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BA245 - Lesson4 - Activity 4 - Optimization

This document contains a lesson on constrained optimization from a Managerial Economics course at Cavite State University. It discusses various solution methods for constrained optimization problems, including substitution, Lagrange multipliers, and using Solver in Excel. Students are assigned an activity to solve several constrained profit maximization problems using these different methods and submit their work by January 14, 2021.

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56 views

BA245 - Lesson4 - Activity 4 - Optimization

This document contains a lesson on constrained optimization from a Managerial Economics course at Cavite State University. It discusses various solution methods for constrained optimization problems, including substitution, Lagrange multipliers, and using Solver in Excel. Students are assigned an activity to solve several constrained profit maximization problems using these different methods and submit their work by January 14, 2021.

Uploaded by

Kevin Pereña Guinsisana
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Cavite State University

Office of the Graduate School and Open Learning College

BA 245
Managerial Economics
First Semester, AY 2020-2021

LESSON 4
CONSTRAINED OPTIMIZATION

Introduction

In mathematical optimization, constrained optimization (in some contexts called constraint


optimization) is the process of optimizing an objective function with respect to
some variables in the presence of constraints on those variables. The objective function is
either a cost function or energy function, which is to be minimized, or a reward
function or utility function, which is to be maximized. Constraints can be either hard
constraints, which set conditions for the variables that are required to be satisfied, or soft
constraints, which have some variable values that are penalized in the objective function if,
and based on the extent that, the conditions on the variables are not satisfied.

A general constrained minimization problem may be written as follows:

Min f (x)
Subject to gi ( x ) =Ci for I = 1,….,n equality constraint
h j ( x) ≥ d j for j = 1,….,m inequality constraint
where gi(x) and hi(x) are constraints that are required to be satisfied (these are called hard
constraints), and f(x) is the objective function that needs to be optimized subject to the
constraints.

In some problems, often called constraint optimization problems, the objective function


is actually the sum of cost functions, each of which penalizes the extent (if any) to which
a soft constraint (a constraint which is preferred but not required to be satisfied) is
violated.

Solution Methods

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and Uphold the University’s tenets of Truth, Excellence, and Service to produce globally competitive and morally upright individuals.
Substitution method
For very simple problems, say a function of two variables subject to a single equality
constraint, it is most practical to apply the method of substitution. The idea is to substitute the
constraint into the objective function to create a composite function that incorporates the
effect of the constraint. For example, assume the objective is to maximize f ( x , y )=x∗y ff  
subject to + y =10 x. The constraint implies  y=10−x y, which can be substituted into the
objective function to create  p ( x ) =x ( 10−x ) =10 x −x2 . The first-order necessary condition

∂p
gives  =10−2 x=0, which can be solved for x=5x and, consequently,  y=10−5=5 y.
∂x

Lagrange multiplier

If the constrained problem has only equality constraints, the method of Lagrange
multipliers can be used to convert it into an unconstrained problem whose number of
variables is the original number of variables plus the original number of equality constraints.
Alternatively, if the constraints are all equality constraints and are all linear, they can be
solved for some of the variables in terms of the others, and the former can be substituted out
of the objective function, leaving an unconstrained problem in a smaller number of variables.

Given the problem of maximizing U =x1 x 2+2 x 1 subject to the constraint 4 x1 +2 x 2=60, let
us write what is referred to as the Lagrangian function, which is a modified version of the
objective function that incorporates the constraint as follows:

Z=x 1 x 2+ 2 x 1 + λ(60−4 x1 −2 x 2)

The symbol λ representing some as yet undetermined number is called a Lagrange multiplier.

The following simultaneous equations are derived as first-order condition for maximum
(extremum):

∂Z
(
Zλ ≡
∂λ )
=60−4 x 1−2 x 2=0

∂Z
(
Z1 ≡
∂ x1 )
=x 2 +2−4 λ=0

∂Z
(
Z2 ≡
∂ x2 )
=x 1−2 λ=0

We Commit to the highest standards of education, value our stakeholders, Strive for continual improvement of our products and services,
and Uphold the University’s tenets of Truth, Excellence, and Service to produce globally competitive and morally upright individuals.
The first equation will guarantee the satisfaction of the constraint. Thus, by incorporating the
constraint into the Lagrangian function Z and by treating the Lagrange multiplier as an extra
variable, we can obtain the constrained maximum U.

Solving the three equations simultaneously for the critical values of the variables, we find
x́ 1=8 , x́ 2=14∧ λ́=4, and the value of our objective function Ź=128.

To solve for the optimization problem with two or more constraints we can use Solver
application using MS Excel. Follow the link https://www.solver.com/excel-solver-tutorial-
step-step-product-mix-example-excel for the step-by-step procedure on creating a Solver
model.

We Commit to the highest standards of education, value our stakeholders, Strive for continual improvement of our products and services,
and Uphold the University’s tenets of Truth, Excellence, and Service to produce globally competitive and morally upright individuals.
Activity

Solve for the following.

1. A firm’s total profit is given by π=20 x−x 2 +16 y−2 y 2.

1.1. What values of x and y will maximize the firm’s profit?

1.2. What values of x and y will maximize profit if the firm faces the constraint
x+y=8?
1.3. What values of x and y will maximize profit if the firm faces the constraint
x+0.5y=7.5?
1.4. Repeat 1.2 using Solver.
1.5. Repeat 1.3 using Solver.
1.6. Use Solver to solve Z=x2+2xy+yw2, subject to 2x+y+w2=24 and x+w=8.

Online sources:
https://www.solver.com/excel-solver-tutorial-step-step-product-mix-example-excel
https://en.wikipedia.org/wiki/Constrained_optimization#:~:text=In%20mathematical%20optimization
%2C%20constrained%20optimization,of%20constraints%20on%20those%20variables.
Other sources:
Chiang, A. C., Fundamental Method of Mathematical Economics. 3rd Ed.
Samuelson, W.F., Marks, S.G., Managerial Economics. 4th Ed.

Save your file as BA245_Activity4_(Surname+FirstName)_(MBA_CvSU)


Send a copy of your activity to [email protected]. Deadline of submission of
output is until 9:00 am, January 14, 2021 (Thursday)

Prepared by:

MARLON A. MOJICA, PhD

We Commit to the highest standards of education, value our stakeholders, Strive for continual improvement of our products and services,
and Uphold the University’s tenets of Truth, Excellence, and Service to produce globally competitive and morally upright individuals.

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