Decision Models & Optimization Solution to Make-up Exam Term II, 2016 Page 1 of 5

Indian School of Business

Mohali, India
Decision Models & Optimization
Term II, 2016

Prof. Anjani Jain Prof. Ziv Katalan

Yale School of Management The Wharton School
Yale University University of Pennsylvania
anjani.jain@yale.edu katalan@wharton.upenn.edu

1. Transportation Safety Administration (15 points)

a) (2 points) Suppose that the total 4-day cost of training an employee on day 2 decreases by $10
and the problem is re-solved. Which one of the following statements holds?
(X) The overall cost changes but the optimal solution values stay the same.

T2 is non-zero in the optimal solution, so the objective function value

will change with a change in the coefficient. The change is within the
allowable decrease for the objective function coefficient for T2, so the
optimal solution will not change.

b) (2 points) The allowable increase for the objective function coefficient of T1 has been hidden.
Given the LP results and the rest of the sensitivity report, what can you say about the hidden
value?
(X) The allowable increase is infinite.

T1 = 0 in the optimal solution, so it is not cost-effective to train

employees on day 1. The reduced cost of $20 equals the allowable
decrease for T1. Thus, a decrease of $20 makes training in day one
become attractive enough so that T1 > 0 in the optimal solution, while
any increase in the coefficient makes T1 remain unattractive.

c) (2 points Suppose that the number of bags to be screened on day 3 decreases by 3,000 and the
problem is re-solved. Which one of the following statements holds?
(X) The overall cost goes down by $420 and the solution values change.

The day 3 capacity constraint is binding, so the optimal solution

changes with the right hand side. The change is within the allowable
decrease so the shadow price of 0.14 per unit holds for all 3,000 units,
for a total decrease of $420.

d) (2 points) Suppose that the number of bags to be screened on day 4 increases by 1,600 and the
problem is re-solved. Which one of the following statements holds?
(X) The overall cost goes up by at least $384, maybe more.

The change tightens the day 4 capacity constraint beyond the allowable
increase, at which point the shadow price may rise above 0.24. Thus,
$384 = 0.24 * 1,600 is a lower bound on the increase.
Decision Models & Optimization Solution to Make-up Exam Term II, 2016 Page 2 of 5

e) (2 points) The allowable increase and decrease for Capacity on Day 2 have been hidden. Given
the LP results and the rest of the sensitivity report, what is the allowable decrease?
(X) The allowable decrease is infinite.

This constraint is not binding, so the shadow price is zero. It is a

“≥” constraint and will continue to be non-binding and have a 0 shadow
price no matter how small the right hand side. Thus, the allowable
decrease is infinite.

f) (2 points) The TSA is considering transferring an additional screener from another location. The
moving cost for the employee is $2,000, and she would be trained and paid using the same
scheme, along with the 200 current screeners. After re-running the LP, which one of the
statements below will be true?
(X) Transferring and training the screener will increase TSA’s costs by less than $2,650.

The shadow price of $599.39 for the “total trained” constraint,

indicates the cost of paying and training additional employees and holds
for an allowable increase of 6.38 > 1. The $2,000 moving cost brings
the total to $2,599.39.

g) (3 points) TSA wants to ensure that, if more than 20 employees are trained on day 2, then at least
30 will be trained on day 3.
Extend the original formulation to ensure this. Your formulation must be an integer LP.

New decision variables, if any:

Let Y be a 0-1 variable. If Y=0, then T2 ≤ 20, and if Y=1, then T3 ≥ 30.

Change to objective function, if any:

No change.

New or modified constraints, if any:

two new constraints

T2 ≤ 20 + M Y, where M = 200

Note that M=200 is sufficient, since at most 200 people will be trained
on day 3.

T3 ≥ 30 Y.
Decision Models & Optimization Solution to Make-up Exam Term II, 2016 Page 3 of 5

2. Princeton Review (10 points)

Princeton Review offers preparation (“prep”) classes for students taking standardized tests, and its
West Philadelphia location is scheduling upcoming classes for the GMAT and GRE….
Formulate a linear program to solve Princeton Review’s problem.

Decision Variables

X12,GMAT = number 12-seat rooms used for GMAT classes

X25,GMAT = number 25-seat rooms used for GMAT classes
X12,GRE = number 12-seat rooms used for GRE classes
X25,GRE = number 25-seat rooms used for GRE classes

All Xij’s are integer

 
Objective Function
 
Min $5000 X12,GMAT + $8000 X25,GMAT + $5000 X12,GRE + $8000 X25,GRE
 
Constraints

Enough Seats for Each Course

12 X12,GMAT + 25 X25,GMAT ≥ 212
12 X12,GRE + 25 X25,GRE ≥ 238

Enough Instructors for Course Sections

X12,GMAT + X25,GMAT ≤ 14
X12,GRE + X25,GRE ≤ 15

Enough Rooms of the Assigned Sizes

X12,GRE + X12,GMAT ≤ 20
X25,GRE + X25,GMAT ≤ 10

Non-Negativity (points?)
Xij ≥ 0 for all i, j
 

 
Decision Models & Optimization Solution to Make-up Exam Term II, 2016 Page 4 of 5

3. Metro Corp’s Nirvana Real Estate Development Project (25 points)

The MetroCorp Syndicate’s (MCS) flagship project Nirvana comprises 250 prestigious villas on
100 acres of land. The Nirvana project is expected to be completed in three years.

a) (4 points) Using the above notation, write general expressions/formulae for the calculation of the
semi-annual revenue in period t = 5, R5, the inventory of unsold units at the start of period t = 6, I6,
and the semi-annual revenue in period t = 6, R6. You may use any mathematical or spreadsheet
functions in the formulae.

R5 = min{I5, D5} x P5 + 0.03 S4

I6 = I5 - min{I5, D5}

R6 = min{I6, D6} x P6 + 0.03 S5 + max{I6 - D6, 0} x (0.3P6)

b) (3 points) Given the above notation, use the balances at the end of period t = 2 and the cash
inflows and outflows during period t = 3 to write general expressions/formulae for the calculations
of the cash balance, the amount borrowed, and the savings amount at the end of period t = 3:
CB3, B3, and S3. You may use any mathematical or spreadsheet functions in the formulae.

CB3 = R3 + 1.03S2 - C3 - 1.035B2

S3 = IF(CB3 > 0, CB3, 0) = MAX(CB3, 0)

B3 = IF(CB3 < 0, -CB3, 0) = -MIN(CB3, 0)

c) (2 points) Based on the above simulation results, what is the approximate 95% confidence
interval for the true expected NPV.

(x) [26.9, 55.7]

41.3 -/+ 2x7.2

d) (2 points) Based on the above simulation results, what is the approximate number of trials used
in the simulation run?

(x) 1,900

MSE = S/√n. Hence, n = (S/MSE)2 = (313.8/7.2)2 = 1,900.

e) (3 points) Based on the simulation results, within what range lies the estimated probability that
the true expected NPV is positive?

(x) between 95% and 100%

The likelihood is almost 100% since the current sample mean is 41.3 and
it is more than five standard errors (i.e., MSE) above zero!
In other words, it is P{N(0,1) ≥ 5.7}.
Decision Models & Optimization Solution to Make-up Exam Term II, 2016 Page 5 of 5

f) (3 points) Based on the above simulation results, within what range lies the estimated probability
that the actual min CB will be less than - 300mm (negative 300 million) Rs?

(x) between 10% and 30%

From the cumulative frequency histogram: Prob[min CB  -300] = 28%

g) (4 points) Suppose the original simulation were re-run using 4 times as many trials.
(i) The sample median of the NPV
(x) is likely to stay the same
The sample median is an unbiased estimate of the population median
and hence is likely to stay roughly the same as the sample size
increases.

(ii) A 99% confidence interval for the true expected NPV

(x) will be roughly ½ of the original
The width of 99% confidence interval is 2 x z0.005 x MSE. MSE is Sn/√n
where Sn is the sample standard deviation and n is the sample size
(i.e., number of trials.) As the sample size quadruples, the MSE is
expected to decrease by √4 = 2 since S is an unbiased estimate of the
population standard deviation is likely to stay roughly the same as
the sample size increases.

h) (4 points) Suppose the original simulation were re-run using the same number of trials, but with
volatility of  = 40% rather than the original 20%.
(i) The sample range of the min CB Distribution (i.e., maximum – minimum)

(x) is likely to grow

With a higher value of , the variability of semi-annual unit prices
increases and, in turn, the range semi-annual cash flows and the
range of the corresponding minimum cash position distribution
increase as well.

(ii) The mean standard error of the min CB

(x) is likely to increase

Similarly to (i), the true standard deviation of the min CB
increases.