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Business and Financial Mathematics-Linear Programming

Business and Financial Mathematics-Linear Programming

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Sub Topics

I. General form of linear programming

II. Graph Method

III Simplex Method

IV Application in business

V. Problems

Linear programming consists of method for solving optimization problems in which

the object function f is a linear function . In linear programming, we discuss how to

find the value of control variables to optimize the object function.

a General form

General form of linear programming consist object function(object function) and

feasible area which are described by a function and linear equations.

b. Example

Object function:

Z = 250 X + 200Y (To maximize)

3X + 2Y ≤ 700

X + Y ≤ 300

X ≥0

Y ≥0

II Graph Method

Steps

• The problems is described by a mathematical model consists of object function and

feasible area(system of linear inequalities)

• Based on the system of linear inequalities , make a graph of the feasible area.

• Based on the object function , make a investigation line.

Z=250X+200Y or 200Y=-250X+Z

Y=-250/200 X+ Z/200

Or Y=-5/4 X+ Z/200

28

• Move the investigation line until it reach the first point the feasible area. The point is

called optimal solution.

Object function:

Z = 250 X + 200Y (To maximize)

3X + 2Y ≤ 700

X + Y ≤ 300

X ≥0

Y ≥0

The Graph

The first point reached is (100,200). The solution is X=100 dan Y=200.

Simplex method solves linear programming with two or more than two variables.

a.Steps

using slack variables.

2. Described it in a table or a matrix.

3. Determine a pivot element ( intersection between pivot row and pivot column) .

29

pivot column is column whose last element is the most negative. Then, pivot

can be found as follows: (a) Find ratio of last element and element at pivot

column. (b) The row whose ratio least positive is pivot row.

4. Transformation at every row : (a) Every element at pivot row divided by pivot

element. (b) Others rows must be subtracted or added by pivot row so the

element of pivot column is zero.

5. Repeat step (3) and (4) if the last row remains negative value.

6. If the last row doesn’t have negative value, then the solution can be seen as

follows:

b) The value of last element is solution variabel(column) whose element is one

and zero at others rows.

b. Example

Use simplex method to solve the following problem.

Object function:

Z = 50 X + 80Y (To maximize)

X + 2Y ≤ 320

3 X + 4 Y ≤ 840

X ≥0

Y ≥0

Steps :

Step 1

X + 2Y ≤ 320 → X + 2 Y + r = 320

3 X + 4 Y ≤ 840 → 3 X + 4 Y +s = 840

Z = 50 X + 80Y → -50 X - 80 Y +Z = 0

Step 2

X Y R S Z Ratio

1 2 1 0 0 320 320/2=160

3 4 0 1 0 840 840/4=210

-50 -80 0 0 1 0 0/-80

Step 3

Pivot column is column 2.

Pivot row is row 1

Pivot element is row 1 dan column 2

30

Step 4

Notation of row transformation as follows:

R1 ↔R1/2 means that new row 1 = old row 1 divided by two.

R2 ↔R2-2R1 new means row 2 = old row 2 minus 2 old row 1

R3 ↔R3 +40R1 new means row 3 = old row 3 plus 40 old row 1.

The result:

X Y R S Z Ratio

½ 1 ½ 0 0 160

1 0 -2 1 0 200

-10 0 40 0 1 12800

Step 5 (Repeat step (3) and (4) because the last row remains negative number.

Step 3

Pivot column is column 1

X Y R S Z Ratio

½ 1 ½ 0 0 160 160/(1/2)=320

1 0 -2 1 0 200 200/1=200

-10 0 40 0 1 12800 12800/-10

Pivot element is row 2 and column 1

Step 4

Notation of row transformation as follows:

R1 ↔R1 – R2/2

R2 ↔R2

R3 ↔R3 +10R2

The results:

X Y R S Z

0 1 3/2 -1/2 0 60

1 0 -2 1 0 200

0 0 20 0 1 14800

Step 6

Solution :

Y=60

X=200

Z=14800

31

IV Application in business

Problem

An agricultural businessman has a land with the area 100 dam2 (are). He will cultivate

the land with plant A, B, and C.

Seed cost per dam2 are: A=40$, B=20$, and C=30$ respectively. The maximum fund

available for the seeds is 3200$.

He also need labors for: A=1 man-day, B=2 man-days, C=1 man-days. There is 160 man-

days available.

Profit per dam2 are : A=100$, B=300$, and C=200$ respectively.

Find the area for plant A, B, and C respectively to maximize the profit?

Answer

Object function:

Z = 100 X1 + 300X2+ 200X3 (To maximize)

X1 + X2+ X3 ≤ 100

40 X1 + 20 X2+ 30 X3 ≤ 3200

X1 + 2 X2+ X3 ≤160

X1 ≥0

X2 ≥0

X3 ≥0

Steps:

Step 1

40 X1 + 20 X2+ 30 X3 ≤ 3200 → 40 X1 + 20 X2+ 30 X3 + s = 3200

X1 + 2 X2+ X3 ≤160 → X1 + 2 X2+ X3 + t =160

Z = 100 X1 + 300X2+ 200X3 → -100 X1 - 300X2- 200X3 + Z =0

Step 2

X1 X2 X3 r S t Z Ratio

1 1 1 1 0 0 0 100 100

40 20 30 0 1 0 0 3200 160

1 2 1 0 0 1 0 160 80

-100 -300 -200 0 0 0 1 0 0

32

Step 3

Pivot column is column 2.

Pivot row is row 3

Pivot element is row 3 dan column 2

Step 4

Notation of row transformation as follows:

R1 ↔R1 - R3/2

R2 ↔R2-10R3

R3 ↔R3/2

R4 ↔R4 +150R3

The result:

X1 X2 X3 r S t Z

½ 0 ½ 1 0 -1/2 0 20

30 0 20 0 1 -10 0 1600

½ 1 ½ 0 0 1/2 0 80

50 0 -50 0 0 150 1 24000

Step 5 (Repeat step (3) and (4) because the last row remains negative number.

Step 3

Pivot column is column 3

X1 X2 X3 r S T Z Ratio

½ 0 ½ 1 0 -1/2 0 20 40

30 0 20 0 1 -10 0 1600 80

½ 1 ½ 0 0 1/2 0 80 160

50 0 -50 0 0 150 1 24000 -480

Pivot element is row 1 dan column 3

Step 4

Notation of row transformation as follows:

R1 ↔2R1

R2 ↔R2-40R1

R3 ↔R3-R1

R4 ↔R4 +100R1

The result:

X1 X2 X3 r S t Z

1 0 1 2 0 -1 0 40

10 0 0 -40 1 10 0 800

0 1 0 -1 0 1 0 60

100 0 0 100 0 100 1 26000

33

Step 6

Solution :

X3 =40

S =800

X2=60

U =26000

V Problems

Problem 1

A home industry produce two kinds of cake those are Cake I and cake II in a day

Cake I need 0.3 kg of wheat (terigu) and 0.1 kg of sugar per unit. Cake II need

0.2 kg of wheat (terigu) and 0.1 kg of sugar per unit. In a day, 140 kg wheat and

60 kg sugar are available. Profit per unit of Cake I and cake II are Rp. 900 and

Rp. 800 respectively. Find number of Cake I and cake II should be made

respectively to maximize the profit?

Problem 2

A factory produces three kinds of toys those are toy A, B, and C. The maximum

production of the toys is 200 units. Cost per unit of product A, B, and C is $24,

$40, and $30 respectively. The maximum budget of $3500 is available. Product

A need 1 man-day, product B need 2 man-days, and product C need 2 man-days.

160 man-days are available. Profit per unit of product A=$14, B=$20, C=$16.

Find number of product A, B, and C should be made respectively to maximize

the profit?

34

Suppose:

M=gradient of investigation line

P = gradient of line I: 3X+2Y=700 2Y=-3X+700 Y=-3/2X +700/2

Q= gradient of line II: X+Y=300 Y=-X+300

When, M< P and M<Q, then the solution is C

When, M>P and M>Q, then the solution is A

Refer to the example above:

M=-5/4

P = -3/2 =-6/4

Q= -1=-4/4

So, P<M<Q, then the solution is B. The Solution is B or X=100, Y=200.

If Profit per unit of Cake I and cake II are Rp. 150 and Rp. 200 respectively.

Find number of Cake I and cake II should be made respectively to maximize the

profit? Z=150X+200Y.

M=-150/200=-3/4 So, M>P and M>Q The optimal solution is A or X=0, Y=300

If Profit per unit of Cake I and cake II are Rp. 350 and Rp. 200 respectively.

Find number of Cake I and cake II should be made respectively to maximize the

profit? Z=350X+200Y.

M=-350/200=-7/4 So, M<P and M<Q The optimal solution is C or X=233, Y=0

35

Simplex Method For Mathematical Model with ≥ and ≤

A factory produces two kinds of bags those are bag A and B. In making bags we

need cutting and assembling. A bag A need 1 hour cutting and 3 hours

assembling. A bag B need 2 hour cutting and 4 hours assembling. Time available

for cutting maximum is 32 hours and for assembling maximum is 84 hours and

minimum 48 hours. Profit per unit of bag A=$50,and B=$80. Find number of

bag A and B should be made respectively to maximize the profit?

X+ 2Y ≤32 (cutting)

3X+4Y≤84 (assembling)

3X+4Y≥48 (assembling)

p=50X+80Y

X+ 2Y +r=32

3X+4Y+s=84

3X+4Y-t=48

-50X-80Y+p=0

X Y R S T P

1 2 1 0 0 0 32

3 4 0 1 0 0 84

3 4 0 0 -1 0 48

-50 -80 0 0 0 1 0

In simplex method, every matrix has a basic solution. In can be seen using step

(6) above. Example: Basic solution of the matrix above is: r=32,s=84,t=-48, p=0 .

If all solutions are non negative, the matrix is called feasible. When, there is a

negative value in basic solution, we need to do a further matrix operation as

follows:

1.Find a row whose solution is negative (This is a key row)

2.Find a column whose at least two non zero. This a key column.

3. Modify the matrix to make all element in the key column is zero except

element in the key row is 1. Look at the example above: key row = row 3, key

column = column 2

Do operation: R1 ↔R1-R3/2 , R2 ↔R2-R3, R3 ↔ R3/4, R4 ↔R4+20R3

X Y R S T P Ratio

-1/2 0 1 0 ½ 0 8 16

0 0 0 1 1 0 36 36

¾ 1 0 0 -1/4 0 12 -48

10 0 0 0 -20 1 960 -48

36

Basic solution: r=8,s=36,y=12,p=960 , Already feasible

Pivot Column =column 5, pivot row=row 1

Next:

R1 ↔2R1 , R2 ↔R2-2R1, R3 ↔ R3+R1/2, R4 ↔R4+40R1

The result:

X Y R S T P Ratio

-1 0 2 0 1 0 16 -16

1 0 -2 1 0 0 20 20

½ 1 ½ 0 0 0 16 32

-10 0 40 0 0 1 1280 -128

Pívot Column =column 1, pivot row=row 2

R1 ↔R1+R2 , R2 ↔R2, R3 ↔ R3-R2/2, R4 ↔R4+10R2

The result:

X y R S T P

0 0 0 1 1 0 36

1 0 -2 1 0 0 20

0 1 -1/2 -1/2 0 0 6

0 0 20 10 0 1 1480

Example:

A factory produces three kinds of product those are product I, II and III. In

making products we need cutting and finishing. A product I needs 2 hours cutting

and 1 hour finishing. A product II needs 1 hour cutting and 1 hour finishing. A

product III needs 1 hour cutting and 2 hours finishing. Total time for cutting at

least 600 hours and Total time for finishing maximum 800 hours. Cost per unit

of product I=$30, II=$30 and III=$10. Find number of product I, II and III

should be made respectively to minimize the cost?

Let x=number of product I, y=number of product II, Z=number of product III and

C=Cost

2X+ Y+ Z ≥ 600

X+ Y+2Z ≤ 800

30X+30Y+10Z=C or 30X+30Y+10Z+(-C)=0

37

2X+ Y+ Z -r = 600

X+ Y+2Z +s = 800

30X+30Y+10Z+p=0 where p=-C

X Y Z r S P

2 1 1 -1 0 0 600

1 1 2 0 1 0 800

30 30 10 0 0 1 0

Basic solution r=-600 s=800 (not feasible)

Key element is row 1 and column 2

Matrix operation : R1 ↔R1, R2 ↔R2-R1, R3 ↔R3-30R1.

X Y Z r S P Ratio

2 1 1 -1 0 0 600 600/2=300

-1 0 1 1 1 0 200 200/(-1)=-200

-30 0 -20 30 0 1 -1800

Basic solution y=600 s=200 (already feasible)

Pivot element is column 1, row 1

Matrix operation : R1 ↔R1/2, R2 ↔R2+R1/2, R3 ↔R3+15R1.

X Y Z R S P Ratio

1 ½ ½ -1/2 0 0 300 600

0 ½ 3/2 1/2 1 0 500 1000/3=333 1/3

0 15 -5 15 0 1 -9000

Basic solution X=300 s=500 (feasible)

Pivot element is column 3, row 2

Matrix operation : R1 ↔R1-R2/3, R2 ↔(2/3)R2, R3 ↔R3+(10/3)R2.

X Y Z R S P

1 1/6 0 -2/3 -1/3 0 400/3

0 1/3 1 1/2 2/3 0 1000/3

0 50/3 0 50/3 10/3 1 -22000/3

Solution:

X=400/3, Z=1000/3, P=-22000/3 or –p=22000/3 or C=22000/3

38

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