IEOR 162, Spring 2012 Homework 04

1. (10 points) A manufacturer is selling a product to two dierent types of retailers. Among all retailers, 40% are type-1 retailers and 60% are type-2 retailers. A type-1 retailers can sell this product at R1 = $20 per unit. A type-2 retailers can sell this product at R2 = $15 per unit. We refer to a pair of payment and quantity (p, q) as a contract. For example, if a retailer chooses (p, q) = ($200, 15), the manufacturer will sell 15 units to the retailer and obtains $200 from the retailer. Therefore, if a type-i retailer chooses a contract (p, q), his prot is Ri q p. The production cost of this product is $10 per unit. Therefore, if a type-i retailer chooses a contract (p, q), the manufacturer will generate a prot p 10q from the retailer. The manufacturer intends to announce two contracts (p1 , q1 ) and (p2 , q2 ) to maximize her expected prot while satisfying (i) a type-i retailer will be willing to choose contract (pi , qi ) (to obtain a nonnegative prot), and (ii) a type-i retailer prefers (pi , qi ) to (p3i , q3i ) (to maximize his prot). (a) (4 points) Formulate the manufacturers problem as an LP. You should include two individual rationality (IR) constraints and two incentive compatibility (IC) constraints. (b) (2 points) Show that every feasible solution satises the monotonicity condition: q1 q2 . (c) (2 points) Show that the IR constraint for the type-1 retailer is redundant. (d) (2 points) Show that the IC constraint for the type-1 retailer will be binding at any optimal solution. 2. (15 points) A retailer is buying a product from two dierent types of suppliers. Among all suppliers, 1 % are type-1 suppliers and 2 % are type-2 suppliers. A type-1 supplier can produce this product at C1 per unit. A type-2 supplier can produce this product at C2 per unit. It is known that C1 < C2 . We refer to a pair of payment and quantity (p, q) as a contract. For example, if a supplier chooses (p, q) = (500, 5), the retailer will buy 5 units from the supplier and pays $500 to the supplier. Therefore, if a type-i supplier chooses a contract (p, q), his prot is p Ci q. The retail price of this product is $R per unit. Therefore, if a type-i supplier chooses a contract (p, q), the retailer will generate a prot Rq p from the supplier. The retailer intends to announce two contracts (p1 , q1 ) and (p2 , q2 ) to maximize her expected prot while satisfying (1) a type-i supplier will be willing to choose contract (pi , qi ) (to obtain a nonnegative prot), and (2) a type-i supplier prefers (pi , qi ) to (pj , qj ), j = 3 i (to maximize his prot). (a) (4 points) Formulate the retailers problem as an LP. (b) (3 points) Show that every feasible solution satises the monotonicity condition. (c) (4 points) Show that one IR constraint is redundant. (d) (4 points) Show that one IC constraint will be binding at any optimal solution. 3. (Modied from Problem 4.14.2; 5 points) Find the standard form LP for max 2x1 + x2 s.t. 3x1 + x2 30 x1 + x2 40 x1 , x2 0.

4. (MODIFIED from Problem 4.4.1; 10 points) Consider the following LP max 3x1 + 2x2 s.t. 2x1 + x2 100 x1 + x2 80 x1 40 x1 , x2 0. (a) (5 points) Find the standard form of (1). (b) (5 points) For the standard form LP in Part (b), show how the basic feasible solutions correspond to the extreme points of the feasible region of the original LP in (1). To answer this part, certainly you need to draw the feasible region for (1). 5. (10 points) Consider the following LP: min s.t. x1 + x2 2x1 + x2 6 x1 x2 = 6 x1 0, x2 0. (a) (5 points) Convert the following LP to its standard form: (b) (5 points) For the LP in (2), show how the basic feasible solutions to its standard form correspond to the extreme points of the feasible region of the original LP in (2). Note. Keep in mind that the original LP is the one having x1 nonpositive. (1)

(2)