Why Talk About

Linear Programming?
• LP is simpler than NLP, hence, good for a foundation

• Linearity has some unique features for optimization

• A lot of problems are or can be converted to a LP formulation

• Some NLP algorithms are based upon LP simplex method

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 Linear-Programming
Applications

Constrained Optimization problems occur

frequently in economics:
– maximizing output from a given budget;
– or minimizing cost of a set of required
outputs.
Lagrangian multiplier problems required
binding constraints.
A number of business problems have
inequality constraints.
 Profit Maximization Problem
Using Linear Programming
• Constraints of production capacity, time,
money, raw materials, budget, space, and
other restrictions on choices. These
constraints can be viewed as inequality
constraints
• A "linear" programming problem assumes
a linear objective function, and a series of
linear inequality constraints
 Linearity implies:
1. constant prices for outputs (as in a perfectly
competitive market).

2.constant returns to scale for production processes.

3.Typically, each decision variable also has a non-

negativity constraint. For example, the time spent using
a machine cannot be negative.
 Solution Methods
• Linear programming problems can be solved using
graphical techniques, SIMPLEX algorithms using
matrices, or using software, such as Fore Profit
software.

• In the Graphical Technique, each inequality constraint is

graphed as an equality constraint. The Feasible Solution
Space is the area which satisfies all of the inequality
constraints.

• The Optimal Feasible Solution occurs along the

boundary of the Feasible Solution Space, at the extreme
points or corner points.
● The corner point that maximize the objective function is the
Optimal Feasible Solution.

● There may be several optimal solutions. Examination of the

slope of the objective function and the slopes of the constraints
is useful in determining which is the optimal corner point.

● One or more of the constraints may be slack, which means it is

not binding.

● Each constraint has an implicit price, the shadow price of the

constraint. If a constraint is slack, its shadow price is zero.

● Each shadow price has much the same meaning as a

Lagrangian multiplier.
 Linear Programming (Graphical method)

110
Constraints Equation Coordinates

1 3x1 + 10x2 = 330 33,110

100

2 16x1 + 4x2 = 400 25,100

3 6x1 + 6x2 = 240 40,40
80

4 X2= 12 0,12
70
60
40
35
25
20

0 12 20 25 33 40 50 60 80 100
Drawing ISO Contribution line and Feasible Region

110
End select two convenient value of Z
substitute into The objective function and
100

plot into the resulting equation ; Here

1750 & 3500 appear to be sensible.
80
70

1750 = 50X1 + 70X2 x1 = 35; x2 = 0

60

3500 = 50X1 + 70X2 x1 = 70; x2 = 0

40
35
25
20

0 12 20 25 33 40 50 60 80 100
 Feasible Region
Points X1 x2 Z

110 A 22 12 1940
B 20 20 2400
C 10 30 2600
100

D 0 33 2310
E 0 12 840
80
70
60
40
35

E
25

D
C
20

A B
0 12 20 25 33 40 50 60 80 100
 Shadow Pricing
CIMA`s Official Terminology

“an increase in value which would be created by having available one additional unit of limiting factor
at its original cost. This represents the opportunity cost of not having the use of the one extra unit”
In our example following is the equation of labour.

6x1 + 6x2 = 240

If one more labour hour will be available then,

6x1 + 6x2 = 241

know the value of Z will be

Z=2607.1

The contribution has increased by 7.1 by increase 1hour of scarce resource. This is the shadow price
a unit of labour

•
 Basic Steps of Simplex
1. Begin the search at an extreme point (i.e., a basic feasible
solution).

2. Determine if the movement to an adjacent extreme can

improve on the optimization of the objective function. If not,
the current solution is optimal. If, however, improvement is
possible, then proceed to the next step.

3. Move to the adjacent extreme point which offers (or,

perhaps, appears to offer) the most improvement in the
objective function.

4. Continue steps 2 and 3 until the optimal solution is found or

it can be shown that the problem is either unbounded or
infeasible.

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