Introduction to Quantitative

Decision Making
(IQDM)
Sessions 2 and 3
 LP Formulation

• Decision variables

• Objective function

• Constraints
• Objective is to maximize or minimize a linear
function, subject to linear constraints.

• Non-negativity
 Some Mathematical Background

• Bounded set

• Closed set
• A (Linear) Inequality provides a boundary on
one side.
• Constraints include the boundary.

• That is, constraints are ≤ or ≥ .

• Hence, the resulting regions are closed.

 Recall: Open vs. closed intervals
• (0, 1) is open
If x is a point in (0, 1),
then 0 < x < 1

• [0, 1] is closed
and corresponds to 0 ≤ x ≤ 1

• Intervals may also be open on one side.

E.g. [0, 1) corresponds to 0 ≤ x < 1
 Linearity

• Is f = xy + yz a linear function?

• f(x,z) = xy + yz?

• f(y) = xy + yz?

• f(x,y) = xy + yz?
 LP Assumptions
• Proportionality

• Additivity

• Certainty

• Divisibility
 Example 4: Investment Problem

A portfolio manager in charge of a bank

portfolio has $10 million to invest. The securities
available for purchase, as well as their respective
quality ratings, maturities, and yields, are shown
in the following table:

Bradley, Hax, Magnanti

Bond name Bond type Quality Years to Yield to After-tax
maturity maturity yield
A Municipal 2 9 4.3 4.3
B Agency 2 15 5.4 2.7
C Government 1 4 5.0 2.5
D Government 1 3 4.4 2.2
E Municipal 5 2 4.5 4.5
The bank places the following policy limitations
on the portfolio manager’s actions:
1. Government and agency bonds must total at
least $4 million.
2. The average quality of the portfolio cannot
exceed 1.4 on the bank’s quality scale. (Note
that a low number on this scale means a
high-quality bond.)
3. The average years to maturity of the portfolio
must not exceed 5 years.
If you are the portfolio manager, what would
your objective be?

What all factors limit your objective?

(What are the constraints?)
 Decision Variables
Let xA , xB , xC , xD and xE

be the amounts (in millions of dollars)

to be invested in bonds A, B, C, D and E,

respectively.
 Objective
• Maximize the total after tax returns.

• That is:

max z = 0.043 xA + 0.027 xB + 0.025 xC

+ 0.022 xD + 0.045 xE
 Constraints
1. Government and agency bonds must total at
least $4 million.

2. The average quality of the portfolio cannot

exceed 1.4 on the bank’s quality scale.

3. The average years to maturity of the portfolio

must not exceed 5 years.
Government and agency bonds must
total at least $4 million

xB + xC + x D  4
 The average quality of the portfolio
cannot exceed 1.4
2 xA + 2 xB + xC + xD + 5 xE
gives the “total” quality (points).

Average is
(2xA + 2xB + xC + xD + 5xE)/(xA + xB + xC + xD + xE ).

The constraint is “Average  1.4”.

That is,
2xA + 2xB + xC + xD + 5xE  1.4(xA + xB + xC + xD + xE )
 The average years to maturity of the
portfolio must not exceed 5 years

(9xA + 15xB + 4xC + 3xD + 2xE)/

(xA + xB + xC + xD + xE)

5
Anything else?
xA + xB + x C + xD + xE

 10
 Non-negativity

xA , xB , xC , xD , xE  0
 Example 5
• A product is assembled with 4 units of component A
and 3 units of component B.

• The manufacturing shop runs three different

processes, each of which requires varying amounts
of raw materials and produce different amounts of
A and B.

• Two types of raw materials are used. 100 units of

raw material I (RM I) and 200 units of raw material II
(RM II) are available to the shop each day.
TTN, Proc. AWTOR
The following table gives the information on the
quantities of raw materials consumed by each
process and the yield of A and B from each of
them

Input per run Output per run

Shop (units) (units)

RM I RM II A B
I 7 5 6 4
II 4 8 5 8
III 2 7 7 3
Formulate as an LP to maximize the number of
completed assemblies produced each day.
 Decision Variables

Let x1, x2 and x3 be the number of runs of

processes I, II and III, respectively.
 Constraints

• 7x1 + 4x2 + 2x3 ≤ 100

• 5x1 + 8x2 + 7x3 ≤ 200

• x1, x2, x3 ≥ 0
Objective Function?
• Total quantity of A produced
= 6x1 + 5x2 + 7x3

• Total quantity of B produced

= 4x1 + 8x2 + 3x3

• Number of completed assemblies

= min { (6x1 + 5x2 + 7x3) / 4 ,
(4x1 + 8x2 + 3x3) / 3 }
 Objective
Maximize min { (6x1 + 5x2 + 7x3) / 4 ,
(4x1 + 8x2 + 3x3) / 3 }

Linear?

max z = y
s.t. y ≤ (6x1 + 5x2 + 7x3) / 4
y ≤ (4x1 + 8x2 + 3x3) / 3
 LP Formulation of Example 5
x1, x2, x3: number of runs of I, II, III, respectively.
y: number of completed assemblies

max z = y

s.t. y ≤ (6x1 + 5x2 + 7x3) / 4

y ≤ (4x1 + 8x2 + 3x3) / 3
7x1 + 4x2 + 2x3 ≤ 100
5x1 + 8x2 + 7x3 ≤ 200
y, x1, x2, x3 ≥ 0
 Example 7
• ABC Pottery Company makes clay bowls and
clay mugs, and has 120 lbs of clay per day and
40 hrs of labor per day.

• The unit contribution per bowl is $40 and that

per mug is $50.

• How many bowls and mugs should AAA make

so as to maximize total contribution, given the
following usage of labor and materials
constraints?
 Resource Requirements
Product Labor Clay
(hr/unit) (lb/unit)
Bowl 1 4
Mug 2 3
 LP Formulation

Resource 40 hrs of labor per day

Availability: 120 lbs of clay
 LP Formulation

Resource 40 hrs of labor per day

Availability: 120 lbs of clay
Decision x1 = number of bowls to produce per day
Variables: x2 = number of mugs to produce per day
 LP Formulation

Resource 40 hrs of labor per day

Availability: 120 lbs of clay
Decision x1 = number of bowls to produce per day
Variables: x2 = number of mugs to produce per day
Objective Maximize z = $40x1 + $50x2
Function: where z = total contribution per day
 LP Formulation

Resource 40 hrs of labor per day

Availability: 120 lbs of clay
Decision x1 = number of bowls to produce per day
Variables: x2 = number of mugs to produce per day
Objective Maximize z = $40x1 + $50x2
Function: where z = total contribution per day
Resource x1 + 2x2  40 hours of labor
Constraints:
 LP Formulation

Resource 40 hrs of labor per day

Availability: 120 lbs of clay
Decision x1 = number of bowls to produce per day
Variables: x2 = number of mugs to produce per day
Objective Maximize z = $40x1 + $50x2
Function: where z = total contribution per day
Resource x1 + 2x2  40 hours of labor
Constraints: 4x1 + 3x2  120 pounds of clay
 LP Formulation

Resource 40 hrs of labor per day

Availability: 120 lbs of clay
Decision x1 = number of bowls to produce per day
Variables: x2 = number of mugs to produce per day
Objective Maximize z = $40x1 + $50x2
Function: where z = total contribution per day
Resource x1 + 2x2  40 hours of labor
Constraints: 4x1 + 3x2  120 pounds of clay
Non-Negativity x1  0; x2  0
Constraints:
 Solving the LP

If feasible, then

• Find the optimal objective function value

• Find all possible optimal values of the decision

variables
• A feasible solution is one that satisfies all
constraints of the problem.

• An optimal solution is a feasible solution that

results in the optimal value of the objective
function.
(Optimal = max or min, as the case may be).
 Graphical Solution:
Coordinate Axes

maximize Z=$40x1 + 50x2

subject to
1x1 + 2x2  40 hours of labor
4x1 + 3x2  120 pounds of clay
x1, x 2  0

Figure 1 Coordinates for graphical analysis

 Labor Constraint Boundary Line

maximize Z=$40x1 + 50x2

subject to
1x1 + 2x2  40 hours of labor
4x1 + 3x2  120 pounds of clay
x1, x 2  0

Figure 2 Graph of the labor constraint line

 Labor Constraint Feasible Region

maximize Z=$40x1 + 50x2

subject to
1x1 + 2x2  40 hours of labor
4x1 + 3x2  120 pounds of clay
x 1, x2  0

Figure 3 The labor constraint feasible area

 Clay Constraint Feasible Area

maximize Z=$40x1 + 50x2

subject to
1x1 + 2x2  40 hours of labor
4x1 + 3x2  120 pounds of clay
x1, x2 0

Figure 4 Feasible area for the clay constraint

 Feasible Set

maximize Z=$40x1 + 50x2

subject to
1x1 + 2x2  40 hours of labor
4x1 + 3x2  120 pounds of clay
x1, x 2  0

Figure 5 Graph of both model constraints and the feasible set

 Feasible and infeasible points

maximize Z=$40x1 + 50x2

subject to
1x1 + 2x2  40 hours of labor
4x1 + 3x2  120 pounds of clay
x1, x2  0

Figure 6 Points inside/ outside the feasible set

 Continuing with some Mathematics

• Convex set
Examples of Convex Sets
 In general…

Any region formed by the intersection of linear

constraints is convex.
Example of an Unbounded Convex Set
Other Examples of Convex Sets
Examples of non-convex sets
Examples of non-convex sets
 Convex combination of points

• Suppose A(x1, y1) and B(x2, y2) are points.

• Suppose  is a real number, 0 ≤  ≤ 1.

( x1 + (1−) x2 , y1 + (1−) y2 )
is a convex combination of A and B, and
is a point on the line-segment AB.

• By varying  over [0, 1], we can get all points on

AB.
 Some Properties

• If A(x1, y1) and B(x2, y2) are optimal, then

any convex combination of A and B is optimal.

• It suffices to look at corner points (vertices).

 B

A
 B

A
 B

A
 B

A
• The rate of change of x2 with respect to x1 is a
constant.

• Slope.
 Solving the ABC Pottery Problem

• …by exhausting all vertices.

 Solving the LP by looking at all corner points

0 (0, 0) 0
A (0, 20) 1000
B (24, 8) 1360
C (30, 0) 1200

maximize Z=$40x1 + 50x2

subject to
1x1 + 2x2  40 hours of labor A
4x1 + 3x2  120 pounds of clay
x1, x 2  0
B

Figure 6 Solving the LP

 Case Discussion:
Merton Truck Company
Questions?
Thank You