UNIVERSITY OF BUEA

FACULTY OF SOCIAL AND MANAGEMENT SCIENCES

DEPARTMENT OF ECONOMICS AND MANAGEMENT

COURSE TITLE:

Managerial Economics (PhD level)

ASSIGNMENT:

An Assessment of the Linear Programming Technique as a

Decision Making Tool in Companies

Presented by:
ANSELM NGWA NIBA

SM15P140

LECTURER: Prof. JOHANNES TABI A. August, 2016

 Introduction

Linear programming has been ranked as the most scientific advancement in the mid 20 th century.

A major proposition of all scientific computation on computers is devoted to the use of linear

programming.

The application of linear programming cuts across almost all field of study, if not all, ranging

from the allocation of production facilities to evaluation of profitability of companies. This

technique is applied to solve the problem of allocating resources among competing activities in

the best possible (optimal) way. In other words, this problem involves selecting the levels of

certain activities that compete for scarce resources that are necessary to perform those activities.

The choice of activity levels then dictates how much of each resources would be utilized by each

activity to the allocation of natural resources to domestic needs. In marketing it could be applied

to select optimal advertisement benefit to the institution.It is also use in finace and investment to

determine the optimla portfolio selection,inpure science iy can be used for the design of radiation

therapy.In all the situations above the major aim of linear programming is to allocate scarce

resources theorght the best combination of activity levels.

In other to aplly the Lp the technique,a mathematical model is usually developed to represent or

deasribe the problem with one of the key requirements being that all the mathematical functions

must be linear functions.It is important to note that the word programming hre does not refer to

computer programming as the case might be, rather programming is a synonym to planning.

The linear probem is usually represented in the form

Maximise,Z=C1X1+C2X2+…+CnXn
subject to certain constraints which depend on the problem at hand. Some of these constrains

for instance could be time, technology, financial resources etc. In case of management. It could

also be water, land, fertilizer etc in case of agriculture. Hence different field of study with

different problem may use linear programming to find the optimal benefits or cost of their

activities.

Other Forms of the Linear Programming Problem

Not all LP problems will naturally correspond to the above form. Other legitimate

representations of LP models are:

1) Objectives which involves minimize instead of maximize i.e.,

Minimize Z = C1 X1 + C2 X2 + ... + Cn Xn.

2) Constraints which are "greater than or equal to" instead of "less than or equal to"; i.e.,

ai1 X1 + ai2 X2 + ... + ain Xn = b1.

3) Constraints which are strict equalities; i.e.,

ai1 X1 + ai2 X2 + ... + ain Xn = b1.

4) Variables without non-negativity restriction i.e., Xj can be unrestricted in sign i.e.,

X<=> 0

5) Variables required to be non-positive i.e., Xj ≥ 0.

Assumptions of Linear Programming

LP problems embody seven important assumptions relative to the problem being modeled. The

first three involve the appropriateness of the formulation; the last four the mathematical

relationships within the model.

Objective Function Appropriateness

This assumption means that within the formulation the objective function is the sole criteria for

choosing among the feasible values of the decision variables. Satisfaction of this assumption can

often be difficult as, for example, the company might base its plan not only on profit but also on

risk exposure which might require a different modeling.

Decision Variable Appropriateness

A key assumption is that the specification of the decision variables is appropriate. This

assumption requires that

a) The decision variables are all fully manipulatable within the feasible region and are under

the control of the decision maker.

b) All appropriate decision variables have been included in the model.

Constraint Appropriateness

The third appropriateness assumption involves the constraints. Again, this is best expressed by

identifying sub-assumptions:

a) The constraints fully identify the bounds placed on the decision variables by resource

availability, technology, the external environment, etc. Thus, any choice of the decision

variables, which simultaneously satisfies all the constraints, is admissible.

b) The resources used and/or supplied within any single constraint are homogeneous items

that can be used or supplied by any decision variable appearing in that constraint.

c) Constraints have not been imposed which improperly eliminate admissible values of the

decision variables.

d) The constraints are inviolate. No considerations involving model variables other than

those included in the model can lead to the relaxation of the constraints.
Proportionality

Variables in LP models are assumed to exhibit proportionality. Proportionality deals with the

contribution per unit of each decision variable to the objective function. This contribution is

assumed constant and independent of the variable level. Similarly, the use of each resource per

unit of each decision variable is assumed constant and independent of variable level. There are

no economies of scale.

For example, in the general LP problem, the net return per unit of Xj produced is cj. If the

solution uses one unit of Xj, then cj units of return are earned, and if 100 units are produced, then

returns are 100cj. Under this assumption, the total contribution of Xj to the objective function is

always proportional to its level

Economists encounter several types of problems in which the proportionality assumption

isgrossly violated. In some contexts, product price depends upon the level of production. Thus,

the contribution per unit of an activity varies with the level of the activity. Another case occurs

when fixed costs are to be modeled. Suppose there is a fixed cost associated with a variable

having any non-zero value (i.e., a construction cost). In this case, total cost per unit of production

is not constant. The integer programming chapter discusses relaxation of this assumption.

Additivity

Additivity deals with the relationships among the decision variables. Simply put their

contributions to an equation must be additive. The total value of the objective function equals the
sum of the contributions of each variable to the objective function. Similarly, total resource use

is the sum of the resource use of each variable. This requirement rules out the possibility that

interaction or multiplicative terms appear in the objective function or the constraints.

In the general LP formulation, when considering variables Xj and Xk, the value of the objective

function must always equal cj times Xj plus ck times Xk. Using Xj does not affect the per unit

net return of Xk and vice versa. Similarly, total resource use of resource I is the sum of aijXj and

aikXk.

Divisibility

The problem formulation assumes that all decision variables can take on any non-negative value

including fractional ones; (i.e., the decision variables are continuous).This assumption is violated

when non-integer values of certain decision variables make little sense. A decision variable may

correspond to the purchase of a tractor or the construction of a building where it is clear that the

variable must take on integer values. In this case, it is appropriate to use integer programming.

Certainty

The certainty assumption requires that the parameters cj, bi, and aij be known constants. The

optimum solution derived is predicated on perfect knowledge of all the parameter values. Since

all exogenous factors are assumed to be known and fixed, LP models are sometimes called non-

stochastic as contrasted with models explicitly dealing with stochastic factors. This assumption

gives rise to the term "deterministic" analysis.

The exogenous parameters of a LP model are not usually known with certainty. In fact, they are
usually estimated by statistical techniques. Thus, after developing a LP model, it is often useful

to conduct sensitivity analysis by varying one of the exogenous parameters and observing the

sensitivity of the optimal solution to that variation.

Practical Illustration of Linear Programming

A company produces and sells high quality alcoholic products including wines and whiskey. The

company has 3 plants fermentation is done in plant 1, wine mixing and bottling is done in plant 2

and whisky mixing and bottling is done on plant 3.

However from the top management Discussion and Analysis, it is realized that the company’s

earnings are declining and therefore unprofitable product are being discontinued, relaxing

production capacity to launch two new products having large sales potential.

Product 1: Lower Alcohol and thicker content whiskey

Product 2: More transparent wine to red wine.

Product 1 requires some of the production capacity in plant 1 and 3,but none in plant 2.Product 2

needs only plant 2 and 3.The marketing department(division) through marketing research has

concluded that the company could sell as much of either product as could be produced by these

plants. However because both products would be competing for the same production capacity in

plant 3,it is not clear which mix of the two products would be the most profitable.

In this line an operations research (OR) management team is formed to analyze the situation and

inform top management of their findings. Their analysis leads to the following information;
i) Number of hours of production time available per week in each plant for these new products

(most of the time in these plants already is committed to current products, so time for new

products is limited.

ii) Number of hours of production time used in each plant for each batch produced of each new

product.

iii) Profit per batch produced of each new product (the OR team assumes that the incremental

profit from each additional batch produced would be roughly constant regardless of the total

number of batches produced and because no additional substantial cost would be incurred as a

result of new production and marketing, the total profit from each one is approximately this

profit per batch produced times the number of batches produced.

In order to obtain reasonable quantities of the new product to be produced it required help from

the key personnel in various departments of the company;

The production department staff provided data for (i) above. the production engeneering

personnel after analyzing cost data alongside with the pricing provided by the marketing

department,the accounting department developed estimates for (iii) above.

From the data gathred the Oprtations Research team realized that this is a Linear Programming

problem and therefore undertook the formulation of the mathematical Linear programming

model.
The following data summary is available for the management;

Plant Production time per Production time per Prodcution

batch of Product 1 batch of Product 2 time available
per week

1 1 0 4

2 0 2 12

3 3 2 18

Total 30,000 50,000

profit Per
batch

From the table above X1 and X2 are decision variables for the model.

Formulating the Linear Programming problem

In order to formulate the objective function for this problem, let us have

X1=Number of batches of product 1 produced per week.

X2=Number of batches of product 2 produced per week.

Z=total profit per week (in millions FCFA) from producing the 2 products.

Thus using the data provided above the objective function can be written as;

Z=3X1+5X2

The objective is to choose the values of X 1 and X2 so as to Maximise Z=3X 1+5X2 subject to the

constraints imposed on their values by the limited production capacities available in the three

plants. Thus from the Table it is seen that each batch of product 1 produced per week uses 1 hour

of production time per week in plant 1 whereas only 4 hours are available per week. This

constrain is shown mathematically by the inequality; X1 ≤ 4

In addition, plant 2 imposes the restrictions that 2X 1≤ 12.The mathematical statement for plant 3

constraint is given by 3X1+2X2 ≤18.

Since production rates cannot be negative it is necessary to restrict the decision variables to be

non negative.

X1 ≥ 0 and X2≥0

Therefore the problem to chose the values of X1 and X2 so as to;

Maximise Z=3X1+5X2

Subject to the constraints;

X1 ≤ 4

2X1≤ 12

3X1+2X2 ≤18

X1 ≥ 0 and X2≥0

Solution with the Graphical Method

Since our problem above has only two decision variables and hence only two dimensions, it

preferable to use the graphical method to solve the problem.

The graphical method involves constructing a two dimensional graph with X1 and X2 as the

axes. The first thing to do is to identify the values of (X1, X2) that are permitted by the

constraints. It is important to note that the non-negativity restrictions X1 ≥ 0 and X2≥0 requires

(X1,X2) to lie on the positive side of each of the axes. In addition X1 ≤ 4 implies that (X1, X2)

cannot lie to the right of the line X1=4.This is shown as follows;

X2
8

6 …....…………..
………… ……
……………
4 ……………….
……………….
……... ………
2 … ………………..

2 4 6 X1

shown as follows;

Also constraints 2X2≤ 12 or (Equality X2≤6 indicates that the line 2X 2=12 should be added to the

boundary of the permissible region. The final restrictions 3X 1+2X2 ≤18, implies that the points

(X1, X2) be plot such that 3X1+2X2=18.

X2
9
-3X1+2X2=18
X1=4

6 2X2=12
…………
……………
……………
3 feasible region
…………….
……………..
……………..
X1
3 6 9
We must note that the points such that 3X1+2X2 ≤18 are those that lie either below or on the line

3X1+2X2 =18.Thus this is the limiting line above which points do not satisfy the inequality. The

region beneath that line is the feasible region.

After establishing the feasible region, the next thing to do is to pick out the point that maximizes

the value of Z=3X1+5X2.Here we apply trial and error, for instance, if Z=10, and Z=20 and

Z=36. We would have the following.

X2
9
-3X1+2X2=18
X1=4
(2,6)
6 2X2=12
…………
……………
……………
3 feasible region Z=36=3X1+5X2
…………….
……………..
…………….. Z=20=3X1+5X2
X1
3 6 9

Thus as seen above after trying 10 we realize that it fall inside the feaseable region,thus implying

that there are other points that can better maximize the lineat function.Thus we have to try larger

values.The points above indicate that the maximum persible value of Z must be at least 20.
One thing the is clear from above is that the lines just constructed are parallel to each other. This

is because any line constructed in this way has the form Z=3X1+5X2 for the chosen value of Z,

which implies that 5X2= -3X+Z or equivalently X2= -3/5X1+1/5Z.

This last equation is called the slope intercept fprm of the objective function, showing that the

slope is -3/5(since each unit increase in X1 changes X2 by -3/5),wheras the intercept of the line

with X2 axis is 1/5Z(since X2=1/5Z whenX=0).Thus since the slope is fixed at -3/5 means all

lines constructed in this way are parallel.

Therefore the graphical method of linear programming can be used to solve any linear

programming problem with 2 decision variables, it may under very difficult circumstances be

possible to extend the graphical method to a problem having 3 decision variables.

Multiple Decision Variables Liner model Problems

For linear programming problems involving two variables, the graphical solution method is

convenient. However, for problems involving more than two variables or problems involving a

large number of constraints, it is better to use solution methods that are adaptable to computers.

One such method is called the simple method, developed by George Dantzig in 1946. It

provides us with a systematic way of examining the vertices of the feasible region to determine

the optimal value of the objective function. We introduce this method with an example..

Suppose we want to find the maximum value of Z=4X1+6X2 where X1≥0, and X1≥0, subject to

the following constraints;

-X1+X2≤ 10
X1+X2≤ 22

2X1+5X2≤ 80

Since the left hand side of each inequality is less than or equal to the right hand side, there must

exist non-negative numbers,S1,S2,S3, that can be added to the left side of each equation to

produce the following system of linear equations.

-X1+X2+S1=10

X1+X2+S2 = 22

2X1+5X2+S3=80

The numbers S1, S2, and S3 are called slack variables because they take up the “Slack” in each

inequality.

Generally the linear programming “standard form” seeks to maximize the objective function

Z=C1X1+C2X2+…+CnXn subject to the constraint.

a11X1+a12X2+…a1nXn≤b1

a21X1+a22X2+…a2nXn≤b2

am1X1+am2X2+…+amnXn≤bm

Where Xi≥0 and bi≥0. After adding slack values the corresponding constraint equations are

given as follows

a11X1+a12X2+…a1nXn+S1=b1

a21X1+a22X2+…a2nXn+S2=b2
am1X1+am2X2+…+amnXn+Sm=bm

Where Si≥0

It is important to note that when the linear programming function is stted in the standard form,the

objective is to maximize not to minimize. Generally a basic solution of a linear programming

problem in standard form, is a solution (X 1, X2…,Xn, S1,S2…,Sm) of the constraint equation in

which at most m variables are non-zero. The variables that are non-zero are called basic

variables. A basic solution for which all variables are non-negative is called a basic feasible

solution.

The Simplex Tableau Method

The simplex method is carried out by performing elementary row operations on a matrix that we

call the simplex tableau. This tableau consists of the augmented matrix corresponding to the

constraint equations together with the coefficients of the objective function written in the form

-C1X1-C2X2……..CnXn+(0)S1+(0)S2+……..+(0)Sm+Z= 0

In this tableaux it is customary to omit the coefficient of Z .For instance the simplex tableaux for

the Linear Programming Problem.

Z=4X1+6X2 : Objective Function

-X1+X2+S1 = 10

X1+X2+S2= 20: Constraints

2X1+5X2+S3=80

Is constructed as follows;
 X1 X2 S1 S2 S3 b Basic Variables

-1 1 1 0 0 10 S1

1 1 0 1 0 22 S2

2 5 0 0 2 80 S3

-4 -6 0 0 0 0

Current X value

For this initial simplex table, the basic variables are S1, S2, and S3 and the non basic variables
(which have a value of zero) are X1 and X2.Hence from the columns that are farthest to the right
the current solution is;

X1=0, X2=0, S1=10, S2=22 and S3=80

This solution is a basic feasible solution and is often written as;

(X1, X2, S1, S2, and S3)= (0, 0, 10, 22, and 80)

The entry in the lower-right corner of the simples is the current value of Z. The Bottom row
entries under X1 and X2 are the negatives of the coefficients of X1 and X2 in the objective
function’s=4X1+6X2.

To perform the optimality check for a solution represented by a simplex tableaux,we look at the
entries in the bottom row of the tableaux.If any of these entries are negative (as above),then the
current solution is not optimal.

Pivoting with simplex tableau

Once we have set up the initial simplex tableau for a linear programming problem, the simplex

method consists of checking for optimality and then, if the current solution is not optimal,

improving the current solution. (An improved solution is one that has a larger z-value than the

current solution.) To improve the current solution, we bring a new basic variable into the

solution––we call this variable the entering variable. This implies that one of the current basic

variables must leave, otherwise we would have too many variables for a basic solution––we call

this variable the departing variable. We choose the entering and departing variables as follows.
a. The entering variable corresponds to the smallest (the most negative) entry in the bottom row

of the tableau.

b. The departing variable corresponds to the smallest nonnegative ratio of, in the

Column determined by the entering variable.

c. The entry in the simplex tableau in the entering variable’s column and the departing variable’s

row is called the pivot.

Finally, to form the improved solution, we apply Gauss-Jordan elimination to the column that

contains the pivot, as illustrated in the following example. (This process is called pivoting.

General Standard form Linear Programming Solution Process

To solve a linear programming problem in standard form, use the following steps.

1. Convert each inequality in the set of constraints to an equation by adding slack

variables.

2. Create the initial simplex tableau.

3. Locate the most negative entry in the bottom row. The column for this entry is called the

entering column. (If ties occur, any of the tied entries can be used to determine the entering

column.)

4. Form the ratios of the entries in the “b-column” with their corresponding positive entries in the

entering column. The departing row corresponds to the smallest nonnegative ratio (If all entries

in the entering column are 0 or negative, then there is no maximum solution. For ties, choose

either entry.) The entry in the departing row and the entering column is called the pivot.

5. Use elementary row operations so that the pivot is 1, and all other entries in the
entering column are 0. This process is called pivoting.

6. If all entries in the bottom row are zero or positive, this is the final tableau. If not, go back to

Step 3.

7. If you obtain a final tableau, then the linear programming problem has a maximum solution,

which is given by the entry in the lower-right corner of the tableau.

Example with 3 Decision Variables

Let us use the simple method, to find the maximum of;

Z=3X1+2X2+X3

Subject to the constraints;

4X1+X2+X3≤30

2X1+3X2+X3≤60

X1+2X2+3X3≤40

Using the basic feasible solution would be for;

(X1, X2, X3, S1, S2, and S3)= (0, 0, 0, 30, 60, and 40)
The initial simplex tableaux for the problem would be as follows.

X1 X2 X3 S1 S2 S3 b Basic Variables

4 1 1 1 0 0 30 S1 Departing

2 3 1 0 1 0 60 S2

1 2 3 0 0 1 40 S3

-3 -2 -1 0 0 0 0

Entering variable

Since we still have negatives numbers present in the solution then we have to adjust the solution.

X1 X2 X3 S1 S2 S3 b Basic Variables

1 1/4 1/4 1/4 0 0 15/2 X1

0 5/2 1/2 -1/2 1 0 45 S2 Departing

0 7/4 11/4 -1/4 0 1 65/2 S3

0 -5/4 -1/4 3/4 0 0 45/2

Entering variable
 X1 X2 X3 S1 S2 S3 b Basic Variables

1 1/5 1/4 3/10 -1/10 0 3 X1

0 1/5 1/2 -1/5 2/5 0 18 X2

0 12/5 11/4 1/10 -7/10 1 1 S3

0 0 0 1/2 1/2 0 45

This implies that the optimal solution is;

(X1, X2, X3, S1, S2, and S3)= (3, 18, 0, 0, 0, 1)

and the maximum value of Z is 45.

(This solution satisfies the equation given in the constraint because

4(3)+1(18)+1(0)=30.

Criticisms of Linear Programming

As already mentioned in the introduction, linear programming has turned out to be a highly

useful tool of analysis for the business executives. It is being increasingly made use of in theory

of the firm, in managerial economics, in inter regional trade, in general equilibrium analysis, in

welfare economics and in development planning.

However, there are limitations in implementing the linear programming model as a decision

making tool.
First, Linear programming is a highly mathematical and complicated technique. The solution of a

problem with linear programming requires the maximization or minimization of a clearly

specified variable. The solution of a linear programming problem is also arrived at with such

complicated method as the simplex method which comprises of a huge number of mathematical

calculations.

Secondly, this technique is based on the hypothesis of linear relations between inputs and

outputs. This means that inputs and outputs can be added, multiplied and divided. But the

relations between inputs and outputs are not always clear. In real life, most of the relations are

non-linear

Thirdly, even if a particular objective function is laid down, it may not be so easy to find out

various technological, financial and other constraints which may be operative in pursuing the

given objective. In addition Given a Specified objective and a set of constraints it is feasible that

the constraints may not be directly expressible as linear inequalities.

Even if the above problems are surmounted, a major problem is one of estimating relevant values

of the various constant co-efficient that enter into a linear programming mode, e.g. prices etc.

This technique presumes perfect competition in product and factor markets. But perfect

competition is not a reality.

The LP technique is based on the hypothesis of constant returns. In reality, there are either

diminishing or increasing returns which a firm experiences in production.

Mostly, linear programming models present trial and error solutions and it is difficult to find out

really optimal solutions to the various economic complexities.

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Alexander Schrijver (1998). Theory of Linear and Integer Programming. John Wiley & Sons.
pp. 221–222. ISBN 978-0-471-98232-6.

Gerard Sierksma (2001). Linear and Integer Programming: Theory and Practice, Second Edition.
CRC Press. p. 1. ISBN 978-0-8247-0673-9.
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H.Graig Peterson and W Cris Lewis,(2004),Managerial Economics, Fourth Edition. Saurabh Printers pvt.Ltd.ISBN
81-7808-530-5.

Mokhtar S. Bazaraa, John J. Jarvis, and Hanif D. Sherali,( 2009),Linear programming and network ows,
Wiley-Interscience.