Managerial Economics in a Global Economy

Chapter 8 Linear Programming

PowerPoint Slides by Robert F. Brooker

Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

Linear Programming
Mathematical Technique for Solving Constrained Maximization and Minimization Problems Assumes that the Objective Function is Linear Assumes that All Constraints Are Linear

PowerPoint Slides by Robert F. Brooker

Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

Applications of Linear Programming

Optimal Process Selection Optimal Product Mix Satisfying Minimum Product Requirements Long-Run Capacity Planning Least Cost Shipping Route (Transportation Problems)
PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

Applications of Linear Programming

Airline Operations Planning Output Planning with Resource and Process Capacity Constraints Distribution of Advertising Budget Routing of Long-Distance Phone Calls Investment Portfolio Selection Allocation of Personnel Among Activities
PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

Production Processes
Production processes are graphed as linear rays from the origin in input space. Production isoquants are line segments that join points of equal output on the production process rays.
PowerPoint Slides by Robert F. Brooker Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

Production Processes
Processes Isoquants

PowerPoint Slides by Robert F. Brooker

Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

Production Processes
Feasible Region

Optimal Solution (S)

PowerPoint Slides by Robert F. Brooker

Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

Formulating and Solving Linear Programming Problems

Express Objective Function as an Equation and Constraints as Inequalities Graph the Inequality Constraints and Define the Feasible Region Graph the Objective Function as a Series of Isoprofit or Isocost Lines Identify the Optimal Solution

PowerPoint Slides by Robert F. Brooker

Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

Profit Maximization
Input A B C
Maximize Subject to

Quantities of Inputs Required per Unit of Output Product X Product Y 1 1 0.5 1 0 0.5
= $30QX + $40QY 1QX + 1QY 7 0.5QX + 1QY 5

Quantities of Inputs Available per Time Period Total 7 5 2

(objective function) (input A constraint) (input B constraint) (input C constraint) (nonnegativity constraint)

0.5QY 2
Q X , QY 0

PowerPoint Slides by Robert F. Brooker

Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

PowerPoint Slides by Robert F. Brooker

Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

Profit Maximization
Multiple Optimal Solutions New objective function has the same slope as the feasible region at the optimum

PowerPoint Slides by Robert F. Brooker

Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

Profit Maximization
Algebraic Solution Points of Intersection Between Constraints are Calculated to Determine the Feasible Region

PowerPoint Slides by Robert F. Brooker

Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

Profit Maximization
Algebraic Solution Profit at each point of intersection between constraints is calculated to determine the optimal point (E)

Corner Point 0 D *E F G

QX 0 7 4 2 0

QY 0 0 3 4 4

Profit $0 210 240 220 160

PowerPoint Slides by Robert F. Brooker

Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

Cost Minimization
Units of Nutrients Per Pound of Meat (Food X) Fish (Food Y) 1 1 0.5 1 0 0.5
C = $2QX + $3QY 1QX + 2QY 14 1QX + 1QY 10 1QX + 0.5QY 6 Q X , QY 0
PowerPoint Slides by Robert F. Brooker

Nutrient Protein Minerals Vitamins

Minimize

Minimum Daily Requirements Total 7 5 2

(objective function) (protein constraint) (minerals constraint) (vitamins constraint) (nonnegativity constraint)

Subject to

Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

Cost Minimization
Feasible Region

Optimal Solution (E)

PowerPoint Slides by Robert F. Brooker

Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

Cost Minimization
Algebraic Solution Cost at each point of intersection between constraints is calculated to determine the optimal point (E)

PowerPoint Slides by Robert F. Brooker

Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

Dual of the Profit Maximization Problem

Maximize Subject to = $30QX + $40QY 1QX + 1QY 7 0.5QX + 1QY 5 (objective function) (input A constraint) (input B constraint)

0.5QY 2
Q X , QY 0 Minimize Subject to

(input C constraint)
(nonnegativity constraint)

C = 7VA + 5VB + 2VC 1VA + 0.5VB $30 1VA + 1VB + 0.5VC $40 VA, VB, VC 0

PowerPoint Slides by Robert F. Brooker

Copyright (c) 2001 by Harcourt, Inc. All rights reserved.

Dual of the Cost Minimization Problem

Minimize Subject to C = $2QX + $3QY 1QX + 2QY 14 1QX + 1QY 10 1QX + 0.5QY 6 (objective function) (protein constraint) (minerals constraint) (vitamins constraint)

QX , Q Y 0
Maximize Subject to

(nonnegativity constraint)

= 14VP + 10VM + 6VV 1VP + 1VM + 1VV $30 2VP + 1VM + 0.5VV $40 VP, VM, VV 0

PowerPoint Slides by Robert F. Brooker

Copyright (c) 2001 by Harcourt, Inc. All rights reserved.