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CHAPTER 1 CHAPTER 1: QUESTIONS 7, 11, 17, AND (PAGE 19,20,22)

Student’s Name

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Professor’s Name

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Date
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7. Modeling Fuel Cost. Suppose you are going on a weekend trip to a city that is three miles
away. Develop a model that determines your round-trip gasoline costs. What assumptions or
approximations are necessary to treat this model as deterministic? Are these assumptions or
approximations acceptable to you?
Suppose I let;
d be the distance to the city (In miles)
$ y be the price of gasoline per liter in my hometown
and g is the total gasoline consumed per mile
Then, the total cost of gasoline per mile will be $ (g x y)
If I let the total cost of gasoline be C, then if in 1 mile, I will spend $ (g x y) on gasoline, then the
total cost of one way (Home – City) will be $(d x g x y). And back (city – home) will be $(d x g
x y). Hence the round-trip gasoline cost will be;
C = $ (2dgy), since the city is 3 miles away, d = 3, hence the model simplifies to, C = $ (6.g.y)
Assumptions and Approximations
a) The only distance covered is from home to the city, and nothing more (6 miles)
b) The assumption is that the price of gasoline will be fixed throughout the journey, but this
is not always the case due to market factors.
c) The car’s rate of consuming gasoline is fixed. This can be affected by factors such as
sloppiness and the weight added
These assumptions are too serious to be ignored, the model can make a very serious error that
can lead to underbudgeting or overbudgeting, hence unacceptable to me.

11. Modeling Demand as a Function of Price. For most products, higher prices result in a
decreased demand, whereas lower prices result in an increased demand.
Let d = annual demand for a product in units, and p is the price per unit.
Assume that a firm accepts the following price–demand relationship as being realistic:
d = 800 – 10p
where p must be between $20 and $70.
a. How many units can the firm sell at the $20 per unit price? At the $70 per unit price?
Using the model above,
the demanded units when the price is $20 will be d = 800 – 10(20) = 600 units
The demanded units when the price is $70 will be d = 800 – 10(70) = 100 units,
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Hence, when the price is $20 and $70, the company can sell 600 and 100 units, respectively.

b. What happens to annual units demanded for the product if the firm increases the per-unit
price from $26 to $27? From $42 to $43? From $68 to $69? What is the suggested
relationship between the per-unit price and annual demand for the product in units?
Case 1 ($26 – 27$)
At $26, d = 800 – 10(26)
Hence the demand is 540 units.
At, $27, d = 800 – 10(27)
Hence the demand will be 530 units.
With the increase of only $1, the annual demand was reduced by 10 units.
Case 2 ($42 - $43)
At, 42$, d = 800 – 10(42) = 380 units
At, $43, d = 800 – 10(43) = 370 units
With the increase of only $1, the annual demand was reduced by 10 units.
Case 3 ($68 - $69)
At $68, d = 800 – 10(68)
Hence the demand is 120 units.
At, $69, d = 800 – 10(69)
Hence the demand will be 110 units.
With the increase of only $1, the annual demand was reduced by 10 units.
Relationship
As the price per unit increases, the annual demand reduces.
c. Show the mathematical model for the total revenue (TR), which is the annual demand
multiplied by the unit price.
Let d be the annual demand and c be the unit price,
The following mode can represent the Total revenue;
TR = d x c
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d. Based on other considerations, the firm’s management will only consider price
alternatives of $30, $40, and $50. Use your model from part (b) to determine the price
alternative that will maximize the total revenue.
According to the model above, demand (d) = 800 – 10p
Alternative 1
When the price is $30. The demand is d = 800 – 10(30) = 500
The total revenue using the model above, 500 x $30 = $ 1500
Alternative 2
When the price is $40. The demand is d = 800 – 10(40) = 400
The total revenue using the model above, 400 x $40 = $ 1600
Alternative 3
When the price is $50. The demand is d = 800 – 10(50) = 300
The total revenue using the model above, 300 x $50 = $ 1500

The price that will generate a lot of revenue is $40, which is $1600

e. What are the expected annual demand and the total revenue corresponding to your
recommended price?
My recommended price is $40
The annual demand is 400 units, and the total revenue is $1600

17. Modeling an Inventory System. Models of inventory systems frequently consider the
relationships among a beginning inventory, a production quantity, a demand or sales, and an
ending inventory. For a given production period j, define s, x, and d as follows.
Sj-1 = ending inventory from the previous period (beginning inventory for period j)
x j = production quantity in period j
d j = demand in period j
S j = ending inventory for period j
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a. Write the mathematical relationship or model that describes how these four variables are
related.
Let’s write a model for the demand in period j.
At the beginning of period j, the inventory was S j-1; at the end, the inventory was S j. Within the
period j, there was an X j production; adding them to the beginning inventory, we get, Sj-1 + X j.
Hence, the demand within period j can be represented by the following model;
d j = Sj-1 + X j – S j ……………. (a)

b. What constraint should be added if C j gives production capacity for period j?

If the production capacity is C j, no production can exceed that. Therefore, the constraint to be
added should be less or equal to the production capacity. That is;
Xj≤ C j
In other words, the production within period j cannot exceed C j

c. What constraint should be added if inventory requirements for period j mandate an

ending inventory of at least I j?
If the inventory should be at least I j, then the ending inventory should be greater than or equal to
I j. However, it should be noted that according to the model above, the bigger the ending
inventory, the smaller the demand if the other factors are constant.
In this case, the constraint to be employed will be;
I j≤ Sj
This means that the ending inventory in period j should be greater or equal to I j