A.

Assignment -1 (10%)
1ST Qustion
1. Consider a firm that is planning an advertising campaign for a new product. Goals set
for the campaign include exposure to at least 100,000 individuals, no fewer than 80,000
of whom have an annual income of at least $50,000 and no fewer than 40,000 of whom
are single. For simplicity, assume that the firm has only radio and television media
available for this campaign. One television advertisement costs $10,000 and is expected
to reach an average audience of 20,000 persons. Ten thousand of these individuals will
have an income of $50,000 or more, and 4,000 will be single. A radio advertisement costs
$6,000 and reaches a toal audience of 10,000, all of whom have at least $50,000 in
income. Eight thousand of those exposed to a radio advertisement are single.
Its summarized as below

Radio Television
Cost per adv 6,000 10,000
Total audience per advert 10,000 20,000
Audience per ad. With income > 50,000 10,000 10,000
Un married audience per ad. 8,000 4,000
a. Using simple method, solve for firms cost minimization level of number of
advertisement via both radio and television
b. What is the optimal level of advertisement cost
c. Solve using dual problem i.e Maxim C*=100,000VA+80,000V1+40,000Vs

Answers:-

a. Using simple method, solve for firms cost minimization level of number of
advertisement via both radio and television
Let R=Radio TV=Television

objective function Zmin=6000R+10,000TV

Subject to Constraint 10,000R+20,000TV > 100,000

10,000R+10,000TV> 80,000

8,000R+4,000TV > 40,000

R,TV > 0

Standard form :-Objective function: Zmin=6,000R+10,000TV +0S1+0S2+0S3+MA1+MA2+MA3

Subject to Constraint: 10,000R+20,000TV-S1+A1=100,000

10,000R+10,000TV-S2+A2 = 80,00

8,000R+4,000TV-S3+A3 = 40,000

1
BVi Cj 6,000 10,000 0 0 0 M M M Sol Ratio

R TV S1 S2 S3 A1 A2 A3

M A1 10,000 20,000 -1 0 0 1 0 0 100,000 5 Smallest

M A2 10,000 10,000 0 -1 0 0 1 0 80,000 8

M A3 8,000 4,000 0 0 -1 0 0 1 40,000 10

Zj 28,000M 34,000M -M -M -M M M M

Cj-Zj 6000-28000M 10,000-34,000M M M M 0 0 0

TABLE-1

Largest No

Our Pivotal{d12}=20,000

TABLE-2

BVi Cj 6,000 10,000 0 0 0 M M Sol Ratio

R TV S1 S2 S3 A2 A3

10,000 TV ½ 1 -1/20,000 0 0 0 0 5 10

M A2 5,000 0 ½ -1 0 1 0 30,000 6

M A3 6,000 0 1/5 0 -`1 0 1 20,000 5/3 Smallest

Zj 5,000+11,000m 10,000 -1/2+7/10m -M _-M M M

Cj-Zj 1,000-11,000M 0 ½-7/10M M M 0 0

2
 Largest negative No.

Our Pivotal No{d31}=6,000

TABLE-3
Ratio
BVi Cj 6,000 10,000 0 0 0 M Sol

R TV S1 S2 S3 A2

10,000 TV 0 1 -1/15,000 0 1/12,000 0 2

M A2 0 0 1/3 -1 5/6 1 65,000/3

6,000 R 1 0 1/30,000 0 -1/6,000 0 6

Zj 6,000 10,000 -7/15+1/3M -M -1/6-5/6M -M 56,000

Cj-Zj 0 0 7/15+1/3M M 1/6+5M/6 M

3
Conclusion: - The number we get in the Cj-Zj row the is positive so we stop on this
TV = 2
R=6
B. What is the optimal level of advertisement cost
Profit (Z) = 6000R+10,000TV
Z = 6000x6+10,000x2
Z= 60,000+20,000
Z= 56,000

C. Solve using dual problem i.e. Maxim C*=100,000VA+80,000V1+40,000Vs

Given: Objective function Zmin=6000R+10,000TV
Subject to Constraint 10,000R+20,000TV > 100,000
4
 10,000R+10,000TV > 80,000

8,000R+4,000TV > 40,000

R,TV > 0

Answer:- Let’ V’ our variables

Analysis 10,000R+10,000R+8,000R 6,000X1

20,000R+10,000R+4,000R 10,000X2

Objective function Maxim C*=100,000VA+80,000V1+40,000Vs

subject to constraint:- 10,000VA+10,000V1+8,000VS < 6,000

20,000VA+10,000V1+4,000VS < 10,000

VA,V1,VS > 0Change to standard for

Maximization C*=100,000VA+80,000V1+40,000Vs+0S1+0S2

subject to constraint:-10,000VA+10,000V1+8,000VS+S1= 6,000

20,000VA+10,000V1+4,000VS+S2=10,000

VA,V1,VS > 0

TABLE-1
Cj 100,000 80,000 40,000 0 0

BVi VA V1 VS S1 S2 Sol Ratio

5
0 S1 10,000 10,000 8,000 1 0 6,000 3/5

0 S2 20,000 10,000 4,000 0 1 10,000 ½

smallest

Z 0 0 0 0 0

Cj-Zj 100,000 80,000 40,000 0 0

Largest No.
Our pivotal No. {d21}=20,000
TABLE-2
Cj 100,000 80,000 40,000 0 0

BVi VA V1 VS S1 S2 Sol Ratio

0 S1 0 5,000 6,000 1 -1/2 1,000 1/5 smallest

100,000 VA 1 ½ 1/5 0 1/20,000 ½ 1

Z 100,000 50,000 20,000 0 5

Cj-Zj 0 30,000 20,000 0 -5

Largest No.
Our pivotal No.{d12}=5,000

6
TABLE-3
Cj 100,000 80,000 40,000 0 0

BVi VA V1 VS S1 S2 Sol Ratio

10,000 V1 0 1 6/5 1/5,000 -1/10,000 1/5

100,000 VA 1 0 -2/5 -1/10,000 1/10,000 2/5

Z 100,000 10,000 28,000 -8 9 22,000

Cj-Zj 0 70,000 12,0000 8 -9

Conclusion:- We get our variable at column of cj fully and the result of Cj-Zj raising again,
so we stop our work on this and result was below
V1=1/5=0.2
VA=2/5=0.4
VS=0
Max C*=100,000VA+80,000V1+40,000VS
Max C*=100,000(0.4)+80,000(0.2)+40,000(0)

MaxC*=56,000
7
 OR We done by another method
objective function Zmin=6000R+10,000TV
Subject to Constraint 10,000R+20,000TV > 100,000

10,000R+10,000TV> 80,000

8,000R+4,000TV > 40,000

R,TV > 0

Change to standard form

8
Minimize Cost = $6,000R + $10,000TV
subject to
10,000R + 20,000TV – S1+A1 = 100,000
10,000R + 10,000TV – S2+A2 = 80,000
8,000R + 4,000TV – S3+A3 = 40,000
R, TV, SA, SI, and SS ≥ 0

R
12

11
FEASIBLE SPACE
10

9 10,000R+20,000TV=100,000

9
7

6 M

5 10,000R+10,000TV=80,000

3
Isocost =56,000 8,000R+4,000TV=40,000

1 TV
0 1 2 3 4 5 6 7 8 9 10

a.Using simple method, solve for firms cost minimization level of number of advertisement via both radio and
television
Linear Programming
The feasible space is bordered by the three constraint equations and the non negativity requirements. An isocost
curve shows that costs are minimized at point M, where the total audience exposure and income constraints are
binding. With these constraints binding, slack variables S1 = S2= 0. Thus,
10,000R + 20,000TV = 100,000
minus 10,000R + 10,000TV = 80,000
10,000TV = 20,000
TV = 2
and
10,000R + 20,000(2) = 100,000
10,000R = 60,000
R=6
The firm should employ six radio advertisements and two television advertisements to minimize
10
costs while still meeting audience exposure requirements. Total cost for such a campaign
A. What is the optimal level of advertisement cost
Minimize Cost = $6,000R + $10,000T
Minimize Cost = $6,000X6 + $10,000X2
=$36,000+$20,000
=$56,000
C .Solve using dual problem i.e Maxim C*=100,000VA+80,000V1+40,000Vs
The dual to the advertising-mix problem is a constrained-maximization problem, because the primal is a
minimization problem. The objective function of the dual is expressed in terms of shadow prices or implicit values for
the primal constraint conditions. The dual objective function includes an implicit value, or shadow price, for the
minimum audience exposure requirement, the audience income requirement, and the marital status requirement.
Because constraint limits in the primal problem become the dual objective function coefficients, the dual objective
function is

Maximize C* = 100,000VA + 80,000VI + 40,000VS

Subject to:10,000VA + 10,000VI + 8,000VS ≤ $6,000
20,000VA + 10,000VI + 4,000VS ≤ $10,000
Following the introduction of constraint slack variables, the dual programming problem is
Maximize C* = 100,000VA + 80,000VI + 40,000VS+0S1+0S2
subject to
10,000VA + 10,000VI + 8,000VS + S1 = $ 6,000
20,000VA + 10,000VI + 4,000VS + S2 = $10,000
VA, VI, VS, S1, and S2≥ 0

11
Solving the Dual
It is possible but difficult to solve this dual problem using a three-dimensional graph or the simplex
method. However, because the primal problem has been solved already, information from this solution
can be used to easily solve the dual. Remember that the solutions to the primal and dual of a single
linear programming problem are complementary, and the following must hold:
Primal Objective Variable i _ Dual Slack Variable i = 0
Primal Slack Variablej _ Dual Objective Variablej = 0
In this linear programming problem,
R _ S1 = 0 and TV _ S2 = 0
And SA _ VA = 0, SI _ VI = 0, and SS _ VS = 0
Because both R and TV have nonzero solutions in the primal, the dual slack variables S1and S2 must
equal zero at the optimal solution. Furthermore, because there is excess audience exposure to the single
marital status category in the primal solution, SS ≠ 0, the related dual shadow price variable VS must also
equal zero in the optimal solution. This leaves only VA and VI as two
unknowns in the two-equation system of dual constraints:
10,000VA + 10,000VI = $ 6,000
20,000VA + 10,000VI = $10,000
Subtracting simultaneously the second constraint equation from the first gives
–10,000VA = –$4,000
VA = $0.40
12
10,000VA + 10,000VI = $ 6,000
10,000[0.40]+ 10,000VI = $ 6,000
VI=$0.2

Max C*=100,000VA+80,000V1+40,000VS
Max C*=100,000[O.4]+80,000[0.2]+40,000[0]
Max C*=$56,000

2nd question
2. Minimization case

13
Use Artificial variables: are assigned a large cost in the objective function to eliminate them from the
final solution
a. Find the optimal number of super- gro fertilizer(x1) and crop quick fertilizer (x2), and farmers
total cost

14
Answer:-
Objective function:-Min z=6x1+3x2+0s1+0s2
Subject to:-2x1+4x2-s1+A1=16
4x1+3x2-s2+A2=24
X1, x2, s1, s2 > 0

TABLE-1
BVi Cj 6 3 0 0 M M Sol Ratio

X1 X2 S1 S2 A1 A2

M A1 2 4 -1 0 1 0 16 4 smallest
No

M A2 4 3 0 -1 0 1 21 7

Zi 6M 7M -M -M M M

Cj-Zj 6-6M 3-7M M M 0 0

15
 Largest Negative No.
A1 Column must out
Our pivotal No{d12}=4

TABLE-2

BVi Cj 6 3 0 0 M Sol Ratio

X1 X2 S1 S2 A2

3 X2 1 -1/4 0 0 4 8
½
M A2 5/2 0 -1 1 9 18/5 smallest NO
¾
Zi 3/2+5M/2 3 -3/4+3M/4 -M M

Cj-Zj 9/2-5M/2 0 M 0
3/4-3M/4

16
 Largest negative No.
A2 column must out
Our pivotal No{d12}=5/2

TABLE-3

BVi Cj 6 3 0 0 Sol Ratio

X1 X2 S1 S2

3 X2 0 1 -2/5 1/5 11/5

6 X1 1 0 3/10 -2/5 18/5

Zi 6 3 3/5 -9/5
17

Cj-Zj 0 0 -3/5 9/5

 X1= 18/5
X2=11/5
Min Z=6x1+3x2
Min Z:6[18/5]+3[11/5]=28.2

B. Assignment 2
1. Demand Curves. ISHO-garment is contemplating a T-shirt advertising promotion. Monthly sales data from T-
shirt shops marketing indicate that
Q=1,500–200P
• Where Q is T-shirt sales and P is price.
a. How many T-shirts could ISHO-garment sell at $4.50 each?
18
 Solution:-
Given: P=4.5
Q=1,500-200(4.5) = 1,500-900 = 600
b. What price would ISHO-garment have to charge to sell 900 T-shirts?
Given: Q=900
Q=1,500-200P
900=1,500-200P
900-1,500=-200P
P=3
c. At what price would T-shirt sales equal zero?
Given:Q=0
Q=1,500-200P
0=1,500-200P
200P=1,500
P = 7.5
d. How many T-shirts could be given away?
Given P=0
Q=1,500-200P
Q=1,500-200(0)
Q = 1,500

e. Calculate the point price elasticity of demand at a price of $5

19
 Given: P=5
Q=1,500-200(5)
Q=1,500-1000
Q=500
Ep= ∆Q/∆P .P/Q= -200(5/500)
EP= -2
Ep=Inelastic
2. Optimal Pricing. In an effort to reduce excess end-of-the-model-year inventory, Harrison Ford offered a
2.5% discount off the average list price of Focus SE sedans sold during the month of August. Customer
response was enthusiastic, with unit sales rising by 10% over the previous month’s level.
A. Calculate the point price elasticity of demand for Harrison Ford Focus SE sedans.
Given: %∆Q=10 rising
%∆P=2.5 discount
EP=%∆Q/%∆P=10/2.5
Ep = 4

B. Calculate the profit-maximizing price per unit if Harrison Ford has an average wholesale cost of $10,000 and
incurs marginal selling costs of $875 per unit.
Given:AC=10,000
MC=875
Eps = 4
Profit maximization (P)=MC = 875 =700
20
 (1+1/EP) (1+1/4)

C. ASSIGNMENT 3, 10%.
1. Determine whether the following production functions exhibit constant, increasing, or decreasing returns to scale.
A. Q = 0.5X + 2Y + 40Z
B. Q = 3L + 10K + 500
C. Q = 4A + 6B + 8AB
D. Q=7L2+5LK+2K2
E. Q=10L0.5K0.3
Answers

Assume that all inputs in the unspecified production function Q = f(X, Y, Z) are increased by using the constant factor
k, where k = 1.01 for a 1 percent increase, k = 1.02 for a 2 percent increase, and so on. Then, the production is
hQ = f(kX, kY, kZ)

 If h > k, then the percentage change in Q is greater than the percentage change in the inputs,
Q > 1, and the production function exhibits increasing returns to scale.
 If h = k, then the percentage change in Q equals the percentage change in the inputs, Q = 1,
and the production function exhibits constant returns to scale.
 If h < k, then the percentage change in Q is less than the percentage change in the inputs,
21
Q < 1, and the production function exhibits decreasing returns to scale.

A. Q = 0.5X + 2Y + 40Z
Let X=100, Y=200, Z=300
Q = 0.5X + 2Y + 40Z
Q1 = 0.5(100)+ 2(200 )+ 40(300)
Q1=50+400+12,000
Q1=12,450

Since the value of K=1.02

X=102,Y=204,Z=306
Q2=0.5(102) + 2(204) + 40(306)
Q2=51+408+12,240
Q2=12,699

22
The result is K=Q2/Q1=12,699/12,450=1.02 which means the value of our production
function is equal to production output , Because a 2 percent increase in all inputs has led to a
2 percent increase in output (1.02 =12,699/12450), this production system exhibits constant
returns to scale

B. Q = 3L + 10K + 500
Consider the same step of the above equation ,
Let we increase our input by 4 percent which means K= 1.04
The L=200, K=300

Q1 = 3(200) + 10(300)+ 500

23
 = 600 +3000 +500
= 4100
Since we increases our in put k by 4 % L=208, k=312 then insert the value
Q2= 3(208) + 10(312) + 500
= 624 +3120 +500
= 4244
Output = Q2/Q1 =4244/4100 =1.108
Because a 4 percent increase in all inputs has led to a 3.5 percent increase in output (1.035 =
4244/4,100), this production system exhibits decreasing returns to scale.
C. Q = 4A + 6B + 8AB
Consider the same step of the above equation ,
Let we increase our input by 1 percent which means K= 1.01
A=100,B=200
Q1 = 4(100) + 6(200)+ 8(100)(200)
Q1=400+1,200+160,000
Q1=161,600
If we increase input by 1 percent
A=101,B=202
Q2 = 4(101) + 6(202)+ 8(101)(202)
24
 Q2= 404+1212+163,216
Q2=164,832
Q2/Q1=164,832/161,600=1.02
Because a 1 percent increase in all inputs has led to a 2 percent increase in output (1.02 =164,832/161), this
production system exhibits increasing returns to scale.
D. Q=7L2+5LK+2K2
Input L,K 1 2 3 4 5 6 7
Q/output 14 56 126 224 350 504
Change 42 70 98 126 154
Q The change shows contant
350

224

126

56

14

1 2 3 4 5 6 7
25
 Input L, K

This production system exhibits constant returns to scale

E. Q=10L0.5K0.3
Input L,K 1 2 3 4 5 6 7
Q/output 10 17.4 24.1 30.3 36.2 41.9 47.4
Change
7.4 6.7 6.2 3.7

47
The change shows
decreasing
41
36 .
30

.
24
.
17

10
26
 1 2 3 4 5 6 7

Input L,K

This production system exhibits decreasing returns to scale

2. Suppose the production Function of Adama metal sheet company is estimated as follows:
Q=BOLb1Kb2Eb3
Where
Q = output
L = labor input in worker hours
K = capital input in machine hours
E = energy input in
Each of the parameters of this model was estimated by regression analysis using monthly data over a
recent 3-year period. Coefficient estimation results were as follows:
ˆb0 = 0.9; ˆb1 = 0.4; ˆb2 = 0.4; ˆb3 = 0.2
27
The standard error estimates for each coefficient are
ˆb0 = 0.6; ˆb1 = 0.1; ˆb2 = 0.2; ˆb3 = 0.1
a. Estimate the effect on output of a 1% decline in worker hours (holding K and E constant).
b. Estimate the effect on output of a 5% reduction in machine hours availability accompanied by a 5%
decline in energy input (holding L constant).
c. Estimate the returns to scale for this production system

Answer :-
Calculation1
Q=BOLb1Kb2Eb3
ΔQ/ ΔL.L/Q
ΔQ/ ΔL = d/dQ(BOLb1Kb2Eb3)= Bob1Lb1-1Kb2Eb3
ΔQ/ ΔK=d/dK(BOLb1Kb2Eb3)= BoLb1 b2Kb2-1Eb3
ΔQ/ ΔE=d/dE(BOLb1Kb2Eb3)= BoLb1Kb2 b3Eb3-1
1. ΔQ/ ΔL.L/Q = Bob1Lb1-1Kb2Eb3 .L/ BOLb1Kb2Eb3= b1Lb1-1 .L / Lb1 =b1
2. ΔQ/ ΔK.K/Q = BoLb1 b2Kb2-1Eb3.L/ BOLb1Kb2Eb3= b2kb2-1 .L / kb1 =b2
28
 3. ΔQ/ ΔE.E/Q = BoLb1Kb2 b3Eb3-1 / BOLb1Kb2Eb3= b3Eb3-1 .L / Eb1 =b3
A.Estimate the effect on output of a 1% decline in worker hours (holding K and E
constant).
Given:- ΔL/L=1%=-0.01 Decline
Because (ΔQ/Q)/(ΔL/L) is the percent change in Q due to a 1% change in L
ΔQ/ Q /ΔL/L=b1
ΔQ/ Q=b1 ΔL/L=0.4X-0.01=-0.004=-0.04%
B. Estimate the effect on output of a 5% reduction in machine hours
availability accompanied by a 5% decline in energy input (holding L
constant).
From calculation 1and part A it is obvious that
Given:- ΔK/K=5%=-0.05 decline
ΔE/E=5%=-0.05decline
ΔQ/Q = b2(ΔK/K) + b3(ΔE/E)
ΔQ/Q= 0.4(–0.05) + 0.2(–0.05)
ΔQ/Q = –0.03 or –3%

C. Estimate the returns to scale for this production system

29
In the case of Cobb-Douglas production functions, returns to scale are determined by simply
summing exponents because
Q = b0Lb1Kb2Eb3
KQ = b0(kL)b1(kK)b2(kE)b3
K(b0Lb1Kb2Eb3) =kb1+b2+b3b0Lb1Kb2Eb3
K = K(b1+b2+b3}
Here b1 + b2 + b3 = 0.4 + 0.4 + 0.2 = 1 indicating constant returns to scale. This means that a
1% increase in all inputs will lead to a 1% increase in output, and average costs will remain constant as
output increases.

30