BRAC University

Managerial Economics
Linear Programming (LP)

A model consisting of linear relationships

representing a firm’s objective and resource
constraints

LP is a mathematical modeling technique used

to determine a level of operational activity in
order to achieve an objective, subject to
restrictions called constraints
What is LP
Linear Programming is a technique for solving a
special set of constrained optimization problem
where

OBJECTIVE function is linear and there are one

or more

CONSTRINTS, which are also linear.

ALL THE IMPORTANT RELATIONSHIPS IN A LINEAR
PROGRAMMING PROBLEM MUST BE LINEAR

Includes:
• Production
• Total Cost
• Total Revenue
• Profit Function
Linearity means:
• Constant return to scale
• Price of output is constant
• Price of inputs are constant
• Production cost per unit is constant
• Profit per unit of output is constant
Constraint Profit Maximization
LP Model Formulation
 Decision variables
 mathematical symbols representing levels of activity of an
operation
 Objective function
 a linear relationship reflecting the objective of an operation
 most frequent objective of business firms is to maximize profit
 most frequent objective of individual operational units (such as a
production or packaging department) is to minimize cost
 Constraint
 a linear relationship representing a restriction on decision making
LP Model Formulation (cont.)
Max/min z = c1x1 + c2x2 + ... + cnxn

subject to:
a11x1 + a12x2 + ... + a1nxn (≤, =, ≥) b1
a21x1 + a22x2 + ... + a2nxn (≤, =, ≥) b2
:
am1x1 + am2x2 + ... + amnxn (≤, =, ≥) bm

xj = decision variables
bi = constraint levels
cj = objective function coefficients
aij = constraint coefficients
Structuring the Problem
 Firm producing two goods, A and B. Its profit
equation,
 п = aQA + bQB

Where
п = total profit
a = profit per unit of A, b = profit per unit of B
Example 1
П = 120 П = 90 П = 60

QA QB QA QB QA QB

0 120 0 90 0 60

10 90 10 60 10 30

20 60 20 30 20 0

30 30 30 0

40 0
 The management problem is to maximize profit
given the resources constraints.
 SUPPOSE: to produce A and B three machines (x y
z) are needed.
Structuring the Problem
Structuring the Problem: Constraints
Constraints:
For X machine
1QA + 3QB ≤ 90
For Y machine
2QA + 2QB ≤ 80
For Z machine
2QA ≤ 60

Non Negativity Constraints

QA ≥ 0
QB ≥ 0

Without this constraint, solution would be easier but would be

meaningless.
The Model
Maximize the Objective function subject to
constraints
π= 3QA + 1QB Objective function
Subject to
1QA + 3QB ≤ 90 Machine X constraint
2QA + 2QB ≤ 80 Machine Y constraint
2QA ≤ 60 Machine Z constraint

QA ≥ 0 and QB ≥ 0 Non-negativity constraint

Feasibility Region
First rewrite the constraints in the following fashion:
1QA + 3QB ≤ 90
or, QB = 30 - 1/3 QA
Again
2QA + 2QB ≤ 80
or, QB = 40 – QA
And
2QA ≤ 60
QA = 30
Feasibility Region: Graphically
Feasibility Region: Definition
 The feasibility region consists of all values of
the decision variables that that satisfy all the
constraints simultaneously.
Graphic Solution
Graphical Solution
 QA = 30, QB = 10
 π = 3QA + 1QB
 = 3(30) + 10 =100
Algebraic Solution
Maximize
π = 3QA + 1QB
subject to
1QA + 3QB ≤ 90
2QA + 2QB ≤ 80
2QA ≤ 60
and
QA ≥ 0 and QB ≥ 0
Algebraic Solution: Contd.
 At corner e  At corner g
1QA + 3QB = 90 2QA + 2QB = 80
0 + 3QB = 90 2QA = 60
 Therefore, QB = 30 Therefore, QB = 10 and
 At corner f QA = 30
1QA + 3QB = 90  At corner h
or 2QA + 6QB = 180 2QA = 60
2QA + 2QB = 80 Therefore QA = 30
Therefore, 4QB = 100 or
QB = 25 and QA = 15
Algebraic Solution
LP Model: Example
RESOURCE REQUIREMENTS
Labor Clay Revenue
PRODUCT (hr/unit) (lb/unit) ($/unit)
Bowl 1 4 40
Mug 2 3 50

There are 40 hours of labor and 120 pounds of clay

available each day

Decision variables
x1 = number of bowls to produce
x2 = number of mugs to produce
 LP Formulation: Example
Maximize Z = $40 x1 + 50 x2

Subject to
x1 + 2x2 40 hr (labor constraint)
4x1 + 3x2 120 lb (clay constraint)
x1 , x2 0

Solution is x1 = 24 bowls x2 = 8 mugs

Revenue = $1,360
Graphical Solution Method
1. Plot model constraint on a set of coordinates
in a plane
2. Identify the feasible solution space on the
graph where all constraints are satisfied
simultaneously
3. Plot objective function to find the point on
boundary of this space that maximizes (or
minimizes) value of objective function
Graphical Solution: Example
x2
50 –

40 –
4 x1 + 3 x2 120 lb

30 –

20 – Area common to
both constraints

10 – x1 + 2 x2 40 hr

0– | | | | | |
10 20 30 40 50 60 x1
 Computing Optimal Values
x1 + 2x2 = 40
x2
4x1 + 3x2 = 120
40 – 4 x + 3 x 120 lb 4x1 + 8x2 = 160
1 2
-4x1 - 3x2 = -120
30 – 5x2 = 40
x2 = 8
20 –
x1 + 2 x2 40 hr x1 + 2(8) = 40
x1 = 24
10 –
8
| | x1
0– 24 | |
10 20 30 40
Z = $50(24) + $50(8) = $1,360
Simplex Method
 A mathematical procedure for solving linear programming problems
according to a set of steps
 Slack variables added to ≤ constraints to represent unused resources
 x1 + 2x2 + s1 = 40 hours of labor
 4x1 + 3x2 + s2 = 120 lb of clay
 Surplus variables subtracted from ≥ constraints to represent excess
above resource requirement. For example
 2x1 + 4x2 ≥ 16 is transformed into
 2x1 + 4x2 - s1 = 16
 Slack/surplus variables have a 0 coefficient in the objective function
 Z = $40x1 + $50x2 + 0s1 + 0s2
Solving LP Problems with Excel
Click on “Tools”
to invoke “Solver.”

Objective function
=E6-F6

=E7-F7

=C6*B10+D6*B11

=C7*B10+D7*B11

Decision variables – bowls

(x1)=B10; mugs (x2)=B11
Solving LP Problems with Excel (cont.)
After all parameters and
constraints have been input, click
on “Solve.”

Objective function

Decision variables

C6*B10+D6*B11≤40
C7*B10+D7*B11≤120

Click on “Add” to
insert constraints
Solving LP Problems with Excel (cont.)
Another Example
 Suppose an MFI wants to maximize profit. It has two loan
portfolio, Business Loan (x1) and Housing Loan (x2). The
interest for x1 is 13 and for x2 is 11.
 In village 1, there are 4 Groups who wants Business Loan and 5
Groups who wants Housing Loans but their loan taking capacity
is maximum of Tk. 1500 (in thousands).
 In village 2, there are 5 and 3 Groups who wants Business Loans
and Housing Loans respectively. But their capacity of loan taking
is Tk. 1575 (in thousands).
 In village 3, there are 1 and 2 Groups respectively with maximum
capacity of Tk. 420 (in thousands).
 No loans can be negative.
 Find out the amount of different loans which would maximize
the profit. [Answer Tk. 270 and Tk. 75 thousands.]
• The linear programming model for this example can be summarized as:

Another Example
…..Eq (4)
Dual Example
 Maximize
Z = x1 + x2
Subject to
X1 ≥ 0
X2 ≥ 0
and
How to Transform to Dual
Objective
x1 + x2
Transform to dual problem
 Minimize
4y1+ 12y2+y3

Where
y1 ≥ 0
y2 ≥ 0