, 0)
The value of the game to player A = 13/7
The value of the game to player B = 13/7
7.11 Graphical Method to Solve 2 u n, m u 2 and 2 u 2

Games
The optimal strategies for a (2 u n) or (m u 2) matrix game can be
located easily by a simple graphical method. This method enables us
to reduce (2 u n) or (m u 2) matrix game to 2 u 2 game that could be
easily solved by the methods already studied.
180 PAGE

Example: Find the solution of game theory problem (6 u 2 game) using Notes
graphical method:
Player B
Strategies B1 B2
A1 1 3
Player A A2 3 5
A3 1 6
A4 4 1
A5 2 2
A6 5 0
Solution: Here, in this case, Minimax value = 4 and Maximin value = 3

Therefore, the game has no saddle point.
Step 1: Draw two parallel lines 1 unit distance apart and mark a scale on each.
Since player B has only two strategies, draw the graph for player B.
The two parallel lines represent strategies B1 and B2 of player B with
probabilities y and (1 y) respectively.
Step 2: Draw the lines corresponding to each strategy of player A and
both the strategies of player B.
PAGE 181

Notes Step 3: Find the feasible region and the point of optimal solution.
Find the feasible region and the point of optimal solution for player B,
as player B has only 2 strategies.
Since player B is a minimax player therefore, consider the lowest point
(P) of the upper feasible region (upper boundary) of all the lines in the
graph.
Step 4: Find the optimal strategies and the value of the game.
The point of optimal solution (P) occurs at the intersection of two lines
corresponding to A2 and A4 strategies of player A, therefore the optimum
strategies for player B can be calculated by the following equations:
3y + 5(1 \ Y௑௑௑\ y) = v
Solving these equations, we get
\ ௑௑௑ y = 1 ௑௑௑Y
Similarly, Let for the strategies A2 and A4 of player A, the respective
probabilities are x and (1 x).
Therefore the optimum strategies for player A can be calculated by the
following equations:
3x + 4(1 [ Y௑௑௑[ x) = v
[ ௑௑௑ x = 1 ௑௑௑Y
Therefore the solution is,
Therefore the optimum strategies for player A (0, 3/5, 0, 2/5, 0, 0)
Therefore the optimum strategies for player B (4/5, 1/5)
The value of the game is 17/5.
Example: Find the solution of game theory problem (2 u 3 game) using
graphical method:
Player B
Strategies I II III
Player A I 1 3 11
II 8 5 2
182 PAGE

Solution: Here, in this case, Minimax value = 11 and Maximin value = 2 Notes
Therefore, the game has no saddle point.
Step 1: Draw two parallel lines 1 unit distance apart and mark a scale on each.
Since player A has only two strategies draw the graph for player A. The
two parallel lines represent strategies I and II of player A with probabil-
ities x and (1 x) respectively.
Step 2: Draw the lines corresponding to each strategy of player B and
both the strategies of player A.
Step 3: Find the feasible region and the point of optimal solution for
player A, as player A has only 2 strategies.
Since player A is a maximin player therefore, consider the highest point (P)
of the lower feasible region (lower boundary) of all the lines in the graph.
Step 4: Find the optimal strategies and the value of the game.
The point of optimal solution (P) occurs at the intersection of two lines
corresponding to II and III strategies of player B, therefore the optimum
strategies for player A can be calculated by the following equations:
3x + 5(1 [ Y௑௑௑[ x) = v
PAGE 183

Notes Solving these equations, we get

[ ௑௑௑ x = 1 ௑௑௑Y
Similarly, let for strategies I and II of player B, the respective probabil-
ities be y and (1 y).
Therefore the optimum strategies for player B can be calculated by the
following equations:
3y + 11(1 \ Y௑௑௑\ y) = v
\ ௑௑௑ y = 1 ௑௑௑Y
Therefore the solution is,
Therefore the optimum strategies for player A (3/11, 8/11)
7KHUHIRUH WKH RSWLPXP VWUDWHJLHV IRU SOD\HU %
7KH YDOXH RI WKH JDPH LV
7.12 Applications of Game Theory

To choose the optimum course of action in situations involving conflict,
the game theory can be employed. It offers more options while making
business judgements. A huge number of independent factors can be taken
into account mathematically with the aid of a computer. The key benefits
of this theory are:
Game theory offers a systematic quantitative technique for determining
the optimum strategy in competitive settings;
It offers a framework for rival businesses’ responses to company
activities; and
It is useful in resolving the situation of firm independence.
Game theory is a management tool that supports thoughtful decision-
making.
7.13 Limitations of Game Theory

Game theory gets harder when there are more participants in the
actual firm.
It merely offers an overarching logical principle, not the winning tactic.
184 PAGE

In the real world of business, there is a great deal of uncertainty Notes

that game theory does not take into account.
Businesspeople lack sufficient game theory expertise.
7.14 Summary
In the theoretical discipline of social sciences known as “game theory,”
results of a certain scenario are predicted using a mathematical model.
Those who work in political science, business, or poker frequently
utilise it to forecast possible outcomes for circumstances relevant to
their disciplines. In order to forecast how individuals or organizations
will behave, game theory uses sequential games to mimic a number
of real-world, strategic situations. Yet, the optimal course of action is
typically to cooperate to secure the most favourable, symmetric outcome
for all parties. The dominating strategy is frequently for a player to
choose the option that benefits them the most.
When examining a particular economic environment, economists can use
game theory to forecast the actions that businesses (or players) will take.
Private companies may also use it to do business or to proactively track
and assess the various elements and competitive practises inside their
target economy. Instructors in business schools may also employ game
theory simulations to teach their students to a variety of techniques and
problem-solving ideas that they may observe applied in the real world.

1. (a) Pure
2. (b) Zero-sum games
3. (b)
4. (d) Saddle point

1. Explain the concept of asymmetric games in game theory. Provide
examples to illustrate the differences between symmetric and
asymmetric games. Discuss how the presence of asymmetry impacts
decision-making strategies and outcomes in games.
PAGE 185

Notes 2. Define and discuss the various types of games classified based on
information availability, such as games with perfect information and
games with imperfect information. Explain how players’ knowledge
about the game’s structure and their opponents’ actions influences
their decision-making processes.
3. Describe the concept of a saddle point in game theory. Explain how
saddle points, optimal strategies, and the value of the game are
determined in matrix games. Provide a step-by-step explanation of
the process involved in identifying a saddle point and determining
optimal strategies for players.
4. Discuss the minimax (maximin) principle in game theory. Explain
how this principle is applied in decision-making under uncertainty
and competition. Provide examples to illustrate how players use
the minimax principle to minimize potential losses and maximize
gains in zero-sum games.
5. Explain the dominance rule in game theory. Discuss how dominant
strategies and dominated strategies are identified in games, and how
they affect players’ decision-making processes. Provide examples and
discuss the implications of the dominance rule in real-life strategic
interactions and competitive scenarios.
7.17 References
Maynard Smith J. Evolution and the Theory of Games. Cambridge,
8. &DPEULGJH 8QLYHUVLW\ 3UHVV
Von Neumann J., & Morgenstern O. (2004). Theory of Games and
Economic Behaviour. 4th ed., Princeton, NJ: Princeton University
Press

Vohra N. D. (2021). Quantitative Techniques in Management. 6th
ed., Tata McGraw Hill.
7DKD +$ 2SHUDWLRQV 5HVHDUFK±$Q ,QWURGXFWLRQ th ed.,
Prentice Hall India.
186 PAGE

Glossary
Activity: A job or task that consumes time and is a key subpart of a total project.
Ambiguity: The inability to characterize or describe important aspects of a decision, such
as core problems, future conditions, alternatives, or criteria.
Analysis: Separating or breaking up the component parts needed to value alternatives so
that estimates for each component can be made and their effects combined.
Comparative Statics: Comparative statics is the process of changing the value of a
variable in a model, in order to see its individual impacts on a value function or outcome
of the decision.
Critical Activities: Critical activities have zero slack time.
Critical Path Method (CPM): A deterministic network technique that is similar to PERT
but uses only one time estimate. CPM is used for monitoring budgets and project crashing.
Decision Levels: A level corresponds to increases in the complexity of decisions, as
assumptions about future conditions become more ambiguous.
Decision Mode: Role of the decider in relation to the decision, e.g., professional.
Decision Tree Analysis: It is a method for evaluating how users make decisions in
performing their tasks.
Destination: It is the location to which shipments are transported.
Evaluation: Putting a number to a judgment, not necessarily a preference judgment, e.g.,
assessing a probability.
Event: A point in time that marks the beginning or ending of an activity.
Feasible Solution: A solution that satisfies the row and column sum restrictions and also
the non-negativity restrictions is a feasible solution.
Gamble: Choice with uncertain outcomes.
Opportunity Cost: The cost of an activity in terms of foregone or sacrificed next best
alternative uses of the assets involved.
Optimal Solution: A feasible solution is said to be optimal solution when the total
transportation cost will be the minimum cost.
Possibility Fork: Branches of outcomes, i.e., event fork.
Unit Transportation Cost: It is the cost of transporting one unit of the consignment from
an origin to a destination.
PAGE 187

BACHELOR OF MANAGEMENT STUDIES
QUANTITATIVE TECHNIQUES
BMS :QUANTITATIVE TECHNIQUES FOR MANAGEMENT (SEMESTER - IV)

FOR
MANAGEMENT
DISCIPLINE SPECIFIC CORE (DSC-10)
SEMESTER - IV COURSE CREDIT -4
(FOR LIMITED CIRCULATION ONLY)
Department of Distance and Continuing Education DEPARTMENT OF DISTANCE AND CONTINUING EDUCATION
University of Delhi UNIVERSITY OF DELHI
AS PER THE UGCF-2022 AND NATIONAL EDUCATION POLICY 2020

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BACHELOR OF MANAGEMENT STUDIES

BMS :QUANTITATIVE TECHNIQUES FOR MANAGEMENT (SEMESTER - IV)

[FOR LIMITED CIRCULATION ONLY]

1st Edition: 2024

Internal Review Committee

Corrections/Modifications/Suggestions proposed by Statutory Body, DU/

Department of Distance & Continuing Education, Campus of Open Learning,

Lesson 2: Application of LP Marketing, Finance, Operations Management

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Lesson 4: Assignment Problem

Lesson 5: Project Scheduling

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Lesson 6: Decision Theory

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1.1 Learning Objectives

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1.3 Linear Programming Problem

1.3.1 Assumptions for Linear Programming Problem

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Figure 1.1: Application of LPP

1.3.2 Properties of Linear Programming Problem

1.4 Formulation of Linear Programming Problem

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Machine Processing Time (Min.)

Objective Function Coefficient: These are some constants that represent

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a21x1 + a22x2 + ... + a2nxn d (t, =) b2

1.4.2 Properties of Linear Programming Solution

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1.5 Graphical Method

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Notes Therefore, the constraints are,

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1.6.1 Unbounded Solution

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1.6.3 Infeasible Solution

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1.7.1 The Simplex Algorithm

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Step 9: Go to step 5 and repeat the algorithm until we get an optimum

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First Iteration Notes

1.7.2 The Big M Method

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First Iteration: X1 is entering variable and XA1 is departing variable.

Second Iteration: X2 is entering variable and XA2 is departing variable

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Step 2: Prepare the initial table for phase I.

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1.8.1 Rules for Writing Dual

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The corresponding dual problem can be written as:

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1.9 Sensitivity Analysis

1.9.1 Changes in the Objective Function

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Notes There may be two cases that arise:

Where, k indicates the rows corresponding to basic variables

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Maximize total WAA = x a

Raw material 1, 7 X 1 4 X 2 2 X 3 d 120