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Lecture 5 (Duality Interpretation)

The document discusses the economic interpretation of duality in linear programming problems. It provides an example of a company that manufactures two products using limited raw materials and labor hours. The dual problem involves renting out these resources to maximize total rent. The shadow prices from the dual problem represent the marginal value or worth of the resources. These imputed prices indicate whether renting or self-production is more profitable for the company.

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RHEA MARISSA ROCH
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80 views12 pages

Lecture 5 (Duality Interpretation)

The document discusses the economic interpretation of duality in linear programming problems. It provides an example of a company that manufactures two products using limited raw materials and labor hours. The dual problem involves renting out these resources to maximize total rent. The shadow prices from the dual problem represent the marginal value or worth of the resources. These imputed prices indicate whether renting or self-production is more profitable for the company.

Uploaded by

RHEA MARISSA ROCH
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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ECONOMIC INTERPRETATION OF DUALITY

Consider the following example as primal


 A company manufactures two products ‘A’ and ‘B’.
– Each of product ‘A’ gives:
 Profit of Rs. 40
 Requires 2 kgs of raw materials.
 Requires 4 labuor hours for finishing.

– Each of product ‘B’ gives:


 Profit of Rs. 35
 Requires 3 kgs of raw materials.
 Requires 3 labuor hours for finishing.
continued
 Each week ABC can obtain:
– Only 60 kgs of raw materials.
– Only 96 labour hours.
 ABC wants to maximize weekly profit.
 Formulate a mathematical model of ABC’s situation
that can be used to maximize weekly profit.
ECONOMIC INTERPRETATION OF DUALITY
We noted that the primal and the dual are related
mathematically, we can now show that they are also
related in economic sense. Consider the economic
interpretation of the dual of the following primal problem.

Primal LPP Dual LPP

Max Z  40 x1  35 x2 Min w  60 y1  96 y2
w.r.t 2 x1  3x2  60 w.r.t 2 y1  4 y2  40
4 x1  3x2  96 3 y1  3 y2  35
and x1 , x2  0 and y1 , y2  0
Optimum Simplex Table
Cj 40 35 0 0

CB Basis Soln. x1 x2 s1 s2

35 x2 8 0 1 2/3 -1/3

40 x1 18 1 0 -1/2 1/2

Zj 1000 40 35 10/3 25/3

= Cj - Zj 0 0 -10/3 -25/3
j
In the above Simplex Table we found all the elements in
j row
are either zero or negative. Therefore the above table is optimum.

Optimum solution is x1= 18, x2 =8 and Maximum value of Z= 1000.


ECONOMIC INTERPRETATION OF DUALITY

Now, ABC wants to rent its two types of resources


i.e. raw material and labour hour to the another
firm for one week.

ABC has 60 kgs of raw material and 96 labour hours.

Let y1 represent the rent per kg of raw material and


y2 the rent per labour hour.

Therefore, the total rent, w (say) = 6Oy1 + 96y2.

ABC would receive a total rent equal to 6Oy1 + 96y2.

The other firm shall compute the minimum value of


the total rent so that the firm will know what
minimum offer shall be economically acceptable to
it.
ECONOMIC INTERPRETATION OF DUALITY
For ABC, the lower limit can be set up after keeping in
mind that the alternative to renting must be at least as
favourable as using the capacity itself.

The rent of the resources should be at least equal to


the earnings from producing products x1 and x2.

We know that production of one unit of A requires 2


kg of raw material and 4 labour hours.

Thus, the total rent for these amounts of resources


should be greater than, or equal to, the profit
obtainable from one unit of the product A, i.e. Rs. 40.
Hence, 2y1+4y2 >= 40
Similarly, the resources consumed in producing one
unit of product B are 3 kg of raw material and 3 labour
hours.
ECONOMIC INTERPRETATION OF DUALITY
The total rent of these resources should equal to at
least Rs. 35, the unit profit of product B.
i.e., 3y1 + 3y2 >= 35

Besides, the rent cannot be negative. Therefore, y1 and


y2 should both be non negative.

In complete form, the problem can be expressed as:


Min w  60 y1  96 y2
w.r.t 2 y1  4 y2  40
3 y1  3 y2  35
and y1 , y2  0
The rates y1 and y2 are obtainable from the solution of
the dual as y1 = 10/3 and y2 = 25/3. Also, these
values can be obtained from ∆j row of optimal simplex
table of the primal problem.
As we have seen, values of the objective function of
the primal and the dual are identical. Naturally, the
minimum total rent acceptable to the firm is equal to
the maximum profit that ABC can earn by producing
the output itself using the given resources.

The individual rents of y1 and y2 are called the


shadow prices or imputed prices.

They indicate the worth of the resources. These


prices, of the two resources, materials and labour
hours, are imputed from the profit obtained front
utilizing their services, and are not derived from the
from the original cost of these resources.
Now we know that each unit of product A contributes Rs.
40 to the profit. The imputed price of material and capacity
is respectively, Rs. 10/3 per kg and 25/3 per hour, we can
find the total imputed cost of the resources for one unit of
product A as:

2 kg @ Rs. 10/3 per kg i.e., 2 X 10/3 = 20/3 Rs.


4 hours @ Rs. 25/3 per kg. = 4 X 25/3 = 100/3 Rs.
The total cost is 120/3 = 40 Rs.
Thus, the total imputed cost of producing one unit of
product A equals the per unit profit obtainable from it.

Similarly, from each unit of product B, the total imputed


cost of resources employed would be:

3 kg @ Rs.10/3 per kg = 3 x lO/3 = 10 Rs.


3 hours @ Rs. 25/3 per hour 3 x 25/3 = 25 Rs.
The total cost is 10 + 25 = 35 Rs.
This obviously equals the profit per unit of the product B.
The shadow prices are also called the marginal value
products or marginal profitability of the
resources.

Thus, if there is a market for renting resources, the


firm ABC would be willing to take some materials if the
price of the material were less than Rs. 10/3 per kg, and
capacity hours, if the price is less than Rs. 25/3 per hour.
Now let us consider the economic significance of the
surplus variables S1 and S2 in the dual.

The numerical values of these variables can be obtained


from ∆j row in the optimal solution of the primal.

The value of S1 in the optimal solution represents the


opportunity cost of the product A while the value of S2
represents the opportunity cost of product B.

Production of an additional unit of A will give the firm a


profit of Rs. 40 and, at the same time, the firm would
use up resources worth 2 x 10/3 + 4 x 25/3 = Rs. 40.
Thus, the net effect of producing one unit of product
would be 40 - 40 = 0. Similarly, for product B the
opportunity cost equals zero.
Further if x1, x2 is a feasible solution to the primal and y1,
y2 is the feasible solution to its dual Then,

c1 x1  c2 x2  b1 y1  b2 y2

i.e. [profit obtained is less than or equal to the rents to be


paid. This would induce the producer to rent the resources
rather than produce the goods himself.]

The concept of dual and shadow prices help us in


determining the upper and lower bounds for changes
in requirement vectors and coefficients in the objective
function. Such that the feasibility of the LPP is not
disturbed.

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