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Decision Models & Optimization

Solution to Make-up Exam Term II, 2016

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Indian School of Business Mohali, India

Decision Models & Optimization Term II, 2016

Prof. Anjani Jain

Yale School of Management Yale University anjani.jain@yale.edu

Prof. Ziv Katalan

The Wharton School University of Pennsylvania katalan@wharton.upenn.edu

1. Transportation Safety Administration (15 points)

a) (2 points) Suppose that the total 4-day cost of training an employee on day 2 decreases by $10 and the problem is re-solved. Which one of the following statements holds?

(X) The overall cost changes but the optimal solution values stay the same.

T 2 is non-zero in the optimal solution, so the objective function value will change with a change in the coefficient. The change is within the allowable decrease for the objective function coefficient for T 2 , so the optimal solution will not change.

b) (2 points) The allowable increase for the objective function coefficient of T 1 has been hidden. Given the LP results and the rest of the sensitivity report, what can you say about the hidden value?

(X) The allowable increase is infinite.

T 1 = 0 in the optimal solution, so it is not cost-effective to train

The reduced cost of $20 equals the allowable

decrease for T 1 .

become attractive enough so that T 1 > 0 in the optimal solution, while any increase in the coefficient makes T 1 remain unattractive.

employees on day 1.

Thus, a decrease of $20 makes training in day one

c) (2 points Suppose that the number of bags to be screened on day 3 decreases by 3,000 and the problem is re-solved. Which one of the following statements holds?

(X)

The overall cost goes down by $420 and the solution values change.

The

day

3 capacity

constraint is binding, so the optimal solution

changes with the right hand side. The change is within the allowable decrease so the shadow price of 0.14 per unit holds for all 3,000 units,

for a total decrease of $420.

d) (2 points) Suppose that the number of bags to be screened on day 4 increases by 1,600 and the problem is re-solved. Which one of the following statements holds?

(X) The overall cost goes up by at least $384, maybe more.

The change tightens the day 4 capacity constraint beyond the allowable increase, at which point the shadow price may rise above 0.24. Thus, $384 = 0.24 * 1,600 is a lower bound on the increase.

Decision Models & Optimization

Solution to Make-up Exam Term II, 2016

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e) (2 points) The allowable increase and decrease for Capacity on Day 2 have been hidden. Given the LP results and the rest of the sensitivity report, what is the allowable decrease?

(X) The allowable decrease is infinite.

This constraint is not binding, so the shadow price is zero. It is a “” constraint and will continue to be non-binding and have a 0 shadow price no matter how small the right hand side. Thus, the allowable decrease is infinite.

f) (2 points) The TSA is considering transferring an additional screener from another location. The moving cost for the employee is $2,000, and she would be trained and paid using the same scheme, along with the 200 current screeners. After re-running the LP, which one of the statements below will be true?

(X) Transferring and training the screener will increase TSA’s costs by less than $2,650.

The shadow price of $599.39 for the “total trained” constraint, indicates the cost of paying and training additional employees and holds for an allowable increase of 6.38 > 1. The $2,000 moving cost brings the total to $2,599.39.

g) (3 points) TSA wants to ensure that, if more than 20 employees are trained on day 2, then at least 30 will be trained on day 3.

Extend the original formulation to ensure this. Your formulation must be an integer LP.

New decision variables, if any:

Let Y be a 0-1 variable. If Y=0, then T 2 20, and if Y=1, then T 3 30.

Change to objective function, if any:

No change.

New or modified constraints, if any:

two new constraints T 2 20 + M Y, where M = 200

Note that M=200 is sufficient, since at most 200 people will be trained on day 3.

T 3 30 Y.

Decision Models & Optimization

Solution to Make-up Exam Term II, 2016

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2. Princeton Review (10 points)

Princeton Review offers preparation (“prep”) classes for students taking standardized tests, and its West Philadelphia location is scheduling upcoming classes for the GMAT and GRE….

Formulate a linear program to solve Princeton Review’s problem.

Decision Variables

X 12,GMAT = number 12-seat rooms used for GMAT classes X 25,GMAT = number 25-seat rooms used for GMAT classes X 12,GRE = number 12-seat rooms used for GRE classes X 25,GRE = number 25-seat rooms used for GRE classes

All X ij ’s are integer

Objective Function

Min $5000 X 12,GMAT + $8000 X 25,GMAT + $5000 X 12,GRE + $8000 X 25,GRE

Constraints

Enough Seats for Each Course

12

X 12,GMAT + 25 X 25,GMAT 212

+ 25 X 25,GRE

238

12 X 12,GRE

Enough Instructors for Course Sections

X 12,GMAT + X 25,GMAT 14

X 12,GRE

+ X 25,GRE

15

Enough Rooms of the Assigned Sizes

X 12,GRE + X 12,GMAT 20 X 25,GRE + X 25,GMAT 10

Non-Negativity (points?)

X ij 0 for all i, j

Decision Models & Optimization

Solution to Make-up Exam Term II, 2016

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3. Metro Corp’s Nirvana Real Estate Development Project (25 points)

The MetroCorp Syndicate’s (MCS) flagship project Nirvana comprises 250 prestigious villas on 100 acres of land. The Nirvana project is expected to be completed in three years.

a) (4 points) Using the above notation, write general expressions/formulae for the calculation of the semi-annual revenue in period t = 5, R 5 , the inventory of unsold units at the start of period t = 6, I 6 , and the semi-annual revenue in period t = 6, R 6. You may use any mathematical or spreadsheet functions in the formulae.

R 5 = min{I 5 , D 5 } x P 5 + 0.03 S 4

I 6 = I 5 - min{I 5 , D 5 }

R 6 = min{I 6 , D 6 } x P 6 + 0.03 S 5 + max{I 6 - D 6 , 0} x (0.3P 6 )

b) (3 points) Given the above notation, use the balances at the end of period t = 2 and the cash inflows and outflows during period t = 3 to write general expressions/formulae for the calculations of the cash balance, the amount borrowed, and the savings amount at the end of period t = 3:

CB 3 , B 3 , and S 3 . You may use any mathematical or spreadsheet functions in the formulae.

CB 3 = R 3 + 1.03S 2

- C 3

- 1.035B 2

S 3 = IF(CB 3 > 0, CB 3 , 0) = MAX(CB 3 , 0)

B 3 = IF(CB 3 < 0, -CB 3 , 0) = -MIN(CB 3 , 0)

c) (2 points) Based on the above simulation results, what is the approximate 95% confidence interval for the true expected NPV.

(x) [26.9, 55.7]

41.3 -/+ 2x7.2

d) (2 points) Based on the above simulation results, what is the approximate number of trials used in the simulation run?

(x) 1,900

MSE = S /n . Hence, n = (S/MSE) 2 = (313.8/7.2) 2 = 1,900.

e) (3 points) Based on the simulation results, within what range lies the estimated probability that the true expected NPV is positive?

(x) between 95% and 100%

The likelihood is almost 100% since the current sample mean is 41.3 and it is more than five standard errors (i.e., MSE) above zero! In other words, it is P{N(0,1) 5.7}.

Decision Models & Optimization

Solution to Make-up Exam Term II, 2016

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f) (3 points) Based on the above simulation results, within what range lies the estimated probability that the actual min CB will be less than - 300mm (negative 300 million) Rs?

(x) between 10% and 30%

From the cumulative frequency histogram: Prob[min CB -300] = 28%

g) (4 points) Suppose the original simulation were re-run using 4 times as many trials.

(i) The sample median of the NPV

(x) is likely to stay the same

The sample median is an unbiased estimate of the population median and hence is likely to stay roughly the same as the sample size increases.

(ii) A 99% confidence interval for the true expected NPV

(x) will be roughly ½ of the original

The width of 99% confidence interval is 2 x z 0.005 x MSE. MSE is S n /n where S n is the sample standard deviation and n is the sample size

As the sample size quadruples, the MSE is

expected to decrease by 4 = 2 since S is an unbiased estimate of the population standard deviation is likely to stay roughly the same as the sample size increases.

(i.e., number of trials.)

h) (4 points) Suppose the original simulation were re-run using the same number of trials, but with volatility of = 40% rather than the original 20%.

(i) The sample range of the min CB Distribution (i.e., maximum – minimum)

(x) is likely to grow

With a higher value of , the variability of semi-annual unit prices increases and, in turn, the range semi-annual cash flows and the range of the corresponding minimum cash position distribution increase as well.

(ii) The mean standard error of the min CB

(x) is likely to increase

Similarly to (i), the true standard deviation of the min CB increases.