ALABADO, Kenneth Adrian

MGT 1102 – Business Analytics with Spreadsheet

MTh (4:30 – 6:00, 6:00 – 7:30)

SEATWORK IN LINEAR OPTIMIZATION

1. What is linear programming?

Linear programming is a pictorial representation of a simple linear program with two variables and six
inequalities. The set of feasible solutions is depicted in yellow and forms a polygon, a 2dimensional
polytypic. The linear cost function is represented by the red line and the arrow: The red line is a level
set of the cost function, and the arrow indicates the direction in which we are optimizing.

A closed feasible region of a problem with three variables is a convex polyhedron. The surfaces giving
a fixed value of the objective function are planes (not shown). The linear programming problem is to
find a point on the polyhedron that is on the plane with the highest possible value.

Linear programming (LP, also called linear optimization) is a method to achieve the best outcome (such
as maximum profit or lowest cost) in a mathematical model whose requirements are represented by
linear relationships. Linear programming is a special case of mathematical programming (also known
as mathematical optimization).

More formally, linear programming is a technique for the optimization of a linear objective function,
subject to linear equality and linear inequality constraints. Its feasible region is a convex polytypic,
which is a set defined as the intersection of finitely many half spaces, each of which is defined by a
linear inequality. Its objective function is a real-valued affine (linear) function defined on this
polyhedron. A linear programming algorithm finds a point in the polyhedron where this function has
the smallest (or largest) value if such a point exists.
Linear programs are problems that can be expressed in canonical form as
where x represents the vector of variables (to be determined), c and b are vectors of (known)
coefficients, A is a (known) matrix of coefficients, and is the matrix transpose. The expression to be
maximized or minimized is called the objective function (cTx in this case). The inequalities Ax ≤ b and
x ≥ 0 are the constraints which specify a convex polytypic over which the objective function is to be
optimized. In this context, two vectors are comparable when they have the same dimensions. If every
entry in the first is less-than or equal-to the corresponding entry in the second, then it can be said that
the first vector is less-than or equal-to the second vector.
Linear programming can be applied to various fields of study. It is widely used in mathematics and to
a lesser extent in business, economics, and for some engineering problems. Industries that use linear
programming models include transportation, energy, telecommunications, and manufacturing. It has
proven useful in modeling diverse types of problems in planning, routing, scheduling, assignment, and
design.
2. What are the general guidelines for problem formulation?
SPECIFY THE RESEARCH OBJECTIVES
A clear statement defining your objectives will help you develop effective research.
It will help the decision makers evaluate the research questions your project should answer as well as
the research methods your project will use to answer those questions. It’s critical that you have
manageable objectives. (Two or three clear goals will help to keep your research project focused and
relevant.)

• REVIEW THE ENVIRONMENT OR CONTEXT OF THE RESEARCH PROBLEM

As a marketing researcher, you must work closely with your team of researchers in defining and testing
environmental variables. This will help you determine whether the findings of your project will produce
enough information to be worth the cost.

In order to do this, you have to identify the environmental variables that will affect the research project
and begin formulating different methods to control these variables.

• EXPLORE THE NATURE OF THE PROBLEM

Research problems range from simple to complex, depending on the number of variables and the nature
of their relationship. Sometimes the relationship between two variables is directly related to a problem
or questions, and other times the relationship is entirely unimportant.

If you understand the nature of the research problem as a researcher, you will be able to better develop
a solution to the problem.

To help you understand all dimensions, you might want to consider focus groups of consumers,
salespeople, managers, or professionals to provide what is sometimes much-needed insight into a
particular set of questions or problems.

• DEFINE THE VARIABLE RELATIONSHIPS

Marketing plans often focus on creating a sequence of behaviors that occur over time, as in the adoption
of a new package design, or the introduction of a new product.

Such programs create a commitment to follow some behavioral pattern or method in the future.

Studying such a process involves:

• Determining which variables affect the solution to the research problem.

• Determining the degree to which each variable can be controlled and used for the purposes of the
company.
• Determining the functional relationships between the variables and which variables are critical to
the solution of the research problem.

During the problem formulation stage, you will want to generate and consider as many courses of action
and variable relationships as possible.
 • THE CONSEQUENCES OF ALTERNATIVE COURSES OF ACTION
There are always consequences to any course of action used in one or more projects. Anticipating and
communicating the possible outcomes of various courses of action is a primary responsibility in the
research process.

3. What are the steps in solving Linear Programs with Excel Solver?

Using Excel's Built-In Solver - Product Mix Example

Understanding the Excel Solver Dialogs

To let the Excel Solver know which cells on the worksheet represent the decision variables, constraints
and objective function, we click Solver button on the Excel Data tab, or the Premium Solver button on
the Add-Ins tab, which displays the Solver Parameters dialog. In the Set Objective (or Set Target Cell)
edit box, we type or click on cell F5, the objective function. In the By Changing Variable Cells edit
box, we type B4:E4 or select these cells with the mouse. (Click on the image to see it full-size.)

To add the constraints, we click on the Add button in the Solver Parameters dialog and select cells
F8:F11 in the Cell Reference edit box (the left hand side), and select cells G8:G11 in the Constraint
edit box (the right hand side); the default relation <= is OK. (Click on the image to see it full-size.)

We choose the Add button again (either from the Add Constraint dialog above, or from the main
Solver Parameters dialog) to define the non-negativity constraint on the decision variables.
 (Alternatively, we can check the Make Unconstrained Variables Non-Negative option in the Solver
Parameters dialog.)
When we've completely entered the problem, the Solver Parameters dialog appears as shown below.
This is the Excel Solver dialog from Excel 2010; the Solver in earlier versions of Excel have similar
elements. Frontline's Premium Solver products can emulate either style, and they also offer a new
Ribbon-based user interface. (Click on the image to see it full-size.)

Finding and Using the Solution

To find the optimal solution, we simply click on the Solve button. After a moment, the
Excel Solver returns the optimal solution in cells B4 through E4. This means that we should build
23 pallets of Tahoe panels, 15 pallets of Pacific panels, 39 pallets of Savannah panels, and 0 pallets
of Aspen panels. This results in a total profit of $58,800 (shown in cell F5). (Click on the image to
see it full-size.)
 The message "Solver found a solution" appears in the Solver Results dialog, as shown above. (Click
on the image to see it full size). We now click on "Answer" in the Reports list box to produce an
Answer Report, and click OK to keep the optimal solution values in cells B4:E4.

After a moment, the Solver creates another worksheet containing an Answer Report, like the one
below, and inserts it to the left of the problem worksheet in the Excel workbook. (Click on the
image to see
it full-size.)

This report shows the original and final values of the objective function and the decision variables, as
well as the status of each constraint at the optimal solution. Notice that the constraints on glue, pressing,
and pine chips are binding and have a slack value of 0. The optimal solution would use up all of these
resources; however, there were 28,000 pounds of oak chips left over. If we could obtain additional glue,
pressing capacity, or pine chips we could further increase total profits, but extra oak chips would not
help in the short run.

4. Define the following terms below:

A. Binding constraint

 I will define non-binding constraints as constraints whose changes do not affect the optimal
solution. We can now somehow think about the binding definition. Suppose that you have a problem
like the following one:

Maximize 5x1 + 4x2 + 6x3

subject to 6x1 + 5x2 + 8x3 <= 16 (c1)
10x1 + 20x2 + 10x3 <= 35 (c2)
0 <= x1, x2, x3 <= 1
 In this case we have two binding constraints c1 and c2, which means that in optimality the left hand
side is equal to the right hand side (as Bill said). More than that, if we analyze the shadow price of
each constraint we will get the benefit of increasing by one unit the right hand side of each
constraint.

B. Slack value
A slack value is reported for each of the constraints. The term "slack" applies to less
than or equal constraints. If a constraint is binding, then the corresponding slack or surplus
value will equal zero. When a less-than-or-equal constraint is not binding, then there is some
unutilized, or slack, resource. The slack value is the amount of the resource, as represented by
the less-than-or-equal constraint that is not being used, when a greater-than-or-equal constraint
is not binding.
C. Slack variable
In an optimization problem, a slack variable is a variable that is added to an inequality
constraint to transform it into an equality. Introducing a slack variable replaces an inequality
constraint with an equality constraint and a non-negativity constraint on the slack variable.
Slack variables are used in particular in linear programming. As with the other variables in the
augmented constraints, the slack variable cannot take on negative values, as the simplex
algorithm requires them to be positive or zero.
D. Surplus variable
In Linear programming a surplus variable is a variable which is subtracted from a constraint
to turn the inequality into an equation. This is required to turn an inequality into an equality
where a linear combination of variables is greater than or equal to a given constant in the
former. As with the other variables in the augmented constraints, the surplus variable cannot
take on negative values, as the Simplex algorithm requires them to be positive or zero.
E. Shadow price
A shadow price is commonly referred to as a monetary value assigned to currently
unknowable or difficult-to-calculate costs. It is based on the willingness to pay principle - in
the absence of market prices, the most accurate measure of the value of a good or service is
what people are willing to give up in order to get it. Shadow pricing is often calculated on
certain assumptions and premises. As a result, it is subjective and somewhat imprecise and
inaccurate. The origin of these costs is typically due to an externalization of costs or an
unwillingness to recalculate a system to account for marginal production.