Chapter 03

Linear Programming Models

IIMT3636
Faculty of Business and Economics
The University of Hong Kong
Instructor: Dr. Yipu DENG
 2

Recap of Last Lecture

• Utility theory
▫ Monetary values are first replaced with the appropriate utility values. Then, decision
analysis is performed as usual.
• LP models are useful for deterministic decision making.
• Properties and assumptions for LP problems
▫ Maximize or minimize one objective function; one or more constraints;
▫ Alternative courses of action to choose from;
▫ The objective function and constraints are linear;
▫ All parameters are certain; non-negative decision variables
• Formulate LP problems → state managerial problems mathematically
▫ Identify the objective and constraints; define decision variables; use decision
variables to mathematically express the objective function and constraints
▫ Example: product mix problem
• Find LP solutions
▫ Graphical solution method for LP problems with two decision variables
➢ Always find the feasible region first!
➢ Isoprofit line solution method
➢ Corner point solution method
➢ Slack (≤) and surplus (≥) → binding vs. non-binding constraint
➢ Sensitivity analysis
▫ Excel Solver
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Excel Solver
• You can solve almost all your LP problems in Excel!
▫ It is typically faster to get solutions than graphing.
▫ Excel can solve LPs with more than 2 decision variables.
• Step 1: Setup the framework and enter the data in Excel.
• Step 2: Write the formulas for the objective function and
the constraints.
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Excel Solver
• Summary of steps to prepare the spreadsheet
▫ Enter the problem data (blue)
➢ the coefficients of the objective function and the constraints, the right-
hand-side value for each of the constraint
▫ Assign specific cells (yellow) for the values of the decision
variables
▫ Write a formula to calculate the value of the objective function
(red)
➢ Use the coefficients of the objective function & decision variables
▫ Write a formula to calculate the value of the left-hand-side of
each constraint (orange)
➢ Use the coefficients of the constraints & decision variables
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Software solves LP with the same logic. The standard

method is called the simplex method. Computer
finds a corner point first and check the optimality. If
Excel Solver optimal, stop; otherwise, move along the edge that
increases the profit the most to the next corner point.

• Step 3: Using Solver.

▫ Set Objective: the red cell
▫ Click Max or Min for the problem.
▫ By Changing Variable Cells: the yellow cells
▫ Click Add to add the constraints.
 In the Cell Reference box, input the orange cells.
 Select <= or other appropriate relationships.
 In the Constraint box, input the cells on the right-hand side.
▫ Check the box for Make Unconstrained Variables Non-Negative.
▫ Click Select a Solving Method and select Simplex LP.
▫ Click Solve. In the Solver Results dialog box, select the reports
you need and click OK.
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Is it worth to spend $500/week hiring a carpenter who can work 20 hrs/week?

How about he can work 80 hrs/week? No; Yes

Sensitivity Report
Coefficient may change by these amounts
Units Produced and the optimal solution will not change.

Resource may
change by these
amounts and the
shadow price will
not change.

If we add one more unit to the resource,

Hours Used
the marginal impact on the optimal profit
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Four Special Cases in LP

• Four special cases and difficulties arise at times when
using the graphical approach to solve LP problems.

▫ Infeasibility → no feasible region

▫ Unboundedness

▫ Redundancy

▫ Multiple optimal solutions

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Four Special Cases in LP

• Infeasibility
→ No feasible region that satisfies all constraints
▫ This might occur if the problem was formulated with conflicting
constraints → check the correctness of constraints
X1 + 2X2 ≤ 6
2X1 + X2 ≤ 8
X1 ≥ 7
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Four Special Cases in LP

• Unboundedness → no finite solution
▫ Example: in a maximization problem, one or more decision variables
and the profit can be infinitely large without violating any constraints.
▫ Open-ended feasible region → check the choice of minimization or
maximization Max X + X
1 2
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Four Special Cases in LP

• Redundancy of constraints, which can cause no major
difficulties in graphically solving LP problems
▫ The feasible region will not change if the constraint is dropped.
▫ The available resource corresponding to a redundant constraint
has zero shadow price.
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Four Special Cases in LP

• Multiple optimal solutions
▫ The Isoprofit line runs perfectly parallel to one of the constraint lines.

Any point along the line between A

and B provides an optimal solution.
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In-class Exercises
• Suppose the following constraints are for one LP
problem. Which of the following constraints is/are
redundant?
Y
10
(1) 2𝑋 + 𝑌 ≤ 10
(2) 3𝑋 + 7𝑌 ≤ 42
6 Constraint 2&3
(3) 𝑋 ≤ 6
4 𝑌≤4 4
5 𝑋, 𝑌 ≥ 0
X
5 6 14
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In-class Exercises
• A warehouse company needs to determine how many
storage rooms of each size to build. Its objective and
constraints follow:
• Maximize monthly earnings = 50𝑋1 + 20𝑋2
• Subject to
(advertising budget) 20𝑋1 + 40𝑋2 ≤ 4,000
(square footage) 100𝑋1 + 50𝑋2 ≤ 8,000
(rental limit) 𝑋1 ≤ 60
𝑋1, 𝑋2 ≥ 0
where 𝑋1(𝑋2) = number of large (small) spaces developed
• Please find the optimal solution using the corner point
solution method.
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In-class Exercises
• Corner point solution method

50𝑋1 + 20𝑋2
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In-class Exercises
• Solve the following LP formulation graphically, using the
isocost line approach:

• Minimize costs =24𝑋1 + 28𝑋2

• Subject to
5𝑋1 + 4𝑋2 ≤ 2,000
𝑋1 ≥ 80
𝑋1 + 𝑋2 ≥ 300
𝑋2 ≥ 100
𝑋1, 𝑋2 ≥ 0
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In-class Exercises
Chapter 03
Linear Programming Applications
IIMT3636
Faculty of Business and Economics
The University of Hong Kong
Instructor: Dr. Yipu DENG
 18

Linear Programming Applications

• Real-world problems that can be modeled using LP
▫ Media selection
▫ Marketing research
▫ Labor scheduling
▫ Financial portfolio selection
▫ Transportation
▫ Production planning
▫ …

• We will solve them using Excel Solver.

• Although some models might be numerically small, the principles

developed here can be applied to larger problems.
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Media Selection
• LP models have been used in the advertising field as a decision aid
in selecting an effective media mix (e.g., radio or television
commercials, newspaper ads, direct mailings, social media, etc.).

• Objective
▫ Maximize audience exposure
▫ Or minimize advertising cost

• Constraints
▫ Contract requirements
▫ Limited media availability
▫ Company policy
▫ …
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Media Selection
• The Win Big Gambling Club promotes gambling junkets to casinos
in the Bahamas.

• The club has $8,000 per week for local advertising, which is to be
allocated among four promotional media (i.e., TV spots, newspaper
ads, and two types of radio ads).

• Win Big’s goal is to reach the largest possible high-potential

audience through the various media.

• Win Big’s contractual arrangements require that at least five radio

spots be placed each week. To ensure a broad-scoped promotional
campaign, management also insists that no more than $1,800 be
spent on radio advertising every week.
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Media Selection
Budget = $8,000
AUDIENCE COST MAX ADS NUMBER
REACHED PER AD PER TAKEN
MEDIUM PER AD ($) WEEK PER WEEK
TV spot (1 minute) 5,000 800 12 𝑋1

Daily newspaper (full-page ad) 8,500 925 5 𝑋2

Radio spot (30 sec., prime time) 2,400 290 25 𝑋3

Radio spot (1 minute, afternoon) 2,800 380 20 𝑋4

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Media Selection
Maximize audience exposure
= 5,000X1 + 8,500X2 + 2,400X3 + 2,800X4
Subject to
X1 ≤ 12 (max TV spots/wk)
X2 ≤5 (max newspaper ads/wk)
X3 ≤ 25 (max 30-sec radio spots ads/wk)
X4 ≤ 20 (max newspaper ads/wk)
800X1 + 925X2 + 290X3 + 380X4 ≤ $8,000 (weekly advertising budget)
X3 + X4 ≥ 5 (min radio spots contracted)
290X3 + 380X4 ≤ $1,800 (max dollars spent on radio)
X1, X2, X3, X4 ≥ 0
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Media Selection
 24

Marketing Research
• Management Sciences Associates (MSA) handles consumer surveys.
• In a survey for the national press service, MSA determines that it
must fulfill several requirements in order to draw statistically valid
conclusions on the sensitive issue of U.S. laws:
▫ Survey at least 2,300 U.S. citizens in total.
▫ Survey at least 1,000 citizens who are 30 years of age or younger.
▫ Survey at least 600 citizens who are between 31 and 50 years of age.
▫ Ensure that at least 15% of those surveyed are female
▫ Ensure that among those surveyed who are 51 years of age or over, no
more than 20% of them are female
COST PER PERSON SURVEYED($)
Gender AGE≤30 AGE 31-50 AGE≥51
Female 7.50 6.80 5.50

Male 6.90 7.25 6.10

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Marketing Research
Minimize total interview costs = 7.5 X1 + 6.8 X2 + 5.5 X3 + 6.9 X4 + 7.25 X5 + 6.1 X6

Subject to
X1 + X2 + X3 + X4 + X5 + X6 ≥ 2,300 (total citizens)
X1 + X4 ≥ 1,000 (citizens age 30 or younger)
X2 + X5 ≥ 600 (citizens are 31-50)
X1 + X2 + X3 ≥ 0.15(X1 + X2 + X3 + X4 + X5 + X6 ) (female)
X3 ≤ 0.2(X3 + X6 ) (limit on citizens age 51 and older that are female)
X1, X2, X3, X4 , X5 , X6 ≥0
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Marketing Research
 27

Worker Scheduling
• A post office requires different numbers of full-time employees on
different days of the week.
• Union rules state that each full-time employee must work five
consecutive days and then receive two days off.
• The post office wants to meet its daily requirements using only full-
time employees, while minimizing the total number of full-time
employees on its payroll.
Day of Week Minimum Number of Employees Required
Monday 17
Tuesday 13
Wednesday 15
Thursday 19
Friday 14
Saturday 16
Sunday 11
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Worker Scheduling
• Decision variables:
▫ 𝑋1 : the number of employees whose first working day is Monday
▫ 𝑋2 : the number of employees whose first working day is Tuesday
▫ 𝑋3 : the number of employees whose first working day is Wednesday
▫ 𝑋4 : the number of employees whose first working day is Thursday
▫ 𝑋5 : the number of employees whose first working day is Friday
▫ 𝑋6 : the number of employees whose first working day is Saturday
▫ 𝑋7 : the number of employees whose first working day is Sunday

• Objective:
▫ Minimize: 𝑋1 + 𝑋2 + 𝑋3 + 𝑋4 + 𝑋5 + 𝑋6 + 𝑋7
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Worker Scheduling
• Constraints:
• Monday constraint: 𝑋1 + 𝑋4 + 𝑋5 + 𝑋6 + 𝑋7 ≥ 17
• Tuesday constraint: 𝑋1 + 𝑋2 + 𝑋5 + 𝑋6 + 𝑋7 ≥ 13
• Wednesday constraint: 𝑋1 + 𝑋2 + 𝑋3 + 𝑋6 + 𝑋7 ≥ 15
• Thursday constraint: 𝑋1 + 𝑋2 + 𝑋3 + 𝑋4 + 𝑋7 ≥ 19
• Friday constraint: 𝑋1 + 𝑋2 + 𝑋3 + 𝑋4 + 𝑋5 ≥ 14
• Saturday constraint: 𝑋2 + 𝑋3 + 𝑋4 + 𝑋5 + 𝑋6 ≥ 16
• Sunday constraint: 𝑋3 + 𝑋4 + 𝑋5 + 𝑋6 + 𝑋7 ≥ 11
• Non-negativity: 𝑋1 , 𝑋2 , 𝑋3 , 𝑋4 , 𝑋5 , 𝑋6 , 𝑋7 ≥ 0
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Worker Scheduling
Worker Scheduling Model

Decision Variables Monday Tuesday Wednesday Thursday Friday Saturday Sunday Total No. of FT Employees
No. of FT Employees: 6.333333333 3.333333333 2 7.333333333 0 3.333333333 0 22.33333

Constraints RHS
Monday 1 1 1 1 1 17 >= 17
Tuesday 1 1 1 1 1 13 >= 13
Wednesday 1 1 1 1 1 15 >= 15
Thursday 1 1 1 1 1 19 >= 19
Friday 1 1 1 1 1 19 >= 14
Saturday 1 1 1 1 1 16 >= 16
Sunday 1 1 1 1 1 12.66667 >= 11

• To get integer solutions

▫ Round the solutions to the nearest integers
▫ Add integer constraints
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Portfolio Selection
• The International City Trust (ICT) is instructed by a
client to invest $250,000, with guidelines:
▫ Municipal bonds should constitute at least 20% of the investment
▫ At least 40% of the investment should be placed in a combination
of electronic firms, aerospace firms, and drug manufacturers
▫ No more than 50% of the amount invested in municipal bonds
should be placed in a high-risk, high-yield nursing home stock
• The goal is to maximize the expected return.
Los Angeles Thompson United Happy Days
municipal Electronics, Aerospace Palmer Nursing
Investment bonds Inc. Corp. Drugs Homes
Projected
Return (%) 5.3 6.8 4.9 8.4 11.8
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Portfolio Selection
Maximize 5.3% x1 + 6.8%𝑥2 + 4.9%𝑥3 + 8.4%𝑥4 + 11.8%𝑥5
𝒙𝟏 + 𝒙𝟐 + 𝒙𝟑 + 𝒙𝟒 + 𝒙𝟓 ≤ 𝟐𝟓𝟎, 𝟎𝟎𝟎
𝒙𝟏 ≥ 𝟎. 𝟐 𝒙𝟏 + 𝒙𝟐 + 𝒙𝟑 + 𝒙𝟒 + 𝒙𝟓
𝒙𝟐 + 𝒙𝟑 + 𝒙𝟒 ≥ 𝟎. 𝟒 𝒙𝟏 + 𝒙𝟐 + 𝒙𝟑 + 𝒙𝟒 + 𝒙𝟓
𝒙𝟓 ≤ 𝟎. 𝟓𝒙𝟏
𝒙𝟏 , 𝒙𝟐 , 𝒙𝟑 , 𝒙𝟒 , 𝒙𝟓 ≥0
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Portfolio Selection: Sensitivity Report

Question: What is the marginal return rate?

 34

Transportation Problem
• Transportation problems deal with the distribution of goods
from several origins to several destinations.
• The Executive Furniture Corporation is faced with the
following transportation problem and is trying to minimize
the daily transportation cost.
Daily Supply Source Destination Daily Demand

100 Des Moines $5 Albuquerque 300

(Plant 1) (Market 1)
$3 $4
Evansville
$8 Boston
300 $4 200
(Plant 2) $3 (Market 2)

Fort $9 $7
300 Cleveland 200
Lauderdale
$5 (Market 3)
(Plant 3)
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Transportation Problem

• In general, for a transportation problem with A sources and B

destinations, the number of decision variables is A×B, and the number
of constraints (except the non-negativity constraint) is A + B.
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In-Class Exercise
• The following table shows the sensitivity analysis of the
transportation problem. If you can expand the supply by
100, which plant would you choose?
Constraints
Final Shadow Constraint Allowable Allowable
Cell Name Value Price R.H. Side Increase Decrease
$C$7 Supply Sum Des Moines 100 -4 100 200 0
$D$7 Supply Sum Evansville 300 -2 300 100 0
$E$7 Supply Sum Fort Lauderdale 300 0 300 1E+30 0
$F$4 Albuquerque Demand Sum 300 9 300 0 200
$F$5 Boston Demand Sum 200 6 200 0 100
$F$6 Cleveland Demand Sum 200 5 200 0 100
 37

Production Planning
• During the next four months, the SureStep Company must meet the
following demand for pair of shoes on time: 3000 in month 1; 5000
in month 2; 2000 in month 3; and 3800 in month 4.
• At the beginning of month 1, 1500 pairs of shoes are on hand.
• At the beginning of month 1, the company has 100 workers. At the
beginning of each month, workers can be hired or fired. Each hiring
costs $1600 and each firing costs $2000.
• A worker is paid $1200 per month. Each worker can work up to 160
hours a month before he or she has to work overtime. A worker can
work up to 20 hours of overtime a month and is paid $12 per hour
for overtime.
• It takes 4 hours of labor and $15 of raw material to produce a pair of
shoes.
• At the end of each month, each pair of unsold shoes incurs a
holding cost of $3.
▫ Factors to consider: product demand, inventory, labor capacity, storage costs…
 38

Production Planning
• SureStep wants to find the minimum-cost solution that meets
forecasted demand on time (i.e., all demand should be satisfied).
▫ How costs are calculated; how labor hours are calculated; how demand is met
with both production and inventory on hand.

• There are three types of decisions to make:

▫ Monthly number of workers hired or fired
▫ Monthly hours of overtime Production capacity
▫ Actual monthly production quantity

• Constraints:
▫ Monthly overtime limit: a worker can only work up to 20 hours of overtime.
▫ Actual monthly production quantity ≤ Monthly production capacity
▫ Actual monthly production quantity + monthly inventory ≥ Monthly demand
 39

The decisions in different months

will affect each other through the
Production Planning balance equations.

• Inventory Balance Equation:

Ending inventory of last month
+ Production quantity of this month
– Demand of this month
= Ending inventory of this month ≥ 0 → satisfy the demand

• Worker Balance Equation:

Workers available last month
+ Workers hired this month
– Workers fired this month
= Workers available this month

• Monthly Production Capacity = Total Available Hours / 4

= (Number of workers available * 160 + Monthly overtime) / 4

• Monthly overtime <= Number of workers available * 20