Decision Models & Optimization Final Examination Term II, 2015 Page 1 of 11

Indian School of Business

Hyderabad, India

Decision Models & Optimization

Term II, 2015

Prof. Anjani Jain Prof. Ziv Katalan

Yale School of Management The Wharton School
Yale University University of Pennsylvania
anjani.jain@yale.edu katalan@wharton.upenn.edu
Instructions
This examination is open book and open notes. Calculators are allowed, but not laptop or handheld
computers capable of running spreadsheets. The examination will last exactly two hours. Write all your
answers in the space provided within this exam booklet.

In all multiple-choice questions, you need only check the correct answer. We will not consider
supplementary explanations when grading these questions.

Final Examination
Good luck!

Question Part points out of

Last Name: _____________________ 1 a 2
b 2
First Name: _____________________ c 2
d 2
Student ID: _____________________ e 2
f 2
g 5
total 17

2 a 10
total 10

3 a 4
b 2
c 2
d 2
e 2
f 3
g 4
h 4
total 23

Total 50
Decision Models & Optimization Final Examination Term II, 2015 Page 2 of 11

1. Air Britain Call Center Staffing (17 points)

Air Britain is operating a call center in Bristol. Table 1 below shows the minimum number of customer
service agents required to have on duty during each of six 4-hour time slots during the day.

Time Slot 2am-6am 6am-10am 10am-2pm 2pm-6pm 6pm-10pm 10pm-2am

Agents Required 60 120 160 165 125 80
Table 1: Minimum number of agents required for each of 6 Time-Slots

Agents work 8-hour shifts, and each of 6 shifts begins at the start of a corresponding time slot. An
agent’s daily pay varies by the time of day s/he works, and Table 2 shows the pay rates.

Shift Number 1 2 3 4 5 6
Time 2am-10am 6am-2pm 10am-6pm 2pm-10pm 6pm-2am 10pm-6am
Daily Pay £160 £140 £120 £140 £160 £180
Table 2: Daily pay for an agent, by Shift

The airline assigns employees to shifts to minimize its total daily staffing costs, and to determine the
minimum-cost staff schedule it formulates and solves the following LP.

Decision Variables

Xi = number of agents to work during shift i where i = 1,2,…,6

Objective Function

min 160 X1 + 140 X2 + 120 X3 + 140 X4 + 160 X5 + 180 X6

Constraints

Minimum Number of Agents on Duty Each Time Slot

X1 + X6 ≥ 60 ( 2am - 6am)
X1 + X 2 ≥ 120 ( 6am - 10am)
X2 + X 3 ≥ 160 (10am - 2pm)
X3 + X4 ≥ 165 ( 2pm - 6pm)
X4 + X5 ≥ 125 ( 6pm - 10pm)
X5 + X6 ≥ 80 (10pm - 2am)

Non-negativity
Xi ≥ 0, i=1,2,3,4,5,6

Note that the formulation assumes that fractional numbers of employees can be assigned to
the various shifts.
Decision Models & Optimization Final Examination Term II, 2015 Page 3 of 11

Here is a Spreadsheet Implementation of the LP

A B C D E F G H I J K
1 ABCall Ctr
2
3 Shift 1 2 3 4 5 6
4 Pay 160 140 120 140 160 180 Total Cost
5 Num. Starting 60 60 120 45 80 0 51,500
6
7 On Duty Required
8 2 a.m.- 6 a.m. 1 0 0 0 0 1 60 >= 60
9 6 a.m.-10 a.m. 1 1 0 0 0 0 120 >= 120
10 10 a.m.- 2 p.m. 0 1 1 0 0 0 180 >= 160
11 2 p.m.- 6 p.m. 0 0 1 1 0 0 165 >= 165
12 6 p.m.-10 p.m. 0 0 0 1 1 0 125 >= 125
13 10 p.m.- 2 a.m. 0 0 0 0 1 1 80 >= 80

Decision variables are in cells B5:G5, the objective function is in cell I5, the left-hand sides of the constraints
are in cells I8:I13, and the right-hand sides are in cells K8:K13. 

Here is the Solver Sensitivity Report

Variable Cells
Final Reduced Objective Allowable Allowable
Cell Name Value Cost Coefficient Increase Decrease
$B$5 Number Starting Shift 1 60 0 160 20 20
$C$5 Number Starting Shift 2 60 0 140 20 20
$D$5 Number Starting Shift 3 120 0 120 20 120
$E$5 Number Starting Shift 4 45 0 140 140 20
$F$5 Number Starting Shift 5 80 0 160 20 140
$G$5 Number Starting Shift 6 0 20 180 1E+30 20

Constraints
Final Shadow Constraint Allowable Allowable
Cell Name Value Price R.H. Side Increase Decrease
$I$8 2 a.m.- 6 a.m. On Duty 60 20 60 20 60
$I$9 6 a.m.-10 a.m. On Duty 120 140 120 1E+30 20
$I$10 10 a.m.- 2 p.m. On Duty 180 0 160
$I$11 2 p.m.- 6 p.m. On Duty 165 120 165 1E+30 20
$I$12 6 p.m.-10 p.m. On Duty 125 20 125 20 45
$I$13 10 p.m.- 2 a.m. On Duty 80 140 80 45 20

Here we need to minimize the no.of people. So Constraint R.H.S 120 -21 will reduce the
shadow price further.
For RHS 60, inc above 20 will increase shadow price.
Decision Models & Optimization Final Examination Term II, 2015 Page 4 of 11

Answer each of the following questions. Each question is independent of the others.

a) (2 points) Suppose that the pay of shift-5 agents increases by £10. Which one of the following
statements holds?
( ) The overall cost and the optimal solution values all stay the same.
( ) The overall cost stays the same but the optimal solution values change.
( ) The overall cost increases but the optimal solution values stay the same.
( ) The overall cost increases and the optimal solution values change.

b) (2 points) Suppose that the pay of shift-2 agents decreases by £25. Which one of the following
statements holds?
( ) The overall cost decreases by at least £1,500, possibly more.
( ) The overall cost decreases by exactly £1,500.
( ) The overall cost decreases by at most £1,500, possibly less.
( ) It cannot be determined from the sensitivity report which of the above cases is true.

c) (2 points) Suppose that the number agents needed from 6pm to 10pm decreases by 20, and the
problem is re-solved. Which one of the following statements holds?
( ) The overall cost goes down by £400 and the optimal solution values stay the same.
( ) The overall cost goes down by £400 and the optimal solution values change.
( ) The overall cost does not change and the solution values stay the same.
( ) The overall cost does not change and the solution values change.
( ) It cannot be determined from the sensitivity report which of the above cases is true.

d) (2 points) Suppose that the number of agents needed from 2am to 6am increases by 40, and the
problem is re-solved. Which one of the following statements holds?
( ) The overall cost goes up by at most £800, maybe less.
( ) The overall cost goes up by exactly £800.
( ) The overall cost goes up by at least £800, maybe more.
( ) It cannot be determined from the sensitivity report which of the above cases is true.

e) (2 points) The allowable increase and decrease for the “10am-2pm On Duty” constraint are
hidden. Given the LP results and the rest of the sensitivity report, what can you say about the
hidden values?
( ) The allowable increase is 160, and the allowable decrease is 20.
( ) The allowable increase is 20 and the allowable decrease is 160.
( ) The allowable increase is infinite (1E+30), and the allowable decrease is 20.
( ) The allowable increase is 20 and the allowable decrease is infinite (1E+30).
( ) The allowable increase and decrease cannot be determined from the information provided.
Decision Models & Optimization Final Examination Term II, 2015 Page 5 of 11

Suppose that Air Britain wants to have the ability to assign some customer service agents to work
overtime by staying four hours beyond the normal eight hours on shifts 2 and 3. That is, for each of
the shifts starting at 6am or 10am, Air Britain can assign agents to work for 8 hours or 12 hours.
Overtime is billed at a 50% premium. Hence, if an agent on shift 2 works overtime, s/he will work
between 6am and 6pm and is paid £245 (= £140 + £105 where 105 = 1.5 x (140/8) x 4.) Similarly,
agents on overtime on shift 3 are paid £210.

Air Britain formulates a new model that minimizes total cost and includes the ability to assign agents to
regular time (8-hour) or overtime (12-hour) shifts.
f) (2 points) Which one of the following claims is true?
( ) The optimal cost under the model that allows Air Britain to assign overtime will be no more
than the cost under the original model.
( ) The optimal cost under the model that allows Air Britain to assign overtime will be no less
than the cost under the original model.
( ) The optimal cost will be the same, with or without the ability of Air Britain to assign overtime.
( ) The optimal cost in the model that allows for overtime could be either higher or lower than the
optimal cost in the model that does not. The answer depends on the number of agents
required per shift.
g) (5 points) Now formulate the new LP/IP model that allow Air Britain to assign agents to work
overtime on shifts 2 and 3. Clearly define any new decision variables or modify current ones if
necessary.

New or Modified Decision Variables

Modified Objective Function

New or Modified Constraints

Decision Models & Optimization Final Examination Term II, 2015 Page 6 of 11

2. Wharton World (10 points)

The Wharton faculty has voted to open a theme park in Shanghai named Wharton World. Visitors will
spend exactly four hours in the park and will be admitted at three times of day: 9am, 11am, and 1pm.
Table 3 shows the number of arriving customers forecast to show up at each entry time, as well as each
customer’s expected contribution over the 4 hours s/he spends at the park.

Entrance Time 9am 11am 1pm

Estimated number of new arrivals 800 1,000 600
Contribution per visitor (in yuan) 360 450 300
Table 3: Visitor Arrivals and Contributions, by Entrance Time
To limit crowding, Wharton World may decide to turn away some of the potential customers who arrive
at a given entry time. About 50% of the customers who are turned away at 9am or 11am are willing to
wait until the next the next entrance time. People turned away at 1pm do not return the next day.
For example, if the park admits 400 of the 800 people who arrive at 9am, then 200 of the 400 customers
who are turned away will return at 11am and join the 1000 “11am arrivals” shown in the table to make
a total of 1200 people that could be served at 11am. If the park then admits 700 of the 1200 waiting
people at 11am, 250 of the 500 people who are turned away will return at 1pm to make total waiting at
1pm equal to 850 people. Again, those who are turned away at 1pm do not return the next day.
The number of people admitted at 9am, 11am, and 1pm drives the total number in the park over the
course of the day. For example, suppose 400 are admitted at 9am, 700 are admitted at 11am, and 500
are admitted at 1pm. Given 4-hour visits, the park must accommodate 400 people from 9am-11am,
1100 (400+700) people from 11am-1pm, 1200 (700+500) people from 1pm-3pm, and 500 people from
3pm-5pm.
The park will require 4 square meters of space for each person visiting the park at the peak hour of the
day. In the example above, a peak of 1200 people is reached from 1pm to 3pm, so the park would
require 4,800 square meters of space. The cost to lease each square meter is 36,500 yuan per year,
or 100 yuan per square meter per day.
Wharton wishes to decide how many square meters to lease, as well as how many visitors to admit at
9am, 11am, and 1pm each day to maximize daily profits – the sum of customer contributions, minus
leasing costs – subject to the constraint that the number of square meters required at peak hours does
not exceed the amount Wharton has leased.
a) (10 points) Formulate a linear program optimization model to solve Wharton’s problem.

Decision Variables (Please define the variables and their units clearly):
Decision Models & Optimization Final Examination Term II, 2015 Page 7 of 11

Objective Function:

Constraints:
Decision Models & Optimization Final Examination Term II, 2015 Page 8 of 11

3. Golden Age Health (23 points)

Golden Age Health (GAH) offers a traditional health insurance policy that reimburses policy holders for
their medical expenses. The amount the policy pays a policy holder depends on the total dollar value
of the medical claims s/he files in a given year.

Reimbursement for annual medical claims works as follows:

 If annual claims fall below a fixed deductible limit of $1,500, the policy holder receives nothing.

 Beyond the $1,500 deductible limit, the policy reimburses 80% of expenses, up to a co-pay limit of
$5,000.
For example, with annual claims of $2,000, a policy holder would receive $400 from GAH (i.e., 80%
of the amount of the claim over the deductible.)
 Annual claims beyond the $5,000 co-pay limit are reimbursed at 100%.
For example, a policy holder with $10,000 of annual claims would receive $7,800 from GAH (i.e.,
100% of the amount above $5,000 plus 80% of the first $5000 over the deductible.)

GAH’s policy holders’ annual medical claims are independent and identically distributed (i.i.d.) and are
lognormally distributed with a mean of $4,000 and a standard deviation of $3,000.

a) (4 points) Let C be a random variable that represents a policy holder’s annual medical claims in $.
Write one or more mathematical expressions to define his or her payout in $ from the policy (P) as
a function of C. You may use any mathematical or spreadsheet functions in the formulae.

P=
Decision Models & Optimization Final Examination Term II, 2015 Page 9 of 11

GAH runs a Monte Carlo simulation to evaluate the distribution of the policy payout for a customer.
Below are the resulting frequency and cumulative distributions, and summary statistics.

25.0% 100%

22.5% 90%

20.0% 80%

% of Payout ≤ top of range
% of Payout in given range

17.5% 70%
Mean 2,119.9
15.0% 60%
Median 1,308.5
12.5% Standard Dev 2,635.7 50%
Minimum 0.0
10.0% Maximum 27,706.9 40%
Mean Std. Err 48.1 
7.5% 30%

5.0% 20%

2.5% 10%

0.0% 0%

Payout to policy holder (in $000's)

b) (2 points) Based on the above simulation results, within what range lies the 90% confidence interval
(with z-value 1.65) for the true mean (expected) payout to a policy holder?

( ) [2,071.8 , 2,168.0]

( ) [2,040.5 , 2,199.3]

( ) [2,023.6 , 2,216.1]

( ) [-2,229,0 , 6,468.8]
c) (2 points) Based on the above simulation results, what is the number of trials in the sample?

( ) 55

( ) 1,000

( ) 3,000

( ) 6,000

( ) 12,000
Decision Models & Optimization Final Examination Term II, 2015 Page 10 of 11

d) (2 points) Based on the above simulation results, within what range lies the estimated probability
that annual claims fall below the deductible limit of $1,500?

( ) between 0% and 30%

( ) between 30% and 50%

( ) between 50% and 70%

( ) between 70% and 100%

e) (2 points) Based on the above simulation results, which value below is closest estimate of the
probability that annual claims exceed the $5,000 copay limit?

( ) 10%

( ) 12%

( ) 25%

( ) 75%

( ) 90%

( ) 95%

f) (3 points) GAH expects to sell a 120,000 policies for the coming year and policy holders’ annual
claims are i.i.d. Based on the above simulation results, what is the lowest price (insurance premium)
should it charge to ensure that there’s a 97.5% chance that it makes a profit of at least 30% on its
total policy holders’ claims at the end of the year?
Pick the answer closest to your estimate and ignore the time value of money.
( ) about $2,216 per policy

( ) about $2,756 per policy

( ) about $2,818 per policy

( ) about $2,881 per policy

( ) about $9,609 per policy

( ) one customer’s payouts cannot be used to estimate the total payout for 120,000 customers
Decision Models & Optimization Final Examination Term II, 2015 Page 11 of 11

Each of the two questions below is independent of the other.

g) (4 points) Suppose GAH decreased the deductible limit to $1,000 to the policy holder and re-run
the simulation using exactly the same sample used in the original simulation run above (i.e., by
using same number of trials and initial seed value.)

i) The new sample mean (expected) payout

( ) will be lower

( ) will stay the same

( ) will be higher

( ) may be the same or be higher or lower

ii) The new sample standard deviation of payout

( ) will be lower

( ) will stay the same

( ) will be higher

( ) may be the same or be higher or lower

h) (4 points) Suppose the standard deviation of the policy holders’ annual medical claims increases
from $3,000 to $4,000.

i) The new true mean (expected) out of pocket expense of the policy holder

( ) will be lower

( ) will stay the same

( ) will be higher

( ) may be the same or be higher or lower

ii) The new true maximum out of pocket expense of the policy holder

( ) will be lower

( ) will stay the same

( ) will be higher

( ) may be the same or be higher or lower