2-604-15 Decision Models in Business Analytics Autumn 2016

FINAL EXAM

Problem 1: Goal programming (25 points)

Dictionnaire franais Le petit Larousse Jachre (nom fm.) : Terre non cultive
temporairement pour permettre la reconstitution de la fertilit du sol.
Oxford English dictionary definition Fallow (adj.): (of farmland) ploughed and
harrowed but left for a period without being sown in order to restore its fertility or to
avoid surplus production: ex. incentives for farmers to let land lie fallow.

Jack the farmer wants to determine the crop plantation for the upcoming spring. He wants to
choose among barley, lettuce, corn, and onions seeds. He has farmland of 30,000 m 2 that can
accommodate the crops. The resulting harvest is used for two purposes: feeding the farm
animals and selling leftovers at the village market. With respect to the first purpose, barley is a
significant portion of the diet of his farm animals such that he established that approximately
30% of the land should receive barley seeds to cover the animals diet need. With respect to the
sales, at least 250 kg of each seed must be available for market sales to ensure a good diversity of
supply. Furthermore, Jack hopes to generate about $10,000 in profit. The following table gives
the profit obtained last year at the village market for each planted kilogram and the surface area
of land needed in m2 to plant one kilogram of the corresponding seed.

Seed Barley Corn Lettuce Onions

Profit in $/kg 0.57 0.55 0.65 0.86
2
Land area in m /kg 2 7 4 3
Table 1. Profit and land surface per kilogram
Thus, if Jack wishes to plant 100 kg of barley for animal feed, 100 kg of barley for sales, 100 kg
of corn, 100 kg of lettuce, and 100 kg of onions, then he will use 1,800 m2 of land.

We want to define a linear program using a goal programming approach using a weighted sum of
normalized deviations to reflect the importance of three goals. For these three goals, we need the
model to capture the following two priorities:
roughly 10% of the farmland should be left fallow since it ensures the land's sustainability.
animal feed is more important than the profit from the sales.
+ :
There are, thus, 3 goals for which you may use slack and excess variables dj and dj

fallow ( j=1 ) , animal diet ( j=2 ) , profit ( j=3) .

The following figure illustrates a possible way that the farmland could be divided.

Figure 1. Possible farmland division

2-604-15 Final-Aut16 Page 1 of 16

Question 1 (5 points)
+
Excluding the deviational variables, d j and d j , clearly define the decision variables for
this model. It is important that the units of measure for each variable are given.

Answer 1.1
Let xi be the kilograms of seed type i planted, where i=1 (barley for animal feed), 2 (barley for
sales), 3 (corn), 4 (lettuce), and 5 (onions).

5 x 1 point (subtract 1 point if units not indicated)

Question 2 (5 points)
Provide the constraints for Jacks farming problem.

Answer 1.2
Farmland area:

2 ( x1 + x 2 ) +7 x 3+ 4 x 4 +3 x 5 30,000

Minimum seed sales:

x i 250,i=2, , 5

Fallow land goal:

+=3,000

d 1
30,000[ 2 ( x 1 + x 2) + 7 x 3 + 4 x 4 +3 x 5]+ d 1

Animal feed goal:

+=9,000

d 2
2 x 1+ d 2

Profit goal:

+=10,000
d 3
0.57 x 2+ 0.55 x 3 +0.65+0.86 x 5 +d 3

5 x 1 point

Non-negativity constraints (optional):

x i 0,i=1, , 5
0, j=1, , 3
d j
+ 0, j=1, ,3
d j

Question 3 (5 points)
Among the four following suggestions for weights given in Figure 2, justify which one
corresponds best to Jacks priorities.

Figure 2. Weight suggestion for the deviational variables

Answer 1.3

Since A and B have the wrong orderings, they can be excluded.

2-604-15 Final Aut2016 Page 2 of 16

1 point

C and D have the correct ordering, but D would penalize excess profit. Therefore, C is the best
set of weights.

4 points

Question 4 (5 points)
Provide in detail the objective function based on your choice of weighting.

Answer 1.4
Objective function minimizes the weighted sum of normalized deviations:

d
3
10,000

d2
5 +
9,000
d
10 1 +
3,000
Min

5 points (no deductions if incorrect weights used from previous answer; 2 points deducted
for missing normalization; 1 point deducted for missing objective)

Question 5 (5 points)
Numerically show that it is impossible to achieve all three goals simultaneously.

Answer 1.5
From the fallow land and animal feed goals, we have set aside 12,000 m2 of land that cannot be
used for profit-making activities. This leaves 18,000 m2 for seed types 2 through 5.

2 points

This means that need to generate $10,000 of profit from 18,000 m2 of land via seed types 2
through 5. This is a profit-to-area ratio of 0.556 (in $/m 2). Yet, each profitable seed type has a
profit-to-area ratio that is less than this, which means that it will be impossible to use the
remaining land to generate enough profit:

Seed Barley Corn Lettuce Onions

Profit-to-area ratio in $/m2 0.285 0.079 0.163 0.287

3 points

2-604-15 Final Aut2016 Page 3 of 16

Problem 2: Decision analysis

The entrepreneur Tarhon has obtained a patent for a new product. The commercial life of this
product is estimated to be 10 years. He must make a decision in order to choose among the
following three options:

1. Do not use the opportunity to make the product and instead sell its patent to a competing
firm for a price of $4 million.
2. Build a large factory that can manufacture this product in a large quantity. For the type of
factory that is envisaged, the cost of construction and subsequent operations for 10 years
is estimated to be $5 million.
3. Build a small factory for manufacturing this product in a more modest quantity. For this
type of factory, the cost of construction and subsequent operations for 10 years is
estimated to be $1.5 million.

Tarhon believes that the demand could be either strong or weak during the first two years after
the launch of the product. The probability for a strong demand is estimated to be 60% and that
for a weak demand is estimated to be 40%.

If the demand is weak for the first 2 years, then it will remain weak for the following 8 years.
However, if the demand is strong for the first 2 years, then it will remain strong for the following
8 years with an 80% probability and will become weak for the following 8 years with a 20%
probability.

The revenues, as estimated by Tahron, depend on the demand and the size of the factory.

If the option of the large factory is used, then a strong demand corresponds to revenues of $1
million per year. By contrast, a weak demand will result in revenues of $200,000 per year.

If the option of the small factory is used, then a strong demand corresponds to revenues of
$450,000 per year for the first 2 years and then $300,000 per year in each of the following 8
years. By contrast, a weak demand will result in revenues of $250,000 per year.

Question 1 (5 points)
Draw the decision tree corresponding to Tahrons situation.

Answer 1

2-604-15 Final Aut2016 Page 4 of 16

Question 2
What will be Tahrons decision if the criterion used is the optimistic one of MAXIMAX?

Answer 2: (5 points)

Build a large factory and expect a strong demand for 10 years.

Question 3
What will be Tahrons decision if the criterion used is the expected value?

Answer 3: (5 points)

Sell the patent. The expected value is 4 million against 1,032 for a large factory and 1,432 for a
small one.

Question 4
Tahron also has the possibility of building a small factory and increasing its size in 2 years if it is
interesting. The supplementary construction and operating costs for enlarging and operating such
a factory are estimated to be $2.5 million. If demand is strong for the 10 years, then the revenues
will be $450,000 per year for each of the 10 years, i.e., the first 2 years in which one operates a
small factory and the next 8 years in which one runs an enlarged factory. By contrast, if the
demand is weak for the final 8 years, then the revenues are estimated to be $200,000 per year for
each of these final 8 years. How should the decision tree from Question 1 be modified to take
this new option into account?

Answer 4: (5 points)

The branch for the small factory becomes:

Question 5
Will this new option change Tahrons mind about the possibility of making a small factory if the
criterion used is expected value?

Answer 5: (5 points)

No. Sell the patent is still the best decision.

2-604-15 Final Aut2016 Page 5 of 16

Problem 3: CPM (25 points)

Question 1 (5 points)
Construct a network comprising 12 activities (A, B, , L) such that the following precedence
relations are respected:
A, B, and C are the first activities of the project and can start simultaneously.
A and B immediately precede D.
B immediately precedes E, F, and H.
F and C immediately precede G.
E and H immediately precede both I and J.
C, D, F, and J immediately precede K.
K immediately precedes L.
I, G, and L terminate the project and are linked to an ending node denoted Z.

Answer 3.1:

2 points for 13 nodes and 3 points for 19 arcs

I
B

E K

J
L
C

2-604-15 Final Aut2016 Page 6 of 16

Question 2 (5 points)
Provide the calculations for the 11 blackened cells in the following table in which the lengths of
the activities are expressed in days.

Answer 3.2:

D, EST = max{8,12}=12

K, EST = max{4,18,12,47}=47

Z, EST = max{60,48,60}=60

F, LFT = min{44,47}=44

B, LFT = min{41,29,24,12}=12

2 points

Slack time B = 0-0=0

Slack time D = 41-12=29

Slack time F = 24-12=12

Slack time K = 47-47=0

Slack time Z =60-60=0

2 points

Project duration = 60

1 point

Question 3 (5 points)
Provide the list of all critical activities as well as the list of all critical paths.

Answer 3.3:

Critical activities are the ones with zero slacks:

1 point

B, H, I, J, K, L, Z

1 point

There are two critical paths that meet the definition (goes from the beginning to the end,
composed entirely of critical activities, have sums of durations exactly equal to the minimum
project duration, and is the longest path from the beginning to the end of the project):
2-604-15 Final Aut2016 Page 7 of 16
1 point

B-H-I-Z and B-H-J-K-L-Z

2 points

Question 4 (5 points)
For an activity i = A, B, , L, Z, let the earliest starting time be denoted as Ti and its duration as
di (in days). Formulate a linear programming model in order to determine the minimum duration
of the project.

Answer 3.4:

Objective function
min T Z

1 point

Constraints
Precedence relationship constraints:
Relationship AD : T D T A + d A
Relationship BD : T D T B + d B
.
.
.
Relationship GZ: T Z T G +d G
Relationship IZ : T Z T I +d I
Relationship LZ : T Z T L + d L

3 points (there should be 19 such constraints)

Non-negativity: T i 0 for i= A , B , C , D , E , F ,G , H , I , J , K , L , Z

1 point

Question 5 (5 points)
The following table indicates that five of the activities may be crashed. It provides the total cost
of the maximum acceleration for each activity.

Activity H I J K L
Normal duration (days) 20 28 15 7 6
Fastest duration (days) 15 25 12 5 5
Total acceleration cost $10,000 $9,000 $3,000 $5,000 $1,200

Calculate the crashing cost per day for these activities and modify the model from Question 4 in
order to determine the minimum crashing cost for completing the project four days earlier than
intially planned. Define clearly the decision variables, the objective function, and the constraints.

Answer 3.5:

The daily crashing cost for each eligible activity is the total acceleration cost divided by the
difference in the number of days:

Activity H I J K L
Daily crashing cost ($/day) 2,000 3,000 1,000 2,500 1,200

1 point

Decision variables are the same as before plus:

Ci = number of days by which activity i is crashed.

1 point

2-604-15 Final Aut2016 Page 8 of 16

Objective function
min 2000C H +3000 C I +1000 C J +2500 C K +1200 C L

1 point

Constraints
Precedence relationship constraints:
Relationship AD : T D T A + d AC A
Relationship BD : T D T B + d B C B
.
.
.
Relationship GZ: T Z T G +d GC G
Relationship IZ : T Z T I +d I C I
Relationship LZ : T Z T L + d L C L

Maximal crashing time constraints:

CA 0
C B 0

CH 5
C I 3
CJ 3
CK 2
CL 1

CZ 0

Accelerating the project by 4 days:

T Z 56

Non-negativity: T i , Ci 0 for i= A , B , C , D , E , F ,G , H , I , J , K , L , Z

2 points

2-604-15 Final Aut2016 Page 9 of 16

PROBLEM 4: (15 points)

Consider the points A, B, , H for a multi-objective problem represented by the objective

function value Z1 (X-axis) and objective function Z2 (Y-axis) as shown in the following figure.

The coordinates of these points are given in the following table:

Point Z1 Z2
A 1 3
B 1.5 3.5
C 2.5 2
D 3 1
E 4 1
F 4 2
G 3.5 3
H 3 4

Question 1 (5 points)
Suppose that objective Z1 is being minimized while the objective Z2 is being maximized. The
points A, , H are not necessarily all feasible, although it is known that the point C is a Pareto-
optimal solution. Indicate with a cross (X) which points are certainly dominated and with the
words (INF) those that are certainly infeasible. Leave all other cells blank.

Point Respons
e
A Inf
B Inf
C
D X
E X
F X
G
H
Answer 4.1:
A and B are infeasible because they have lower Z1 and higher Z2 values than C, which is Pareto
optimal. If they were feasible, then they would dominate C, and C would not be Pareto optimal.

2 points

D, E, and F are Pareto-dominated by C because they have higher Z1 and lower Z2 values than C.

2 points

2-604-15 Final Aut2016 Page 10 of 16

We cannot say anything about G and H because they have higher Z1 and higher Z2 values than C.

1 point

Question 2 (5 points)
Suppose now that the points A, B, , H are feasible for the problem. Under a Pareto frontier
optimization where Z1 is maximized and Z2 is minimized, indicate with a cross (X) which
solutions are Pareto optimal and leave all other cells blank.

Solutio Respons
n e
A
B
C
D
E X
F
G
H

Answer 4.2:
A and B are Pareto-dominated by E.

1 point

C and D are Pareto-dominated by E.

1 point

F, G, and H are Pareto-dominated by E.

2 point

Therefore, only E is Pareto optimal as it is not dominated.

1 point

2-604-15 Final Aut2016 Page 11 of 16

Question 3 (5 points)
Let us recall the newsvendor example from Session 10. Our vendor must decide on the number
of newspapers to buy each morning. He pays $0.75 per copy. He re-sells each copy to customers
at $1.35 and returns the unsold copies to the supplier for a credit of $0.25 per copy. The
following screenshot gives the data for the problem and the result for a scenario in which the
vendor had bought 18 copies and had sold all of them to customers, i.e., demand was 18:

We then have the output of a simulation for 1,000 scenarios given below:

In expected value, what is the maximum amount of money that the newsvendor would be willing
to pay to know the state of nature before making his decision? Indicate your answer in the box
on the right.

a) 10.3436
d
b) 8.7535
c) 1.5901
d) 1.4331
e) 11.7767

Answer 4.3:
If we knew the state of nature, then we could simply pick the corresponding order quantity. Our
expected profit would be:

11*0.65*0.01 + 12*0.65*0.03 + + 27*0.65*0.005 = 11.7767

2 points

2-604-15 Final Aut2016 Page 12 of 16

However, not knowing the state of nature, we use the simulation approach to order 19 units,
which has the highest expected profit of 10.3436.

1 point

Hence, the expected value of perfect information is the difference between these two: 11.7767-
10.3436=1.4331.

2 points

2-604-15 Final Aut2016 Page 13 of 16

PROBLEM 5: Simulation (10 points)
Let us consider a project with 7 activities. The precedence constraints are indicated in the
following network:

The duration (in days) of each of the tasks, A, E, F, and G, is known and deterministic. However,
for tasks B, C, and D, these durations are random. The following table provides the mean
duration for each task:

Task Mean
duration
A 3
B 16
C 12
D 15
E 11
F 10
G 5

And, the following table provides the distribution of the durations of tasks B, C, and D:

Task B Task C Task D

Probabilit Probabilit Probabilit
Duration Duration Duration
y y y
14 0.10 10 0.15 14 0.40
15 0.20 11 0.20 15 0.30
16 0.40 12 0.25 16 0.20
17 0.20 13 0.30 17 0.10
18 0.10 14 0.10 18 0.00

If we calculate the duration of the project using only the mean durations, then this project will
take 35 days. This is the duration that was used for obtaining the contract. If the completion of
the project is delayed, then it will result in a penalty of $100,000 for the first day and $500,000
for each additional day. We would like to have an idea of the probability distribution associated
with this penalty.

We have simulated the durations of tasks B, C, and D and evaluated the duration of the project.
The distributions are in cells E8 to O14. The simulated durations for the three tasks are in the
1,000 rows under the cells C18 to E18. The earliest ending times for tasks B to G are in the 1,000
rows under the cells F18 to K18. A summary of cells K19 to K1018 is given in cells M18 to N28.

2-604-15 Final Aut2016 Page 14 of 16

Question 1 (5 points)
What is the formula that permits us to calculate the contents of the following cells?

Answer 5.1:

C19: =VLOOKUP(RAND();$F$10:$G$14;2)

1 point

G19: =$C$8+D19

1 point

K19: =MAX(I19;J19)+$C$14

2 points

N23: =COUNTIF($K$19:$K$1018;M23)

1 point

Question 2 (2 points)
Using this simulation, how can we estimate the probability that we will not have to pay the
penalty?

Answer 5.2:

Sum the totals in cells N24 to N28 and divide by 1,000.

2 points

Question 3 (3 points)
Using this simulation, how can we estimate the penalty to be paid?

Answer 5.3:

Perform the following calculation to obtain the weighted average of the penalty:

=(100000*(M24-M23)*N24+500000*(M25-M24)*N25+500000*(M26-
M24)*N26+500000*(M27-M24)*N27+500000*(M28-M24)*N28)/N29

3 points

2-604-15 Final Aut2016 Page 15 of 16

2-604-15 Final Aut2016 Page 16 of 16