Assignment 2

Exercise Questions

1. Quick-Screen is a clothing manufacturing company that specializes in producing commemorative

shirts immediately following major sporting events such as the World Series and the Super Bowl.
The company has been contracted to produce a standard set of shirts for the winning team of a
college football game on New Years. The items produced include two sweatshirts, one with silk-
screen printing on the front and one with print on both sides, and two T-shirts of the same
configuration. The company has to complete production within 72 hours after the game, at which
time a trailer truck will pick up the shirts. The company will work around the clock. The truck has
enough capacity to accommodate 1,200 standard-size boxes. A standard-size box holds 12 T-
shirts, and a box of 12 sweatshirts is three times the size of a standard box. The company has
budgeted $25,000 for the production run. It has 500 dozen blank sweatshirts and T-shirts each in
stock, ready for production.

The resource requirements, unit costs, and profit per dozen for each type of shirt are shown in
the following table:

The company wants to know how many dozen (boxes) of each type of shirt to produce in order to
maximize profit.
Given:
Must complete production within 72 hours
Truck capacity = 1,200 standard sized boxes.
Standard size box holds12 T-shirts.
One-dozen sweatshirts box is three times size of standard box.
$25,000 available for a production run.
500 dozen blank T-shirts and sweatshirts in stock.

Required:
a. Formulate the linear programming problem
Decision Variables

This problem contains four decision variables, representing the number of dozens (boxes) of each type of
shirt to produce:

x1= sweatshirts, front printing

x2=sweatshirts, back and front printing

x3=T-shirts, front printing

x4=T-shirts, back and front printing

The Objective Function

The company's objective is to maximize profit. The total profit is the sum of the individual profits gained
from each type of shirt. The objective function is expressed as

maximize Z = $90x1 + 125x2+ 45x3+ 65x4

Model Constraints

The first constraint is for processing time. The total available processing time is the 72-hour period
between the end of the game and the truck pickup:

0.10x1+ 0.25x2+ 0.08x3+ 0.21x<72hr.

The second constraint is for the available shipping capacity, which is 1,200 standard-size boxes. A box of
sweatshirts is three times the size of a standard-size box. Thus, each box of sweatshirts is equivalent in
size to three boxes of T-shirts. This relative size differential is expressed in the following constraint:

3x1+ 3x2+ x3+ x4< 1,200 boxes

The third constraint is for the cost budget. The total budget available for production is $25,000:

$36x1+ 48x2+ 25x3 + 35x4 < $25,000

The last two constraints reflect the available blank sweatshirts and T-shirts the company has in storage:

x1 + x2 < 500 dozen sweatshirts

x3 + x4 < 500 dozen T-Shirts

Model Summary

The linear programming model for Quick-Screen is summarized as follows:

Maximize Z=90x1 + 125x2 +45x3 + 65x4

Subject to

0.10x1 + 0.25x2 + 0.08x3 + 0.21x4 < 72

3x1 + 3x2 + x3 + x4 < 1,200

36x1 + 48x2 + 25x3 + 35x4 < 25,000

X1 + x2 < 500

X3 + x4 < 500

X1, x2, x3, x4 > 0

Optimal production plan:

The firm should produce 175 dozens of sweatshirts with front printing,
58 dozens of sweatshirts with back and front printing,
500 dozens of T-shirts with front printing and no T-shirts with back and front printing.
The maximum profit = $45,500

b. Solve the problem using LINDO or LINGO

c. Identify the basic and non-basic variables
d. Identify the allowable increase and decrease for both the coefficients of the objective function
and the RHS
e. What will be the effect on the value of the objective function if we increase the production of
T-Shirts, back and front printing by three units?
f. What will be the new solution if the available time is 60 hours and 90 hours? What technique
do you apply to find the new solution when the available time is 60 hours and 90 hours?

2. Machinco produces four products, requiring time on two machines and two types (skilled and
unskilled) of labor. The amount of machine time and labor (in hours) used by each product and
the sales prices are given in Table below. Each month, 700 hours are available on machine 1 and
500 hours on machine 2. Each month, Machinco can purchase up to 600 hours of skilled labor (SL)
at $8 per hour and up to 650 hours of unskilled labor (UL) at $6 per hour. Formulate and LP that
will enable Machinco to maximize its monthly profit. Solve this LP and use the output to answer
the following questions:

ys and yu give the total hours of skilled and unskilled labor, respectively
 a. By how much does the price of product 3 have to increase before it becomes optimal to
produce it?

Answer: By 9:6296, the negative reduced cost of product 3.

b. If product 1 sold for $290, then what would be the new optimal solution to the problem?

Answer: $290 lies within the allowable range of [229; 328]. Hence the old basis remains
feasible. And the new value would the current 15433 1/3 10.16 2/3= 15266 2/3

c. What is the most Machinco would be willing to pay for an extra hour of time on each machine?
Answer: For machine 1: 10.52. For machine 2: 6.22.

d. What is the most Machinco would be willing to pay for an extra hour of each type of labor?
Answer: For skilled labor: $8:00. For unskilled labor: $13:63.

e. If up to 700 hours of skilled labor could be purchased each month, then what would be
Machincos monthly profits?
Answer: Since 700 is in the interval [583.33; ), Machincos monthly profits would not change:
100.0 = 0.

f. Calculate the allowable range for each coefficient and for each RHS value.
Answer:

g. Determine the optimal z-value and shadow price change as the amount of skilled labor
changes between 0 and 8,000 hours.
Answer:

Products M1 M2 UL SL Sales ($)

 1 11 4 8 7 300
2 7 6 5 8 260
3 6 5 4 7 220
4 5 4 6 4 180

3. There are three categories of income tax filers in Ethiopia: those who never evade taxes, those
who sometimes do it, and those who always do it. An examination of audited tax returns from
one year to the next shows that of those who did not evade taxes last year, 95% continue in the
same category this year, 4% move to the sometimes category, and the remainder move to
always category. For those who sometimes evade taxes, 6% move to never, 90% sty the same,
and 4% move to always. As for the always evaders the respective percentages are 0%, 10%,
and 90%.
a. Express the problem as a Markov Chain.
b. In the long run, what would be the percentage of never, sometimes, and always tax
categories?
c. Statistics show that a taxpayer in the sometimes category evade taxes on about Br. 20,000
per return and in the always category on about Br. 48,000. Assuming an average income tax
of 20% and a filers population of 10 million, determine the annual reduction in collected taxes
due to evasion.
Answer:
N states (never), S states (sometimes), A states (always)
One step transition matrix

N S A
N 0.95 0.04 0.01
P=
S 0.06 0.9 0.04
A 0 0.1 0.9

0.95 0.04 0.01

(a) [ N, s, A] = [ N, S, A] 0.06 0.9 0.04
0 0.1 0.9
(b) Writing in equation form,
N = 0.95 N + 0.6 S + 0 A
S= 0.04 N + 0.9 S + 0.1 A
A= 0.01 N + 0.04 S + 0.9 A (eliminated)
 N + S + A=1
[N, S, A]=[0.44, 0.37, 0.19]
(c) Annual reduction in collected taxes due to evasion

(a) Number of taxpayers in sometimes" on average: (10,000,00)(0.37)

Evasion per taxpayer: (20,000)(0.2)
Total evasion from sometimes": (10,000,000)(0.37)(20,000)(0.2)

(b) Number of taxpayers in always" on average: (10,000,000)(0.19)

Evasion per taxpayer: (48,000)(0.2)
Total evasion from always": (10,000,000)(0.19)(48,000)(0.2)

(c) Total: (10,000,000)(0.37)(20,000)(0.2) + (10,000,000)(0.19)(48,000)(0.2)

=33,040,000,000 = 33.04 billion birr

4. The following is an interpretation of the rivalry between the United States and the Soviet Union
for geopolitical influence in the 1970s and 1980s. Each side has the choice of two strategies:
Aggressive and Restrained. The following payoff matrix prevails:
Soviet Union
USA

Restrained Aggressive
Restrained (4,3) (1,4)
Aggressive (3,1) (2,2)
For each player, 4 is best and 1 is worst.
a. Does either country have a dominant strategy?
The game is dominance solvable. Aggressive is the Soviet Unions dominant strategy, and
then Aggressive is the U.S.s best response.
b. Suppose the countries move simultaneously. Find the Nash equilibrium.
Answer: The game is dominance solvable. Aggressive is the Soviet Unions dominant strategy,
and then Aggressive is the U.S.s best response. The unique Nash equilibrium is (Aggressive,
Aggressive).

c. Next consider three different and alternative ways in which the game could be played with
sequential moves:
I. The U.S. moves first and the Soviet Union moves second
II. The Soviet Union moves first and the U.S. moves second
III. The Soviet Union moves first, the U.S. moves second, but the Soviet Union has a
further move where they can change their first move.

For each case, draw the game tree and find the sub-game perfect equilibrium.
 Answer:

Sub-game perfect equilibriums are:

(i) (Aggressive, Always Aggressive)

(ii) (Restrained, Restrained if Restrained/Aggressive if Aggressive),
(iii) The SPE strategies are: U.S. always aggressive at its only move in the game, S.U.:
Aggressive or Restrained at its first move, and Always Aggressive at last move, regardless
of history of game.

d. What are the key strategic issues (e.g. commitment, credibility etc.) for the two countries?
Answer: Both the US and the SU are better off in the situation in which the US moves last.
This is the situation where the US retains its flexibility and respond to the actions of the
Soviets (second mover advantage). With this order of timing, the SUs awareness of the USs
ability to respond to its action discourages it from acting aggressively. The Soviets know
that if they did so, the US would match their aggression, and they would suffer as a
result. In turn, the SU knows that restraint will be met by restraint.

5. Ephrem is working in a call center while pursuing his MBA, in order to use his time effectively, he
is contemplating to buy a new bike. Currently he is considering to buy one of the three brands: X,
Y, Z. In doing so he decides to use price, gear action and durability as a selection criteria. Given
the following alternative comparison matrix and criterion comparison marix.
Alternative Comparison Matrix
Price Gear Action Durability
Alternatives/Criteria
X Y Z X Y Z X Y Z
X 1 3 6 1 1/3 1/7 1 3 1
Y 1/3 1 2 3 1 1/4 1/3 1
Z 1/6 1/2 1 7 4 1 1 2 1

Criterion Comparison Matrix

Criteria Price Gear Action Durability

Price 1 3 5
Gear Action 1/3 1 2
Durability 1/5 1

a. Which brand does he need to buy?

b. Is his analytical analysis consistent? Support your answer with appropriate statistics.

Answer: (a)

Step 1: Develop normalized matrices and preference vectors for all the alternative comparison matrices
for criteria.
 PRICE
Bike X Y Z Row Averages
X 0.6667 0.6667 0.6667 0.6667
Y 0.2222 0.2222 0.2222 0.2222
Z 0.1111 0.1111 0.1111 0.1111
1.0000

Gear Action
Bike X Y Z Row Averages
X 0.0909 0.0625 0.1026 0.0853
Y 0.2727 0.1875 0.1795 0.2132
Z 0.6364 0.7500 0.7179 0.7014
1.0000

Durability
Bike X Y Z Row Averages
X 0.4286 0.5000 0.4000 0.4429
Y 0.1429 0.1667 0.2000 0.1698
Z 0.4286 0.3333 0.4000 0.3873
1.0000
Criteria
Bike Price Gears Durability
X 0.6667 0.0853 0.4429
Y 0.2222 0.2132 0.1698
Z 0.1111 0.7014 0.3873

Step 2: Rank the criteria.

 Criteria Price Gears Durability Row Averages
Price 0.6522 0.6667 0.6250 0.6479
Gears 0.2174 0.2222 0.2500 0.2299
Durability 0.1304 0.1111 0.1250 0.1222
1.0000

Price 0.6479
Gear Action 0.2299
Durability 0.1222
Step 3: Develop an overall ranking
Bike X
Bike Y
Bike Z
1. Bike X score = .6667(.6479) + .0853(.2299) + .4429(.1222) = .5057
2. Bike Y score = .2222(.6479) + .2132(.2299) + .1698(.1222) = .2138
3. Bike Z score = .1111(.6479) + .7014(.2299) + .3873(.1222) = .2806
Overall ranking of bikes: X first followed by Z and Y (sum of scores equal 1.0000). Therefore,
Ephrem will prefer to buy Bike X brand.
Answer: (b)

Step 1: Multiply the pairwise comparison matrix of the 3 criteria by its preference vector

Gear
Criteria Price Durability
Action
Price 1 3 5
Gear
Action
1/3 1 2
Durability 1/5 1
(1) (1*0.6479)+(3*0.2299)+(5*0.1222)= 1.9486
(2) (1/3*0.6479)+(1*0.2299)+(2*0.1222)= 0.6903
(3) (1/5*0.6479)+(1/2*0.2299)+(1*0.1222)= 0.3667

Step 2: Divide each value by the corresponding weight from the preference vector and compute
the average

1.9486/0.6479= 3.0076
0.6903/0.2299= 3.0026
0.3667/0.1222= 3.0008
9.0110
Average= 9.0110/3
= 3.0037
Step 3: Calculate the Consistency Index (CI)
CI = (Average n)/(n-1), where n is no. of items compared
CI = (3.0037-3)/(3-1) = 0.0018
N.B. CI = 0 indicates perfect consistency)