MBA 2004

Managerial Economics

Case on Optimization Techniques

The Zip & Lock Company manufactures commercial zippers of two kinds, kind X and
kind Y. Its production department estimates that the average-cost function of the firm
is:

AC = 2X2 + 3Y2 – 2XY – 2X – 6Y + 200

A. The Manager of the firm would want to know the level of output of zipper X
and zipper Y at which the average cost of the firm is minimized and the level
of this minimum average cost. (10 points)

Answer:

AC = 2X2 + 3Y2 – 2XY – 2X – 6Y + 200

AC dx/x = 2(2)x – 2y – 2 + 0
AC dx/x = 4x – 2y – 2

4X – 2Y= 2
4X – 2 (1.4) = 2
4X-2.8 = 2
4X = 2 + 2.8
4x/4 = 4.8/4
X= 1.2

2(-2X + 6Y – 6) 2
4X - 2Y - 2
-4X + 12Y – 12
10Y – 14
10Y = 14
10 10
Y = 1.4

Zipper X = 1.2
Zipper Y = 1.4

B. The firm expects an order of both zippers that will require to produce a total
output of 6 units of both kinds of zippers (each unit may be a large number of
zippers), and so the manager would also like to know how many each type of
 zipper the firm must produce to minimize its average cost, and what its
minimum average cost would be if it receives the order. (30 points)
Answer:

X+Y=6
X=6–Y

AC = 2X2 + 3Y2 – 2XY – 2X – 6Y + 200

AC = 2(6-Y)2 + 3Y2 – 2(6-Y) Y – 2 (6-Y) – 6Y + 200
AC = 2(36-12Y+Y2) + 3Y2 – 12Y+2Y2 -6Y+200
AC = 2(36-12Y+Y2) + 3Y2 – (12+2Y) Y – 12+2Y – 6Y+200

AC = 72 – 24Y + 2Y2 + 3Y2 – 12Y + 2Y2 – 6Y + 200

AC = 72 – 24Y +2Y2 + 3Y2 – 12Y + 2Y2 – 6Y + 200
AC = 7Y2 – 42Y + 272

AC dx/dy = 7(2)y – 42 + 0
AC dx/dy = 14y – 42

14Y/14 = 42/14
Y=3

X+Y = 6
X+3 = 6
X = 6-3
X= 3

C. How do answers A and B differ? (10 points)

Answer:

Answers A and B differ depending on the problem that was asked. For the A
problem, it is clearly stated that the manager wants to know the level of output of
zipper X and zipper Y. To have a solution, I use the optimization containing
multivariable functions. The Letter B problem, would like to know how much to
produce and to minimize its average cost and what its minimum average cost would
be and to have a solution, I use the Constrained Optimization.