EMGT 501

HW #1
Chapter 2 - SELF TEST 18
Chapter 2 - SELF TEST 20
Chapter 3 - SELF TEST 28
Chapter 4 - SELF TEST 3
Chapter 5 - SELF TEST 6

Due Day: Sep 13

Ch. 2 18
For the linear program

Max

4 x1 1x2

s.t.

10 x1 2 x2 30
3 x1 2 x2 12
2 x1 2 x2 10
x1 , x2 0
a. Write this linear program in standard form.
b. Find the optimal solution using the graphical solution
procedure.
c. What are the values of the three slack variables at the
optimal solution?

Ch. 2 20
Embassy Motorcycle (EM) manufactures two lightweight
motorcycles designed for easy handling and safety. The EZRider model has a new engine and a low profile that make it
easy to balance. The Lady-Sport model is slightly larger,
uses a more traditional engine, and is specifically designed
to appeal to women riders. Embassy produces the engines
for both models at its Des Moines, Iowa, plant. Each EZRider engine requires 6 hours of manufacturing time and
each Lady-Sport engine requires 3 hours of manufacturing
time. The Des Moines plant has 2100 hours of engine
manufacturing time available for the next production period.
Embassys motorcycle frame supplier can supply as many
EZ-Rider frames as needed.

However, the Lady-Sport frame is more complex and the

supplier can provide only up to 280 Lady-Sport frames for
the next production period. Final assembly and testing
requires 2 hours for each EZ-Rider model and 2.5 hours for
each Lady-Sport model. A maximum of 1000 hours of
assembly and testing time are available for the next
production period. The companys accounting department
projects a profit contribution of $2400 for each EZ-Rider
produced and $1800 for each Lady-Sport produced.

a. Formulate a linear programming model that can be used

to determine the number of units of each model that
should be produced in order to maximize the total
contribution to profit.
b. Find the optimal solution using the graphical solution
procedure.
c. Which constraints are binding.

Ch. 3 28
National Insurance Associates carries an investment portfolio of
stocks, bonds, and other investment alternatives. Currently $200,000
of funds are available and must be considered for new investment
opportunities. The four stock options National is considering and the
relevant financial data are as follows:
Stock
A
B
C
D
Price per share
$100 $50
$80
$40
Annual rate of return
0.12 0.08 0.06 0.10
Risk measure per dollar invested
0.10 0.07 0.05 0.08
The risk measure indicates the relative uncertainty associated with the
stock in terms of its realizing the projected annual return; higher
values indicate greater risk. The risk measures are provided by the
firms top financial advisor.

Nationals top management has stipulated the following

investment guidelines: the annual rate of return for the portfolio
must be at least 9% and no one stock can account for more than
50% of the total dollar investment.
a. Use linear programming to develop an investment portfolio that
minimizes risk.
b. If the firm ignores risk and uses a maximum return-oninvestment strategy, what is the investment portfolio?
c. What is the dollar difference between the portfolios in parts (a)
and (b)? Why might the company prefer the solution developed
in part (a)?

Ch. 4 3
The employee credit union at State University is planning
the allocation of funds for the coming year. The credit union
makes four types of loans to its members. In addition, the
credit union invests in risk-free securities to stabilize
income. The various revenue-producing investments
together with annual rates of return are as follows:
Type of Loan/Investment
Automobile loans
Furniture loans
Other secured loans
Signature loans
Risk-free securities

Annual Rate of Return (%)

8
10
11
12
9

The credit union will have $2,000,000 available for

investment during the coming year. State laws and credit
union policies impose the following restrictions on the
composition of the loans and investments.
Risk-free securities may not exceed 30% of the total funds
available for investment.
Signature loans may not exceed 10% of the funds invested
in all loans (automobile, furniture, other secured, and
signature loans).
Furniture loans plus other secured loans may not exceed
the automobile loans
Other secured loans plus signature loans may not exceed
the funds invested in risk-free securities.

How should the $2,000,000 be allocated to each of the

loan/investment alternatives to maximize total annual
return? What is the projected total annual return?

Ch. 5 6

x1
Basis cB 5
2
0
3
zj
cj zj

x2

x3

20 25
1
0
2
1
0 -1/2

s1

s2

s3

0
1
0
0

0
0
1
0

0
0
0
1

40
30
15

a. Complete the initial tableau.

b. Write the problem in tableau form.
c. What is the initial basis? Does this basis correspond to
the origin? Explain.
d. What is the value of the objective function at this initial
solution?

e. For the next iteration, which variable should enter the

basis, and which variable should leave the basis?
f. How many units of the entering variable will be in the
next solution? Before making this first iteration, what do
you think will be the value of the objective function after
the first iteration?
g. Find the optimal solution using the simplex method.

EMGT 501
HW #1 Solutions
Chapter 2 - SELF TEST 18
Chapter 2 - SELF TEST 20
Chapter 3 - SELF TEST 28
Chapter 4 - SELF TEST 3
Chapter 5 - SELF TEST 6

Ch. 2 18
(a)

x2

Ch. 2 18
(b)

14
12

10
8
6
Optimal Solution
x1 = 18/7, x2 = 15/7, Value = 87/7

4
2

(c)
s1 = 0, s2 = 0, s3 = 4/7

x1
0

10

Ch. 2 20
(a)
Let E = number of units of the EZ-Rider produced
L = number of units of the Lady-Sport produced

Ch. 2 20
(b)

700

600

Engine
Manufacturing Time

500

400
Frames for Lady-Sport

300

Optimal Solution E = 250, L = 200

Profit = $960,000

200

100
Assembly and Testing
0

E
100

200

300

400

Number of Lady-Sport Produced

500

Ch. 2 20
(c)
The binding constraints are the manufacturing time and the
assembly and testing time.

Ch. 3 28
(a)
Let A = number of shares of stock A
B = number of shares of stock B
C = number of shares of stock C
D = number of shares of stock D
To get data on a per share basis multiply price by rate of
return or risk measure value.

Solution:
A = 333.3, B = 0, C = 833.3, D = 2500
Risk: 14,666.7
Return: 18,000 (9%) from constraint 2

Ch. 3 28
(b)

Solution:
Risk:
Return:

A = 1000, B = 0, C = 0, D = 2500
10A + 3.5B + 4C + 3.2D = 18,000
22,000 (11%)

Ch. 3 28
(c)
The return in part (b) is $4,000 or 2% greater, but the risk
index has increased by 3,333.
Obtaining a reasonable return with a lower risk is a preferred
strategy in many financial firms. The more speculative,
higher return investments are not always preferred because
of their associated higher risk.

Ch. 4 3

x1 = $ automobile loans
x2 = $ furniture loans
x3 = $ other secured loans
x4 = $ signature loans
x5 = $ "risk free" securities

Solution

Annual Return $188,800 (9.44%)

Ch. 5 6
(a)
x1

x2

x3

s1

s2

s3

Basis

cB

20

25

s1

40

s2

30

s3

1/2

15

Z
cj+zj

0
5

20 25

Ch. 5 6
(b)

Ch. 5 6
(c) The original basis consists of s1, s2, and s3. It is the
origin since the nonbasic variables are x1, x2, and x3
and are all zero.
(d) 0
x3 enters because it has the largest negative zj - cj
(e)
and s2 will leave because row 2 has the only positive
coefficient.
(f) 30; objective function value is 30 times 25 or 750.
(g) Optimal Solution:

x1 = 10 s1 = 20
x2 = 0 s2 = 0
x3 = 30 s3 = 0
z = 800.