Name:

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Question 1 2 3 Total

Possible Points 20 20 20 60

Score

BA 502 (QMETH) Professor Hillier Sample Final Exam

Exam is closed book with 1 page of notes allowed. Please show all work. Please read questions carefully. Please do not hand in work on extra paper. There are 3 questions; please be sure that your exam is complete.

I have neither given nor received inappropriate aid on this work. Nor have I observed any academic misconduct on the part of others pertaining to this work.

______________________________ (signed)

(20)

1.

UW Toys has just completed a successful test-market of the Professor Hillier Action Figure in Yakima, and will soon be marketing the product statewide. Therefore, the Vice President for Marketing would like to design a promotional campaign that will achieve the largest possible exposure for the new toy. The company has allocated a $400,000 budget for the advertising campaign. The Vice President has identified the three most effective advertising media for the product: 1. Television commercials on Saturday morning programs for children. 2. Advertisements in food and family-oriented magazines. 3. Advertisements in Sunday supplements of major newspapers. The number of total potential customers reached and the cost of each of these types of advertising is shown in the table below. Cost (per ad) $40,000 $12,000 $8000 Number of Potential Customers Reached (per ad) 15,000 (2000 parents, 13,000 children) 7000 (5500 parents, 1500 children) 5000 (5000 parents, 0 children)

Television commercial Magazine ad Newspaper ad

One possible complication is that there are only four spots available for television ads. Furthermore, UW Toys would like to make sure that they reach at least 5000 children, since they will be the primary consumers of the product. Finally, since the Vice President is not a big fan of print media, and newspaper ads in particular, she would like to be sure that there are at least twice as many magazine ads as newspaper ads, and also that the amount spent on print media (magazine ads and/or newspaper ads) is no more than 60% of the total amount spent.
(12)

a. Formulate (but do not solve) an algebraic linear programming model to determine at which levels to choose the advertising activities so as to reach the maximum number of potential customers, while staying under budget, and with the additional considerations above.

1 continued.
(4)

b. Suppose UW Toys would incur a fixed cost of $50,000 (charged to the advertising budget) if any television ads need to be produced (in addition to the per ad cost of $40,000). Describe what modifications would be necessary to your formulation in part a to implement this change. That is, what new decision variables would be needed (if any), what new constraints would be needed (if any), and what modifications would need to be made to the objective function and/or constraints in part a (if any) to create a revised linear program (with binary variables).

(4)

c. Suppose UW Toys Vice President (not being a fan of print media) did not want to run both newspaper and magazine ads (i.e., one or the other, or neither, but not both). This would replace the requirement that at least twice as many magazine ads as newspaper ads be placed. Describe what modifications would be necessary to your formulation in part a to implement this change. That is, what new decision variables would be needed (if any), what new constraints would be needed (if any), and what modifications would need to be made to the objective function and/or constraints in part a (if any), to create a revised linear program (with binary variables).

(20)

2.

The Monet Company produces four types of picture frames, which we label 1, 2, 3, and 4. The four types of frames differ with respect to size, shape, and materials used. Each type requires a certain amount of skilled labor, metal, and glass, and generates various amounts of profit, as given in the following table. During the coming week Monet has 4000 hours of skilled labor, 6000 pounds of metal, and 10,000 pounds of glass available. Also, market constraints are such that it is impossible to sell more than 1000 type 1, 2000 type 2, 500 type 3, and 1000 type 4 frames. Labor (hours) 2 1 3 2 Metal (pounds) 4 2 1 2 Glass (pounds) 6 2 1 2

Frame 1 Frame 2 Frame 3 Frame 4

Profit $50 $30 $40 $30

The production manager formulated a linear program to determine the production levels that would maximize profit. The algebraic model, spreadsheet solution, and sensitivity report are shown below. (Note that the sensitivity information for the glass constraint is omittedthe reason will become obvious when answering part g).

Let x i = the production quantity of picture frame i (for i = 1,2, 3,4). Maximize 50x1 + 30x2 + 40x3 + 30x 4 subject to Labor: 2x 2 + x2 + 3x3 + 2x 4 ! 4000 hours Metal: 4x1 + 2x2 + x 3 + 2x4 ! 6000 pounds Glass: 6x1 + 2x2 + x 3 + 2x4 ! 10, 000 pounds Sales: x1 ! 1000; x2 ! 2000; x3 ! 500; x 4 ! 1000 and x1 , x 2 , x3 , x 4 " 0.
A 1 2 3 4 5 6 7 8 9 10 11 12 13 Profit per Frame Constraints Labor Metal Glass B Frame 1 $50 C Frame 2 $30 D Frame 3 $40 E Frame 4 $30 Totals 4000 6000 6800 Available 4000 6000 10000 Slack 0 0 3200 F G H I

2 4 6

Resource Usage per Frame Produced 1 3 2 1 2 1

2 2 2

<= <= <=

Production Quantity Max Sales

Adjustable Cells Cell $B$11 $C$11 $D$11 $E$11

Frame 1 400 <= 1000

Frame 2 2000 <= 2000

Frame 3 400 <= 500

Frame 4 0 <= 1000

Total Profit $96,000

Name Quantity Quantity Quantity Quantity Frame Frame Frame Frame 1 2 3 4

F i n a l Reduced O b j e c t i v e A l l o w a b l e A l l o w a b l e Value Cost Coefficient Increase Decrease 400 2000 400 0 0 5 0 -6 50 30 40 30 10 1E+30 35 6 15 5 15 1E+30

Constraints Cell $F$5 $F$6 $F$7 Name Labor Totals Metal Totals Glass Totals Final Shadow Value Price 4000 6000 11 7 Constraint Allowable Allowable R.H. Side Increase Decrease 4000 6000 250 2000 1000 500

Problem #2 continued For each of the following, answer the question as specifically and completely as is possible without re-solving the problem with the Solver. All problems are independent (i.e., any change made in one problem does not affect other problems).
(2.5)

a. What is the optimal solution and its profit.

(3)

b. Suppose the profit per frame 1 changes to $40. Will this change the optimal production quantities? What can be said about the change in profit?

(3)

c. How much would the selling price of frame 4 need to be increased before it would become profitable to produce this product?

(3)

d. Suppose they can hire additional labor at the rate of $12 per hour. Should they? Explain why or why not.

(3)

e. Suppose they discover that 100 pounds of metal has been stolen, thus reducing the quantity available for production. Will this change the optimal production quantities? What can be said about the change in profit?

(3)

f.

Briefly explain why the allowable increase is (1E+30) for frame 2.

(2.5)

g. You should be able to fill in all of the sensitivity analysis information for the glass constraint, given just the original solution to the problem. Fill in the five quantities directly in the sensitivity report on the previous page. (Note: partial credit will be given1/2 point for each correct number.)

(20)

3.

A customer has approached First Bank of Seattle for a $10,000 one-year loan. If First Bank does not approve the loan, the $10,000 will be invested in bonds that earn a 6% annual return for First Bank. If First Bank does approves the loan, they will charge the customer 12% interest. However, without additional information, the bank believes that there is a 4% chance that this customer will default on the loan, in which case First Bank would lose the entire $10,000.

(5)

a. Construct a decision tree to help First Bank decide whether or not to approve the loan. Solve the tree to determine the course of action that will maximize their expected profit.

(5)

b. First Bank can (at a cost) thoroughly investigate the customers credit record and supply a favorable or unfavorable recommendation. Past experience with 200 similar customers in the past has yielded the following results (their credit record, and then whether or not the customer eventually defaulted on the loan): Credit Record Favorable Unfavorable Default 2 6 Dont Default 158 34

Assuming they perform this credit investigation, construct a decision tree to help First Bank with their decision. Solve the tree to determine the course of action that will maximize their expected profit.

(1)

c. Compute the expected value of the information provided by the credit investigation.

(2)

d. Suppose the credit investigation costs $100. Considering your answers to a, b, and c, completely describe the best course of action, and the resulting expected profit.

(2)

e. Compute the expected value of perfect information in this decision problem (i.e., suppose a test existed that could perfectly predict whether or not the customer would defaultwhat would be the expected value of such a test?).

(5)

f.

Reconsider part a (i.e., with no additional information from a credit investigation). Assume that you are the manager responsible for the decision of whether or not to approve the loan. Use one of the

equivalent lottery method discussed in class to determine your utility function (in particular, your utility values for all of the possible payoffs in the decision). Note: you will be graded on
the process you use to construct the utility function, not the specific utilities you come up with. Use the utility function to re-solve the problem facing First Bank, this time maximizing expected utility.