INDIAN INSTITUTE OF MANAGEMENT INDORE

Post Graduate Programme in Management

Term: II Batch: PGP 2020-22

Subject: IQDM

QUIZ 1 Date: Friday, 27 November 2020

Total Marks: 40 Duration: 40 minutes

Instructions:

1. This is a closed book/closed notes examination. No printed or written material must

be used for reference.

2. You may use blank sheets and blank graph papers for rough work.

3. You may use a simple, scientific (non-programmable, non-graphing) calculator.

Mobile phones and other electronic devices are not allowed.

4. Your laptop/ desktop and internet must be used only for answering this question
paper and not for performing any computation or for drawing graphs or for using
any software or for browsing anything. You are not allowed to use Microsoft Excel
Solver or Open Office or Google sheet or any other spreadsheet or any other
software, and are not allowed to use your internet browser for anything else except
for answering this question paper.

5. For each Multiple-Choice Question (MCQ), there is exactly one correct choice. No
explanation/ steps are required for the MCQs. If you choose more than one answer,
it will be considered wrong. There is negative marking for MCQs. For each correct
answer, you will get 4 marks and for each wrong answer, you will lose 1 mark.

6. For Work-it-out Questions requiring detailed answers, write your answers in the
space provided below each question. Please write your answers as precisely as
possible. Credit (marks) will be given for correctness, completeness as well as
brevity. Answers without necessary steps/ computation/ justification/ explanation
will not fetch any marks. If you write more than one answer for any question and
one of them is wrong, no marks will be given.

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Questions 1 and 2 are MCQs (Multiple Choice Questions).

1. Given an LP, if a constraint is tight or binding, then (4 marks)

a. its shadow price must be zero
b. its shadow price must always be a positive number
c. its shadow price may or may not be zero
d. its shadow price must be non-zero

Explanation: If a constraint is tight, its slackness is zero. Complementary slackness

condition only says that if slackness is non-zero, then shadow price is zero. If
slackness is zero, the shadow price may or may not be zero.

2. Given an LP with maximization objective, if the reduced cost corresponding to a

decision variable is negative (4 marks)
a. the value of the decision variable is zero, at optimum
b. the value of the decision variable is a positive number, at optimum
c. the value of the decision variable is a negative number, at optimum
d. the value of the decision variable is non-zero and may be positive or negative,
at optimum

Explanation: Reduced cost and optimal value of DV are complementary. Here,

reduced cost is non-zero. Therefore, optimal value of DV is zero.

Questions 3 to 8 are based on the following LP:

An organization wants to maximize the total contribution from two products, P1 and
P2, while satisfying three resource constraints, (C1), (C2) and (C3). Suppose 𝑥1 is the
amount of P1 and 𝑥2 the amount of P2 to be manufactured, and their unit contributions
are $8 and $5 respectively. Following is the LP:

Maximize: Total Contribution, 𝑧 = 8𝑥1 + 5𝑥2

Subject to
2𝑥1 + 3𝑥2 ≤ 36 (C1)
2𝑥1 + 𝑥2 ≤ 20 (C2)
𝑥2 ≤ 10 (C3)
𝑥1 , 𝑥2 ≥ 0

3. What are the optimal quantities (𝑥1 ∗ , 𝑥2 ∗ ) that will maximize the total contribution z?
What is the optimal objective function value? (6 marks)

Method 1:
Slope of iso-contribution line, s = -8/5
Slope of (C1), s1 = -2/3
Slope of (C2), s2 = -2
Slope of (C3), s3 = 0

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 s is between s1 and s2. Hence, the optimal is the intersection of (C1) and (C2),
which is (6, 8).
Optimal total contribution = 88

Method 2:
Intersection of (C1) and (C2) is (6, 8). The corresponding value of the objective
function is 88.
Intersection of (C1) and (C3) is (3, 10). The corresponding value of the objective
function is 74.
Intersection of (C2) and (C3) is (5, 10), which is outside the feasible region (as it
does not satisfy (C1).
The other corner points are (0, 0), (10, 0) and (0, 10).
At (0, 0), the value of the objective function is 0.
At (10, 0), the value of the objective function is 80.
At (0, 10), the value of the objective function is 50.

Max. is attained at (6, 8). Max. contribution = 88.

4. What are the shadow prices of constraints (C2) and (C3), and their respective
allowable increase and allowable decrease? (12 marks)

(C3) is slack (or not tight or non-binding). Therefore, its shadow price is 0.
Allowable increase = Infinity.
To compute the allowable decrease:
If the RHS of (C3) is reduced from 10 to 8, the optimal point is reached, below which
the shadow price becomes non-zero. Therefore, allowable decrease = 2.

Shadow price of (C2):

If (C2) becomes 𝟐𝒙𝟏 + 𝒙𝟐 ≤ 𝟐𝟏, the intersection of (C1) and (this modified) (C2) is
still optimal.
The new intersection point is (6.75, 7.5), giving new contribution = 91.5.
Shadow price = increase in contribution = 91.5 – 88 = 3.5

Allowable increase:
With increase in the RHS of (C2), 𝒙𝟏 increases and 𝒙𝟐 decreases. This happens till the
corner point (18, 0) is reached. At this point, LHS of new (C2) = 2*18 + 0 = 36, an
increase of 16 from the initial RHS (of 20).
Therefore, allowable increase = 16.

Allowable decrease:
When we keep decreasing the RHS of (C2), the optimal point moves till it reaches (3,
10), the intersection of (C1) and (C3). At this point, 𝟐𝒙𝟏 + 𝒙𝟐 = 16.
Therefore, allowable decrease = 4.

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5. If objective function coefficient for 𝑥1 changes, what are the maximum increase and
decrease for which the optimal solution ((𝑥1 ∗ , 𝑥2 ∗) found earlier) remains unchanged?
(4 marks)
For original optimal, (6, 8), to continue to be optimal,
s2 ≤ s ≤ s1, where s = – 8/5, s1 = – 2/3, s2 = –2.
When the coefficient of x1, originally 8, becomes 10, s becomes equal to s2.
When the coefficient becomes 5  2/3, s equals s1.
Therefore, allowable increase = 2 and allowable decrease = 8 – 10/3 = 14/3

6. What is the reduced cost corresponding to 𝑥1 ? (2 marks)

The reduced cost corresponding to x1 is 0, as the value of x1 at optimum is non-

zero (and the two are complementary).

7. Assume that the objective function coefficient of 𝑥1 remains 8 while that of 𝑥2 changes
(by a finite quantity). Is it possible that with such a finite change, 𝑥1 equals zero in the
optimal solution? If yes, then what is the minimum change that is required in the
objective function coefficient of 𝑥2 ? If no, then why not? (4 marks)

No.

If x1 = 0 at optimal, then x2 = 10, corresponding to the corner point (0, 10).

The slope of any iso-contribution line must be the slope of x2 = 10, that is 0. This is
not possible when the coefficient of x1 is nonzero.

8. The organization is considering the possibility of manufacturing a 3rd product. To

manufacture 1 unit of this product, 1 unit each of the first and the second raw
materials (constraints (C1) and (C2)) are required. Further, the contribution per unit
(objective function coefficient) of this product will be $4.5. Should this product be
manufactured? Why/why not? (4 marks)

Yes.

Shadow price of (C1) is 0.5.

Shadow price of (C2) is 3.5.

To manufacture one unit of the 3rd product, x1 or x2 or both must be reduced (from
(6, 8)). Resulting loss in contribution = 1  0.5 + 1  3.5 = 4, as product 3 uses 1 unit
each of (C1) and (C2) that have shadow prices 0.5 and 3.5, respectively.

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The contribution per unit of the 3rd product is 4.5 which is > 4.

Therefore, manufacturing the 3rd product will lead to a net increase in the total
contribution by 0.5 per unit.

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