Linear-Programming

Applications
 Linear-Programming
Applications
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.
A number of business problems have
inequality constraints.
 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
 A "linear" programming problem
assumes a linear objective function, and
a series of linear inequality constraints
 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.
 Solution Methods
 Linear programming problems can be solved using

graphical techniques, SIMPLEX algorithms using
matrices, or using software, such as ForeProfit
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.
 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
GRAPHICAL

X1

CONSTRAINT # 1 Optimal Feasible

Highest
Solution at
Profit
Point B
Line A

B
CONSTRAINT
#2

O C
X2
 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.
 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
 Primal:
Maximize= P11·Q11 + P22·Q22 subject to:

c·Q11 + d·Q22 <R11 The budget

constraint, for example.
e·Q11 + f·Q22 < R22 The machine scheduling
time constraint.
where Q11 and Q22 > 0 Nonnegativity
constraint.
 Dual:
MinimizeC= R11·w11 + R22·w22 subject to:

c·W11 + e·W22 >P11 Profit Contribution of Product

1

d·W11 + f·W22 > P22 Profit Contribution of Product

2

where W11 and W22 > 0 Nonnegativity

constraint.
 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 FOREPROFIT
 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.
 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.
 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.
 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.