Econ 162 THR (Managerial Economics)

I. (20 pts.) Joey makes three fancy door hinges: Baltic, chic and Goethic. All of the
materials used in making these hinges are plentiful except that only ​100 square feet
of brass plate are on hand and a maximum of ​200 hours of handcrafting labor can
be spared​. A set of heavy Baltic hinges requires 2 square feet of brass plate; a set of
chic or Gothic requires 1 square foot. Handcrafting takes 1 hour for a set of Baltic
hinges, 3 hours for a set of chicsand 1¼ hours for a set of Gothics. Joey can sell the
entire production run at a profit P10 for a set of Baltic or Goethic and P15 for a set of
Chic.

Baltic Chic Goethic Available

(X​1​) (X​2​) (X​3​)
Brass Plate
Required 2 1 1 100
Labor Required 1 3 1.25 200
Profit 10 15 10

a. Formulate the linear programming problem.

M ax = 10x1 + 15x2 + 10x3
S ubject to : 2x1 + x2 + x3 ≤ 100
x1 + 3x2 + 1.25x3 ≤ 200
x1 ≥ 0 , x2 ≥ 0 , x3 ≥ 0

b. Formulate the dual problem and solve it graphically. What are the optimal values
of the dual main (decision) variables? Of the dual surplus variables?
M in C = 100y 1 + 200y 2
S ubject to : 2y 1 + y 2 ≥ 10
y 1 + 3y 2 ≥ 15
y 1 + 1.25y 2 ≥ 10
y1 ≥ 0 , y2 ≥ 0 , y3 ≥ 0

VOF ( y )

(0,10) 2000

(1.667,6.667) 1500

(6.429, 2.857) 1214.286

(15,0) 1500
 Optimal Values: ​y​1​= 45/7 or 6.429; y​2​= 20/7 or 2.857

Surplus Variables:
1. 2y 1 + y 2 − t1 = 10
2 ( 45
7 ) + ( 7 ) − t2 = 10
20

t1 = 2 ( 45
7 ) + ( 7 ) − 10 = 40/7 or 5.715
20

- SURPLUS
2. y 1 + 3y 2 − t2 = 15 t2 = ( 45
7 )
+ 3 ( 20
7 )
− 15 = 0
- BINDING
3. y 1 + 1.25y 2 − t3 = 10 t3 ( 45
7 )
+ 1.25 ( 20
7 )
− 10 = 0
- BINDING

c. What is the maximum premium that Joey would pay for each extra square foot of
brass plate? For each hour of handcrafting?

- 45/7 or 6.429 ( y 1 ) is the maximum premium that Joey would pay for each extra
square foot of the brass plate. They are the opportunity costs of the available brass
plate (constraints of the primal).
- 20/7 or 2.857 ( y 2 ) is the maximum premium that Joey would pay for each extra
hour of handicrafting. They are the opportunity costs of the available hours of
handcrafting (constraints of the primal).

d. Solve the primal linear program using complementary slackness. How many sets
of each type of hinge should Joey make? What will Joey’s maximum profit be?
 If Then
y1 45/7 s1 0
y2 20/7 s2 0
t1 40/7 x1 (Baltic) 0
t2 0 x2 (Chic) 42.857
t3 0 x3 (Goethic) 57.1428

Using the complementary slackness property, we know that y1 and y2 are both >0 thats why s1
and s2 are = 0 in the constraints of the primal problem. This shows that the constraints in the
primal problem are binding.
2x1 + x2 + x3 ≤100
2x1 + x2 + x3 + s1 = 100
2 (0) + x2 + x3 + (0) = 100
x2 + x3 = 100

x1 + 3x2 + 1.25x3 ≤200

x1 + 3x2 + 1.25x3 + s2 = 200
(0) + 3x2 + 1.25x3 + (0) = 200
3x2 + 1.25x3 = 200

− 1.25 [x2 + x3 = 100]

3x2 + 1.25x3 = 200

1.75x2 = 75
300
x2 = 7 or 42.85714288

300 400
x3 = 100 − x2 = 100 − 7 = 7 or 57.14285714

M ax = 10x1 + 15x2 + 10x3

V OF (x) = 10 (0) + 15 (42.85714288) + 10 (57.14285714) = 1, 214.286
 Final Answer:
300 400
x1 = 0 , x2 = 7 or 42.85714288 , x3 = 7 or 57.14285714
V OF (x) = 1, 214.286

II. (20 pts.) BRJ manufactures three types of silicon chips for computers: central
processing unit (x1), integrated circuits (x2) and core memories (x3). The following
linear program applies:

M ax = 0.25x1 + 0.4x2 + 0.15x3

S ubject to : 0.005x1 + 0.02x2 + 0.01x3 ≤ 10, 000 (Silicon Sheets)
0.2 + 0.5x2 + 0.1x3 ≤ 200, 000 (Labor in minutes)
x1 ≥ 0 , x2 ≥ 0 , x3 ≥ 0

a. Formulate the dual problem and solve it graphically.

M in C = 10, 000y 1 + 200, 000y 2
S ubject to : 0.005y 1 + 0.2y 2 ≥ 0.25
0.02y 1 + 0.5y 2 ≥ 0.4
0.01y 1 + 0.1y 2 ≥ 0.15
y1 ≥ 0 , y2 ≥ 0

VOF ( y )

(0,1.5) 300, 000

(3.333, 1.167) 266, 666.667

(50, 0) 500, 000

 Optimal Values: y 1 = ( 10 3 ) or 3.333 ; y 2 = ( 76 ) or 1.1667
1. 0.005y 1 + 0.2y 2 − t1 = 0.25
t1 = 0.005y 1 + 0.2y 2 − 0.25
t1 = 0.005 ( 103 ) + 0.2 ( 6 ) − 0.25 = 0
7

- ​BINDING
2. 0.02y 1 + 0.5y 2 − t2 = 0.4
t2 = 0.02y 1 + 0.5y 2 − 0.4
t2 = 0.02 ( 10
3 ) + 0.5 ( 6 ) − 0.4 = 0.25
7

- SURPLUS
3. 0.01y 1 + 0.1y 2 − t3 = 0.15
t3 = 0.01y 1 + 0.1y 2 − 0.15
t3 = 0.01 ( 10
3 ) + 0.1 ( 6 ) − 0.15 = 0
7

- ​BINDING

b. What is the maximum premium that BRJ would pay for one additional silicon
sheet? For one additional minute of labor?

- 10/7 or 3.333 ( y 1 ) is the maximum premium that BRJ would pay for one
additional silicon sheet.They are the opportunity costs of the available silicon
sheet (constraints of the primal).
- 7/6 or 1.1667 ( y 2 ) is the maximum premium that BRJ would pay for one
additional minute of labor. They are the opportunity costs of the available labor
(constraints of the primal).
 c. Use the principle of complementary slackness to determine the solution to the
primal linear program algebraically.
If Then
y1 10/3 s1 0
y2 7/6 s2 0
t1 0 x1 (CPU) 666,666.67
t2 0.25 x2 (Integrated Circuits) 0
t3 0 x3 (Core Memories) 666,666.67

Using the complementary slackness property, we know that y1 and y2 are both >0 thats why s1
and s2 are = 0 in the constraints of the primal problem. This shows that the constraints in the
primal problem are binding.

0.005x1 + 0.02x2 + 0.01x3 ≤10, 000

0.005x1 + 0.02x2 + 0.01x3 + s1 = 10, 000
0.005x1 + 0.02(0) + 0.01x3 + (0) = 10, 000
0.005x1 + 0.01x3 = 10, 000

0.2x1 + 0.5x2 + 0.1x3 ≤200, 000

0.2x1 + 0.5x2 + 0.1x3 + s2 = 200, 000
0.2x1 + 0.5(0) + 0.1x3 + (0) = 200, 000
0.2x1 + 0.1x3 = 200, 000

0.2x1 + 0.1x3 = 200, 000

(− 1/0.1) (0.005x1 + 0.01x3 = 10, 000)

0.15x1 = 100, 000

x1 = 666, 666.667

0.2x1 + 0.1x3 = 200, 000

0.2(666, 666.667) + 0.1x3 = 200, 000
0.1x3 = 200, 000 - 0.2(666, 666.667)
0.1x3 = 200,000/3
x3 = 666,666.667
 M ax = 0.25x1 + 0.4x2 + 0.15x3
= 0.25(666, 666.667) + 0.4(0) + 0.15(666, 666.667) = 266, 666.67

Final Answer:
x1 = 666, 666.667 , x2 = 0 , x3 = 666, 666.667
V OF (x) = 266, 666.67
d. Suppose that BRJ can manufacture an all-purpose video game chip at a profit of
P1 per chip. If each game chip requires 0.01 silicon sheet and 0.4 minute of labor,
should any game chips be made?
- Idea: Opportunity Cost ≤ Profit
0.1y 1 + 0.4y 2 ≤ 1
y1 = ( 103 ) or 3.333 ; y2 = ( 76 ) or 1.1667
0.1(3.333) + 0.4(1.1667) ≤ 1
0.79998 ≤ 1

- All-purpose video game chips should be made because the opportunity cost of
producing it is lesser than the profit per chip.

i. SELL VIDEO GAME CHIPS (X4) IN CONJUNCTION WITH CPU

(X1), INTEGRATED CIRCUITS (X2), CORE MEMORIES: ​500,000
video game chips should be made
M ax = 0.25x1 + 0.4x2 + 0.15x3 + 1x4
Constraints:
0.005x1 + 0.2 + 0.01x3 + 0.01x4 ≤ 10,000
0.2x1 + 0.5 + 0.1x3 + 0.4x4 ≤ 10,000
x1 ≥ 0 , x2 ≥ 0 , x3 ≥ 0 , x4 ≥ 0
 DUAL: M in C = 10, 000y 1 + 200, 000y 2
Constraints:
0.005y 1 + 0.2y 2 ≥ 0.25
0.02y 1 + 0.5y 2 ≥ 0.4
0.01y 1 + 0.1y 2 ≥ 0.15
0.01y 1 + 0.4y 2 ≥ 1
y1 , y2 ≥ 0

ANSWER USING EXCEL SOLVER: