LINEAR

PROGRAMMING
Dhanwanti Danica T. Sadhwani
Managerial Economics
Prof Junaid Karim
What is Linear Programming?
◦ It is a solution method for maximization or minimization
decision problems subject to underlying constraints.
◦ Is a method to achieve the best outcome in a
mathematical model whose requirements are
represented by linear relationships. Linear programming
is a special case of mathematical programming.
Inequality Constraints
◦ Constraints often limit the resource employed to less than or
equal to (≤) some fixed amount available.
◦ Constraints specify that the quantity or quality of output must be
greater or equal to (≥) some minimum requirement.
Linearity Assumption
◦ The linearity assumption can best be tested with scatter plots, the following two
examples depict two cases, where no and little linearity is present.

◦ Typical managerial decision problems that can be solved using the linear programming
method involve revenue, cost, and profit functions.

◦ Each must be linear; as output increases, revenues, costs, and profits must increase in
linear fashion. For costs to be a linear function of output, both returns to scale and input
process must be constant.
◦ Constant input prices, when combined with constant returns to scale, result in a linear
total cost function. If both output process and units costs are constant, profits also rise in
a linear fashion with output.
Production Processes Example
◦ Assume that a firm produces a single product Q, using two inputs L and K,
which might represent labor and capital. Assume that Q can be produced
using only four input combinations.
 Process A requires the combination of 15 units
of L and 1 unit of K for each unit of Q
produced.
 Process B uses 10 units of L and 2 units of K for
each unit of output.
 Process C and D uses 7.5 units of L and 3 units
of K, and 5 units of L with 5 units of K,
respectively, for each unit of Q produced.

• Process A is very labor intensive in comparison

with the other production systems, whereas B,
C, and D are based on increasingly capital –
intensive technologies.
◦Isocost line – illustrates all the possible
combinations of two factors that can be used at
given costs and for a given budget.
◦Isoquants – firm’s counterpart of the consumer’s
indifference curve
- an isoquant is a curve that shows all the
combinations of inputs that yield the same level of
output
◦ Iso means equal; quant means quantity
Production Isoquants
◦ Production Isoquants in linear programming are composed of linear segment
connecting the various production process rays. Each of the isoquant
segments are parallel to one another.
◦ Points along each segment of an isoquant between two process rays
represent a combination of output from each of the two adjoining production
processes.
• For example A1 B1 is parallel to segment A2 B2 ;
isoquant segment B3 C3 is parallel to B2 C2.
• Point X represents production of 4 units of Q
using 25 units of L and 16 units of K. None of
the available production processes can
manufacture Q using L and K in the ration of
25 to 16, but that combination is possible by
producing part of the output with process C
and part with process D.
Relative Distance Method
◦ It is the method for determining the quantity to be produced by
each production process at varying points along the isoquant.
◦ It is based on the fact that the location of a point along an
isoquant determines the relative shares of production for the
adjacent
Least – Cost Input Combinations

• Adding isocost curves to a set of isoquants

permits one to determine least-cot input
combinations for the production of
product Q.

• Assume that each unit of L costs $3 and

each unit of K costs $10. The isocost curve
illustrated indicates a total expenditure of
$150.
Optimal Input Combinations with
Limited Resources
◦ Firms with limited inputs during a production period find it optimal to use inputs in
proportions other than the least-cost combination.

◦ Feasible Space – Graphical region that is both technically and economically feasible
and includes the optimal solution – best answer.
 Example:
• Assume that only 20 units of L and 11 units o K
are available during the current production
period and that the firm seeks to maximize
output Q.
• The horizontal line drawn at L = 20 indicates
the upper limit on the quantity of L that can
be employed during the production period;
the vertical line at K = 11 indicates a similar
limit on the quantity of K.
• Production possibilities are determined by
noting that, in addition to limitations on
inputs L and K, the firm must operate within
the area bounded by production process
rays A and D.
• Any point within this space combines L and K
in a technically feasible ratio without
exceeding availability limits on L and K. It
should operate at the feasible space point
that touches the highest possible isoquant.
Objective Function Specification
◦ An equation that expresses the goal of a linear programming problem.

Constraint Equation Specification

◦ Constraint equations specify the available quantities of each input and their usage in
the production of X and Y.

Nonnegativity Requirement
◦ The mathematically optimal output level might be a negative quantity, clearly an
impossible solution. In a distribution problem, an optimal solution might indicate negative
shipments from one point to another, which again is impossible
◦ To prevent economically meaningless results, non negativity requirement must be
introduced. This is merely a statement that all variables in the problem must be equal to
or greater than zero.
Qx ≥ 0 ; QY ≥ 0
Analytic Expression
◦ The decision problem is to maximize total profit contribution, 𝜋, subject to resource
contraints. This is expressed as,
Graphing the Feasible Space
• The graph of the constraint equation for input A,
4Qx + 2Qy = 32 indicates he maximum quantities
of X and Y that can be produced given the
limitation on the availability of input A.

• A maximum of 16 units of Y can be produced if

no X is manufactured; 8 units of X can be
produced if the output of Y is zero.
• Any point along the line connecting these two
outputs represents the maximum combination of
X and Y that can be produced with no more than
32 units of A.

• This constraint equation divides the XY plane into

two half spaces. Every point lying on the line or to
the left of the line satisfies the constrain expressed
by the equation; every point to the right of the
line violates that expression. Only points on the
constraint line or to the left of it are in the feasible
space
Slack Variables
◦ Indicates the amount by which constraint conditions are exceeded. In this case of less-
than-or-equal-to constraints. Slack Variables are used to increase the left side to equal the
right side limits of the constraint conditions. In the case of greater-than-or-equal-to
constraint, Slack Variables are use to decrease the left side to equal the right side limits of
the constraint conditions.

Simple Solution Method

◦ It is an iterative method used to solve linear programming problems. In this procedure,
computer programs find solution values for all variables at each corner point, then isolate
that corner point with the optimal solution to the objective function.
Duality Concept
◦ For every maximization problem in linear programming, there is a symmetrical
minimization problem; for every minimization problem there is a symmetrical problem.
These pairs of related maximization and minimization problems are knows as the primal
and dual linear programming problems.

◦ Primal Solution
- is often describes as a tool for short-run operating decisions.
◦ Dual Solution
- is often seen as a tool for long-range planning.
- both provide management with valuable insight for the decision – making
process.
Shadow Prices
◦ Are implicit values or opportunity costs associate with linear-programming-
problem decision variables. In this case of output, shadow prices indicate the
marginal cost of a 1-unit increase in output. In this case of the constraints,
shadow prices indicates the marginal cost of a 1-unit relaxation in the
constraint condition.
*THANK YOU AND GOD BLESS*