Optimization Techniques: Linear

Programming
Linear Programming
 Linear programming is a mathematical
technique for solving constrained maximization
and minimization problems, when there are
many constraints and the objective function to
be optimized, as well as the constraints faced,
are linear (i.e., can be represented by straight
lines).
 It is a technique for providing specific numerical
solutions of problems.
 It bridges the gap between abstract economic
theory and managerial decision making in
practice.
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 The technique was developed by the Russian
mathematician L.V. Kantorovich in 1939 and
extended by the American mathematician G. B.
Dantzig in 1947.

 Use of linear programming is expanding very

fast because of use of computer which can
quickly solve complex problems involving the
optimal use of many resources, which are
available to a firm at a particular time.
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 Difference between Traditional Economic
Analysis Vs. Linear Programming
Both approaches show how economic agents
(producers or consumers) reach optimal
choices, how they do their planning or
programming in order to attain maximum utility,
maximum profit, minimum cost, etc.
Neither economic theory nor linear
programming say anything about the
implementation of the optimal plan or solution.
They simply derive the optimal solution in any
particular situation.

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However,
 In economic theory the optimal solution is
usually shown in qualitative abstract terms,
diagrams, or general mathematical symbols. In
contrast, linear programming yields specific
numerical solutions to the particular
optimization problems.
 Relationships of economic theory are usually
non-linear, expressed by curves (not straight
lines), while in linear programming all
relationships between the variables involved
are assumed to be linear.
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Suppose a firm has the following quantities of factors of
production
L= 400 units of labour (hours)
K= 300 units of capital (machine hours)
S = 1000 units of land (square feet)
The firm can produce either commodity x or commodity y
with the following available processes (activities)
activity A for x activity B for y
Labour lx = 4 ly = 1
Capital Kx = 1 ky = 1
Land Sx = 2 Sy = 5
The production of one unit of x requires 4 hours of labour,
1 machine hour and 2 square feet of land. Similarly, the
production of one unit of y requires 1 hour of labour, 1
machine hour and 5 square feet of land.
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 Suppose x yields a unit profit of Rs. 2, and commodity y
yields a unit profit of Rs.1. The goal of the firm is to
choose the optimal product mix, that is, the combination
that maximises its total profit.
The total profit function can be written as
Z = 2X + 1Y
Where, Z = total profit; X = quantity of commodity x (or
level of Activity A); Y = quantity of commodity y (or level
of Activity B); and 2 and 1 are the unit profits of the two
commodities.
Objective Function: The total profit function is called the
objective function as it expresses the objective of the
firm. This is the function, which represents the goals of
the economic agent.

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Constraints
 Technical (or functional) constraints, and
 Non-negativity constraints.
The technical constraints are set by the state of
technology and the availability of factors of
production. There are many technical
constraints as the factors of production
They express the fact that the quantities of factors
which will be absorbed in the production of the
commodities cannot exceed the available
quantities of these factors. Thus, in our problem

4 X  1Y  400;1X  1Y  300;2 X  5Y  1000

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Where, X and Y are the levels of commodities x
and y, and integers on the left-hand side of the
equations are the technical coefficients of
production, i.e., the factors inputs required for the
production of one unit of the products x and y.
The figures on the right-hand side are the
resources that the firm has at its disposition.
The non-negativity constraints express the
necessity that the levels of production of the
commodities cannot be negative. The level of
production of any one commodity can either be
zero or positive, i.e.,
X  0;Y  0
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The linear programming problem may be stated as
Maximize Z = 2X + 1Y
Subject to
4 X  1Y  400;1X  1Y  300;2 X  5Y  1000
(technical constraints)

X  0;Y  0
(non-negativity constraints)

In linear programming the optimal solution is defined

by examining the set of possible alternatives
solutions and eliminating gradually the sub optimal
ones until the optimal is reached.
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Graphical Solution of the Linear Programming Problem

 Graphical determination of the region of

feasible solutions,
 Graphical determination of the objective
function, and
 Determination of the optimal solution.

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 Graphical determination of the region of
feasible solutions
A solution will be feasible when it satisfies all the
constraints.
Here we have to satisfy both non-negativity
constraints as well as technical constraints.
Boundary set by the factor Labour: This is
defined by a straight line whose slope is the ratio
of the labour inputs in the production of the two
commodities.
Hence, slope of the line = input of L in x / input of L in y
= 4/1 = lx/ly

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Similarly slope of the line for capital will be
= input of K in x/ input of K in y = Kx/Ky= 1/1=1
And, slope of the line for land will be
= input of S in x / input of S in y= Sx/ Sy = 2/5

As objective function may be represented by iso-

profit lines i.e., Z  2 X  1Y   x X   yY
Slope of the iso-profit line will be

Y  x unitprofitofx 2
   2
X  y unitprofitofy 1
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Determination of the Optimal Solution

 The optimal solution will be found by the point of

tangency of the frontier of the region of feasible
solutions to the highest possible iso-profit curve.
 The optimal solution will be a point on the
frontier of the region of all feasible solutions.
Here it will be Z = 2X + 1Y = 2(56) + 1 (178) = 290

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The Duel Problem and Shadow Prices
 The basic problem whose solution is attempted by
the linear programming technique is called the
primal problem.
 To each primal problem corresponds a dual
problem, which yields additional information to the
decision-maker.
 The nature of the dual problem depends on the
primal problem. If the primal problem is a
maximization problem, its dual is a minimization
problem.
 From the solution of dual problem, we can derive the
shadow prices of the factors of production used by
the firm.
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Shadow Prices
 These are the imputed costs or opportunity costs
of the factors for a particular firm.
 They are crucial indicators for the expansion of
the firm. They show which factors are
bottlenecks to the further expansion of the firm.
 The shadow prices of the resources can be
compared with their market prices and help the
entrepreneur decide whether it is profitable to
hire additional units of these factors.
 It decides how much the profit of the firm will be
increased if the firm employs an additional unit
of this factor.
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Reference:
 Koutsoyiannis, A. (1979), Modern
Microeconomics, Macmillan Press Ltd.,
London

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