No.

of Pages: 4 EC3057
No. of Questions: 4

JANUARY EXAMINATIONS 2005

Subject ECONOMICS

Title of Paper EC3057 MANAGEMENT SCIENCE

Time Allowed One and a Half Hours (90 minutes)

________________________________________________________________________________________________
Instructions to candidates

Answer two questions, ONE from section A and ONE from section B. Section A carries
60 marks, section B carries 40 marks. Graph paper will be provided. Statistical tables
will be provided. The approved calculator may be used.

________________________________________________________________________________________________

Section A

1. The following table summarizes the key facts about two products, x1 and x2, and the resources,
I, II, III and IV, required to produce them.

Resource Usage per Unit

Produced
Amount of Resource
Resource Product x1 Product x2 Avalailable
I 3 5 150
II 0 1 25
III 7.5 5 300

IV 1 0 35

Profit/unit 80 40

(a) Formulate a linear programming model for this problem. [5%]

(b) Use the graphical method to solve this model. [30%]

(c) Compute the shadow prices of the four constraints. Explain the economic meaning of

Continued/…
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“the shadow price of a constraint”. [20%]

(d) Compute the allowable ranges of the right hand sides of the third and the fourth
constraint. Explain the economic meaning of “the allowable range of the right hand side
of a constraint”. [30%]

(e) Suppose the right-hand side of the fourth constraint increases by 10 units, while the
right-hand side of the third constraint decreases by 10 units. Can we use the 100%
percent rule to determine how those changes affect profits? Why or why not?
[15%]

2. (a) What is the simplex method? Explain the intuition behind that algorithm.
[34%]

(b) Larry Edison is the Director of the Computer Centre for Buckley College. He now
needs to schedule the staffing of the centre. It is open from 8 AM until midnight. Larry
has monitored the usage of the centre at various times of the day and determined that
the following number of computer consultants are required:

Minimum Number of
Time of Day Consultants required
to be on Duty
8 AM - noon 6
Noon – 4 PM 8
4 PM – 8 PM 12
8 PM – midnight 6

Two types of computer consultants can be hired: full-time and part-time. The full-time
consultants work for eight consecutive hours in any of the following shifts: morning (8 AM – 4
PM), afternoon (noon – 8 PM), and evening (4 PM – midnight). Full-time consultants are paid
14 USD per hour. Part-time consultants can be hired to work any of the four shifts listed in the
table. Part-time consultants are paid 12 USD per hour.
An additional requirement is that during every time-period, there must be at least two full-time
consultants on duty for every part-time consultant on duty. Larry would like to determine how
many full-time and part-time consultants should work each shift to meet the above
requirements at the minimum possible cost.

Formulate a linear program for this problem. Provide a full justification of what you are doing.

[66%]

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Section B

3. Putin Abramovich, CEO of Abramovich Inc., considers building a new beer and carpet factory
in Birstall, Leicestershire. Seven tasks must be performed to build the new factory. Using the
PERT three-estimate approach, Putin has obtained the estimates in the table below for how
long these tasks will take. Also shown are the precedence relationships for these tasks.

Time Required (Weeks)

Optimistic Most Likely Pessimistic Immediate

Task Estimate Estimate Estimate Predecessors

A 4 8 10 -
B 1 2 4 -
C 3 5 6 A
D 1 7 13 A
E 1 3 5 B,D
F 4 8 10 E
G 5 7 10 B

The Leicester City Council promised that if the factory is completed before the next general
elections (to be held in 25 weeks), Putin will receive an investment subsidy equal to 500,000
Pounds. Therefore, Putin wants to know the probability that his company could finish the new
factory in time.

(a) Construct the project network for this project. [12%]

(b) Find the estimate for the mean and variance of the duration of each activity.
[18%]

(c) Find the mean critical path. [12%]

(d) Find the approximate probability of completing the project within 25 weeks.
[38%]

(e) Putin has concluded that the new factory would earn Abramovich Inc. a profit of about
250,000 Pounds if the project is completed within 25 weeks. However, because of the
penalty (i.e. not receiving the investment subsidy) for missing this deadline, his
company would lose about 300,000 Pounds if the project takes more than 25 weeks.
Putin only wants to construct the factory if it yields positive expected profits. How
would you advise him?
[20%]

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4. Yeltsin Abramovich is the production manager of Abramovich Inc. which produces beer in the
Midlands of the United Kingdom. To produce their annual production of beer, the firm uses
4000 kilos of Russian malt which they buy from Zyuganov Inc., a Russian based malt
producer.

To hold down his inventory level, Yeltsin has been ordering only 100 kilos each time. However,
Zyuganov, Inc. is now offering a discount for higher quantity orders according to the following
price schedule.

Discount Quantity Price per kilo

Category
1 1 to 750 10 Pounds
2 750 to 1000 8 Pounds
3 Above 1000 7 Pounds

The company uses an annual holding cost rate of 25% of the price of the item. The total cost
associated with placing an order is 100 Pounds per order.

Yeltsin has decided to use the basic EOQ model with quantity discounts to determine his optimal
inventory policy for malt.

(a) Explain the assumptions of the basic EOQ model. Are these assumptions restrictive or not?
[26%]

(b) Prove that at the optimal order quantity, annual holding costs equal the annual set-up costs.
[14%]

(c) For each discount category, use the square root formula for the basic EOQ model to
calculate the value of Q (feasible or infeasible) that minimize total inventory costs.
[12%]

(e) Determine the optimal (feasible) order quantity and the corresponding value of total
inventory costs. Provide a full justification of what you are doing. [38%]

It takes one week for the malt to be transported from Russia to the Midlands. A year consists of
250 working days.

(f) Compute the reorder point. [10%]

END OF PAPER