BU.520.

601
Decision Models
Sensitivity Analysis

Basic theory
Understanding optimum solution
Sensitivity analysis

Summer 2013

LP: Sensitivity Analysis BU.520.601 1

Introduction to Sensitivity Analysis
Sensitivity analysis means determining effects of changes
in parameters on the solution. It is also called What if analysis,
Parametric analysis, Post optimality analysis, etc,. It is not
restricted to LP problems. Here is an example using Data Table.

We will now discuss LP and

sensitivity analysis..

LP: Sensitivity Analysis BU.520.601 2

Primal dual relationship 10x1 + 8x2 Max
0.7x1 + x2 630
Consider the LP problem shown. We will call
() x1 + (5/6) x2 600
this as a primal problem. For every primal
problem, there is always a corresponding LP x1 + (2/3) x2 708
problem called the dual problem. (1/10) x1 + (1/4) x2 135
630y1 + 600y2 + 708y3 + 135y4 - 150y5 Min -x1 - x2 -150
0.7y1 + ()y2 y3 (1/10)y4 -y5 10 x1 0, x2 0
y1 + (5/6)y2 + (2/3)y3 + (1/4)4 - y2 8 Note the
y1 0, y2 0, y3 0, y4 0, y5 0 following
Any one of these can be called primal; the Min
other one is dual.
If one is of the size m x n, the other is of the optimal
size n x m.
If we solve one, we implicitly solve the other. Max
Optimal solutions for both have identical
value for the objective function (if an optimal
solution exists).
LP: Sensitivity Analysis 3
BU.520.601
The Simplex Method
Consider a simple two product example
with three resource constraints. The
feasible region is shown.
Maximize 15x1 + 10x2 = Z
2x1 + x2 800
x1 + 3x2 900
+ x2 250
x1 0, x2 0

We now add slack variables Max Z - 15x + 10x = 0

1 2
to each constraint to convert
these in equations. 2x1 + x2 + S1 = 800
x1 + 3x2 + S2 = 900
Primal - dual + x2 + S3 = 250
Maximize 15 x1 + 10 x2
Minimize 800 y1 + 900 y2 + 250 y3
LP: Sensitivity Analysis 4
BU.520.601
The Simplex Method: Cont
Start with the tableau for Maximize 15 x1 + 10 x2
Z x1 x2 S1 S2 S3
1 -15 -10 0 0 0 0 Initial solution:
Z = 0, x1 = 0, x2 = 0,
0 2 1 1 0 0 800
S1 = 800, S2 = 900
0 1 3 0 1 0 900
0 0 1 0 0 1 250 and S3 = 250.
After many iterations (moving from one
Z x1 x2 S1 S2 S3 corner to the next) we get the final answer.
1 0 0 7 1 0 6500
Optimal solution:
0 1 0 3/5 -1/5 0 300 Z = 6500, x1 = 300, x2 = 200 and S3 = 50.
0 0 1 -1/5 -2/5 0 200 Z = 15 * 300 + 10 * 200 = 6500
0 0 0 0 0 1 50
Notice 7, 1, 0 in the objective row.
These are the values of dual variables, called shadow prices.
Minimize 800 y1 + 900 y2 + 250 y3 gives 800*7 + 900*1 + 250*0 = 6500

LP: Sensitivity Analysis 5

BU.520.601
 Solver Consider the
Maximize 10 x1 + 8 x2 = Z
7/10 x1 + x2 630
Answer Golf Bag 1/2 x1 + 5/6 x2 600
Report problem. x1 + 2/3 x2 708
1/10 x1 + 1/4 x2 135
x1 0, x2 0 x1 + x2 150
Optimal solution: x1 = 540, x2= 252. Z = 7416
Binding constraints: constraints intersecting at
the optimal solution. ,
Nonbinding constraint? , and

Now consider the

Solver solution.

Linear Optimization BU.520.601 6

Set up the problem, click
Solve and the box appears.
If you select only OK, you
can read values of decision
variables and the objective
function.

Instead of selecting only

OK, select Answer under
Reports and then click OK.
A new sheet called Answer
Report xx is added to your
workbook.
Next slides shows the report (re-formatted).
LP: Sensitivity Analysis BU.520.601 7
Answer The answer report has three tables:
Report 1: Objective Cell for the objective function
2: Variable Cells 3: for constraints.
Lets try to interpret
some features..

?
You may want
to rename this
Answer Report
worksheet.
LP: Sensitivity Analysis BU.520.601 8
Sensitivity Analysis Now we will consider changes in
the objective function or the
Objective function RHS coefficients one
coefficient at a time.
Maximize 10 x1 + 8 x2 = Z Right Hand Side (RHS).
7/10 x1 + x2 630
1/2 x1 + 5/6 x2 600
x1 + 2/3 x2 708
1/10 x1 + 1/4 x2 135 Optimal solution:
x1 + x2 150 x1 = 540, x2= 252.
x1 0, x2 0 Z = 7416
Here are some questions we will try to answer.
Q1: How much the unit profit of Ace can go up or down from $8
without changing the current optimal production quantities?
Q2:What if per unit profit for Deluxe model is 12.25?
Q3: What if an 10 more hours of production time is available in
cutting & dyeing? inspection?
LP: Sensitivity Analysis BU.520.601 9
Sensitivity Analysis Maximize 10 x1 + 8 x2 = Z
7/10 x1 + x2 630
Golf bags
Q1: How much the unit profit of 1/2 x1 + 5/6 x2 600
X1: Deluxe
Ace can go up or down from x1 + 2/3 x2 708
X2: Ace
$8 without changing the 1/10 x1 + 1/4 x2 135
current optimal production x1 0, x2 0 x1 + x2 150
quantities?

As long as the slope of the objective

function isoprofit line stays within the
binding constraints.

LP: Sensitivity Analysis BU.520.601 10

 Solver
Sensitivity
Report

If you click on Sensitivity, a new

worksheet, called Sensitivity Report
is added. It contains two tables:
Variable cells and Constraints.

Variable cells table helps us answer questions related to changes in

the objective function coefficients.

Constraints table helps us answer questions related to changes in

the RHS coefficients.

We will discuss these tables separately.

LP: Sensitivity Analysis BU.520.601 11

Solver Sensitivity Report
Z = 7416
Maximize 10 x1 + 8 x2 = Z x1 = 540, x2= 252
Q1: How much the unit profit of Ace can go up or down from $8 without
changing the current optimal production quantities?

Range for X1: 10 4.4 to 10 + 2

Range for X2: 8 1.333 to 8 + 6.286
Try per unit profit for X2 as 14.28, 14.29, 6.67 and 6.66
Q2:What if per unit profit for Deluxe model is 12.25?
Slight round off error?
Reduced cost will be explained later.
LP: Sensitivity Analysis BU.520.601 12
What if questions are about the RHS?
A change in RHS can change the shape of the solution space
(objective function slope is not affected).

Q3: Add 10 more hours of production time for

cutting & dyeing? inspection?
Cutting & dyeing is a binding constraint;
increasing the resource will increase the solution
space and move the optimal point.

Inspection is a nonbinding
constraint; increasing the resource
will increase the solution space and
but will not move the optimal point.

LP: Sensitivity Analysis BU.520.601 13
Sensitivity Report Q3

Q3: Add 10 more hours of production time for

cutting & dyeing? inspection?

For cutting & dyeing up to 52.36 units can be increased. Profit will
increase @ $2.50 per unit.
For inspection ?
Shadow price represents change in the objective function value
per one-unit increase in the RHS of the constraint. In a business
application, a shadow price is the maximum price that we can pay for
an extra unit of a given limited resource.

LP: Sensitivity Analysis BU.520.601 14

Trail Mix : Cost / unit: S: R: F: P: W:
$ $4 $5 $3 $7 $6 Min.
sensitivity needed
Grams / lb.
analysis Vitamins 10 20 10 30 20 25.00
Minerals 5 7 4 9 2 8.00
Protein 1 4 10 2 1 12.50
Answer Report Calories/lb 500 450 160 300 500 500
Seeds, Raisins, Flakes,
Pecans, Walnuts: Min. 3/16
pounds each
Total quantity = 2 lbs.

Linear Optimization BU.520.601 15

Trail Mix :
Cont

Interpretation of allowable increase or decrease?

What is reduced cost? Also called the opportunity cost.

One interpretation of the reduced cost (for the minimization

problem) is the amount by which the objective function coefficient for
a variable needs to decrease before that variable will exceed the
lower bound (lower bound can be zero).

Linear Optimization BU.520.601 16

Trail Mix :
Cont.

Explain allowable increase or decrease and shadow price

Linear Optimization BU.520.601 17

Example 5 Max 2.0x1 + 8.0x2 + 4.0x3 + 7.5x4 = Z
x1 + x2 + x3 + x4 200
2.0x1 + 3.0x3 + x4 100
Optimal: Z = 1670,
+ 4.0x2 + + 5.0x4 1250
X2 = 115, X4 = 100
x1 + 2.0x2 230
4.0x3 + 2.5x4 300
x1 0, x2 0, x3 0, x4 0

Reduced Cost (for

maximization) : the
amount by which the
objective function
coefficient for a variable
needs increase before
that variable will exceed
the lower bound.
Shadow price represents change in the objective function value
per one-unit increase in the RHS of the constraint. In a business
application, a shadow price is the maximum price that we can pay for
an extra unit of a given limited resource.
LP: Sensitivity Analysis BU.520.601 18
Objective Function Right Hand Side

Change one coefficient at a time within allowable range

The feasible region does not Feasible region changes.
change. If a nonbinding constraint
Since constraints are not is changed, the solution is
affected, decision variable not affected.
values remain the same. If a binding constraint is
Objective function value will changed, the same corner
change. point remains optimal but
the variable values will
change.

LP: Sensitivity Analysis BU.520.601 19

Miscellaneous info:
We did not consider many other topics . Example are:
Addition of a constraint.
Changing LHS coefficients.
Variables with upper bounds
Effect of round off errors.

What did we learn?

Solving LP may be the first step in decision making;
sensitivity analysis provides what if analysis to improve
decision making.

LP: Sensitivity Analysis BU.520.601 20