Linear Programming Applications

Web Chapter B
Constrained Optimization problems occur frequently
in economics:
» maximizing output from a given budget;
» or minimizing cost of a set of required outputs.
Lagrangian multiplier problems required binding
constraints (found in Web Chapter A Appendix)
But a number of business problems have
inequality constraints, as in a machine cannot work
more than 24 hours in a day.
2002 South-Western Publishing Slide 1
 Profit Maximization Problem
Using Linear Programming
• Constraints of production capacity, time,
money, raw materials, budget, space, and
other restrictions on choices.
• These constraints can be viewed as
inequality constraints, ≥ or ≤.
• A "linear" programming problem assumes a
linear objective function, and a series of
linear inequality constraints
Slide 2
 Linearity implies:
1. constant prices for outputs (as in a
perfectly competitive market).

2. constant returns to scale for

production processes.

3. Typically, each decision variable

also has a non-negativity constraint. For
example, the time spent using a machine
cannot be negative.
Slide 3
 Solution Methods
• Linear programming problems can be solved
using graphical techniques, SIMPLEX
algorithms using matrices, or using software,
such as Lindo software*.
• In the graphical technique, each inequality constraint
is graphed as an equality constraint. The Feasible
Solution Space is the area which satisfies all of the
inequality constraints.
• The Optimal Feasible Solution occurs along the
boundary of the Feasible Solution Space, at the extreme
points or corner points.
*www.lindo.com  Slide 4
• The corner point that maximize the objective
function is the Optimal Feasible Solution.
• There may be several optimal solutions. Examination of
the slope of the objective function and the slopes of the
constraints is useful in determining which is the optimal
corner point.
• One or more of the constraints may be slack, which
means it is not binding.
• Each constraint has an implicit price, the shadow price of
the constraint. If a constraint is slack, its shadow price is
zero.
• Each shadow price has much the same meaning as a
Lagrangian multiplier.
GRAPHICAL
Corner Points
X1 A, B, and C

CONSTRAINT # 1

B
Feasible
Region OABC CONSTRAINT
#2

O C
X2

Slide 6
GRAPHICAL

X1

CONSTRAINT # 1 Optimal Feasible

Highest
Solution at
Profit
Point B
Line A

B
CONSTRAINT
#2

O C
X2

Slide 7
 The Dual Problem
• Each linear programming problem (the primal
problem) has an associated dual problem.
• EXAMPLE: A maximization of profit objective
function, subject to resource constraints has an
associated dual problem
» The dual is a minimization of the total costs of
the resources subject to constraints that the
value of the resources used in producing one
unit of each output be at least as great as the
profit received from the sale of that output.

Slide 8
 Duality Theorem

• THEOREM: the maximum value of the

primal (profit max problem) equals the
minimum value of the dual (cost
minimization) problem.
• The resource constraints of the primal
problem appear in the objective function of
the dual problem

Slide 9
 Primal:
Maximize π = P1·Q1 + P2·Q2 subject to:

c·Q1 + d·Q2 < R1 The budget

constraint,
for example.
e·Q1 + f·Q2 < R2 The machine
scheduling
time constraint.
where Q1 and Q2 > 0 Nonnegativity
constraint.
Slide 10
 Dual:
Minimize C = R1·w1 + R2·w2 subject to:

c·W1 + e·W2 > P1 Profit Contribution

of Product 1

d·W1 + f·W2 > P2 Profit Contribution

of Product 2

where W1 and W2 > 0 Nonnegativity

constraint.
Slide 11
 Complexity and the
Method of Solution
• The solutions to primal and dual problems
may be solved graphically, so long as this
involves two dimensions.

• With many products, the solution involves

the SIMPLEX algorithm, or software
available in LINDO.

Slide 12
 Cost Minimization Problem
Using Linear Programming
• Multi-plant firms want to produce with the lowest cost
across their disparate facilities. Sometimes, the relative
efficiencies of the different plants can be exploited to
reduce costs.
• A firm may have two mines that produces different
qualities of ore. The firm has output requirements in
each ore quality.
• Scheduling of hours per week in each mine has the
objective of minimizing cost, but achieving the
required outputs.
Slide 13
• If one mine is more efficient in all
categories of ore, and is less costly to
operate, the optimal solution may
involve shutting one mine down.
• The dual of this problem involves the
shadow prices of the ore constraints. It
tells the implicit value of each quality
of ore.

Slide 14
 Capital Rationing Problem
• Financial decisions sometimes may be viewed as a
linear programming problem.
• EXAMPLE: A financial officer may want to
maximize the return on investments available,
given a limited amount of money to invest.
• The usual problem in finance is to accept all
projects with positive net present values, but
sometimes the capital budgets are fixed or limited
to create "capital rationing" among projects.

Slide 15
• The solution involves determining
what fraction of money allotted should
be invested in each of the possible
projects or investments.
• In some problems, projects cannot be
broken into small parts.
• When this is the case, integer
programming can be added to the
problem.
Slide 16