Sensitivity analysis (continued) BSAD 30 Dave Novak Spring 2017 Source: Anderson et al., 2013 Quantitative Methods for Business 12th edition – some slides are directly from J. Loucks © 2013 Cengage Learning Overview Sensitivity analysis continued Changes in objective function coefficients • Called “Range of optimality” (ROO) Changes in RHS values • Called “Range of feasibility” (ROF) Focus on ROF Interpretation of shadow prices Example Sensitivity analysis Recall that last class we discussed: changes in objective function coefficients (identifying the range of optimality - ROO) this was a detailed discussion Discuss sensitivity analysis using the maximization example from Lecture 7 Sensitivity analysis Sensitivity analysis involves changing only one coefficient at a time! All other coefficients are held constant We cannot use basic sensitivity analysis to examine simultaneous changes or changes in LHS constraint coefficients Changes in OF coefficients Identify the Range of Optimality (ROO) Changes in OF coefficients do NOT impact feasible region At what point do changes in the per unit profits associated with the items we are producing result in a change in the optimal quantities we produce? Sensitivity report (from Lecture 7) Variable Cells Final Xi values ci Final Reduced Objective Allowable Allowable Cell Name Value Cost Coefficient Increase Decrease $B$1 X1 (# of units of product 1) 5 0 5 2 0.333333333 $B$2 X2 (# of units of product 2) 3 0 7 0.5 2 Constraints Cell Name $B$10 3) Constraint #3 LHS $B$8 1) Constraint#1 LHS $B$9 2) Constraint #2 LHS Final Shadow Constraint Allowable Allowable Value Price R.H. Side Increase Decrease 8 1 8 0.333333333 1.666666667 5 0 6 1E+30 1 19 2 19 5 1 Changes in OF coefficients Each OF coefficient can take on any value within the ROO, and the current optimal solution will remain optimal ROO for c1: 4.67 ≤ c1 ≤ 7 ROO for c2: 5 ≤ c2 ≤ 7.50 Changes in OF coefficients will result in changes to the final profit maximizing value or final cost minimizing value even if the current optimal solution remains optimal Changes in OF coefficients If c1 were to increase by $1.50 (from $5 / unit to $6.50 / unit), we would still produce 5 units of x1 and 3 units of x2 because the change to c1 is within the ROO Our total profit is now $53.50 instead of $46 Old c1 = $5: 5(5) + 7(3) = 46 New c1 = $6.5: 6.5(5) + 7(3) = 53.5 Sensitivity analysis Changes in the RHS of the constraint coefficients impact the feasible region as well as the optimal solution Identify the Range of Feasibility (ROF) Considering one change at a time! Changes to RHS values have nothing to do with the optimal solution ROF gives us different information than ROO Original Feasible Region x2 Coincides with Con 3: x1 + x2 < 8 8 7 Coincides with Con 1: x1 < 6 6 5 4 3 2 Con 2: 2x1 + 3x2 < 19 Feasible Region 1 1 2 3 4 5 6 7 8 9 10 x1 Change to RHS of Con#2 x2 Con 3: x1 + x2 < 8 8 Con 1: x1 < 6 7 6 Think about a ONE unit increase in RHS of Con 2 from 19 to 20 units 5 4 3 2 Feasible Region Con 2: 2x1 + 3x2 < 20 1 1 2 3 4 5 6 7 8 9 10 x1 Graphical change in RHS x2 Con 3: x1 + x2 < 8 8 7 The values of two critical points change! (x1 , x2) (0, 6.67) 6 5 (4, 4) 4 3 2 Con 1: x1 < 6 Feasible Region Con 2: 2x1 + 3x2 < 20 1 1 2 3 4 5 6 7 8 9 10 x1 Changes in RHS constraint coefficients When examining questions related to changes to RHS constraint coefficients you need to determine the ROF Inside ROF 1. Shadow price holds (is valid), AND 2. The new optimal solution (the solution that involves the change in the RHS) will involve the same set of binding constraints as the old optimal solution (the original problem before changing RHS) Changes in RHS constraint coefficients Outside of the ROF 1. The interpretation of the shadow price does not hold (doesn’t mean anything), AND 2. The new optimal solution will involve a different set of binding constraints Changes in RHS constraint coefficients When the RHS of a constraint changes, you typically must re-formulate and resolve the LP to obtain the new optimal solution Changes to RHS constraint coefficient values involves examining changes to the quantity of resources that are available The feasible region will change Can result in a different set of extreme points and a different optimal solution Sensitivity report (from Lecture 7) Variable Cells Final Reduced Objective Allowable Allowable Cell Name Value Cost Coefficient Increase Decrease $B$1 X1 (# of units of product 1) 5 0 5 2 0.333333333 $B$2 X2 (# of units of product 2) 3 0 7 0.5 2 Constraints Cell Name $B$10 3) Constraint #3 LHS $B$8 1) Constraint#1 LHS $B$9 2) Constraint #2 LHS Final Shadow Constraint Allowable Allowable Value Price R.H. Side Increase Decrease 8 1 8 0.333333333 1.666666667 5 0 6 1E+30 1 19 2 19 5 1 bi Sensitivity report The number in the “Final Value” column associated with each constraint is the amount of the resource that is used in the optimal solution. Note that the difference between the values in the “Final Value” column and The “Constraint RHS” is the value of the slack or surplus variables Variable Cells Final Reduced Objective Allowable Allowable Cell Name Value Cost Coefficient Increase Decrease $B$1 X1 (# of units of product 1) 5 0 5 2 0.333333333 $B$2 X2 (# of units of product 2) 3 0 7 0.5 2 Constraints Cell Name $B$10 3) Constraint #3 LHS $B$8 1) Constraint#1 LHS $B$9 2) Constraint #2 LHS Final Shadow Constraint Allowable Allowable Value Price R.H. Side Increase Decrease 8 1 8 0.333333333 1.666666667 5 0 6 1E+30 1 19 2 19 5 1 Shadow prices The shadow price is a measure of the relative value of a resource The shadow price is typically interpreted as the marginal value of a resource or the maximum amount you should be willing to pay for one additional unit of a resource The shadow price can be viewed as the monetary change in the final OF value when we increasing the resource by one unit Shadow prices As the RHS of a constraint increases or decreases, other constraints may become binding and impact the optimal solution, so the shadow price interpretation is only applicable for SMALL changes in the RHS – the range of those changes is the ROF Sensitivity report Variable Cells Final Reduced Objective Allowable Allowable Cell Name Value Cost Coefficient Increase Decrease $B$1 X1 (# of units of product 1) 5 0 5 2 0.333333333 $B$2 X2 (# of units of product 2) 3 0 7 0.5 2 Constraints Cell Name $B$10 3) Constraint #3 LHS $B$8 1) Constraint#1 LHS $B$9 2) Constraint #2 LHS Final Shadow Constraint Allowable Allowable Value Price R.H. Side Increase Decrease 8 1 8 0.333333333 1.666666667 5 0 6 1E+30 1 19 2 19 5 1 Changes in RHS constraint coefficients If we increase the RHS of constraint #2 by 1 unit what are the implications with respect to our profit and the current optimal solution? We now have additional resources available with respect to constraint #2 Is the change within the ROF? Sensitivity report Variable Cells Final Reduced Objective Allowable Allowable Cell Name Value Cost Coefficient Increase Decrease $B$1 X1 (# of units of product 1) 5 0 5 2 0.333333333 $B$2 X2 (# of units of product 2) 3 0 7 0.5 2 Constraints Cell Name $B$10 3) Constraint #3 LHS $B$8 1) Constraint#1 LHS $B$9 2) Constraint #2 LHS Final Shadow Constraint Allowable Allowable Value Price R.H. Side Increase Decrease 8 1 8 0.333333333 1.666666667 5 0 6 1E+30 1 19 2 19 5 1 Constraint #2: We can increase the RHS up to 5 and decrease the RHS by 1 Lower bound = 19 -1 (current RHS – allowable decrease) Upper bound = 19 + 5 (current RHS + allowable increase) The ROF for constraint #2 is (18 ≤ b2 ≤ 24) – within this range, the shadow price remains valid and the optimal solution involves the same set of binding constraints (#2 and #3) Sensitivity report Variable Cells Final Reduced Objective Allowable Allowable Cell Name Value Cost Coefficient Increase Decrease $B$1 X1 (# of units of product 1) 5 0 5 2 0.333333333 $B$2 X2 (# of units of product 2) 3 0 7 0.5 2 Constraints Cell Name $B$10 3) Constraint #3 LHS $B$8 1) Constraint#1 LHS $B$9 2) Constraint #2 LHS Final Shadow Constraint Allowable Allowable Value Price R.H. Side Increase Decrease 8 1 8 0.333333333 1.666666667 5 0 6 1E+30 1 19 2 19 5 1 Constraint #2: if we increase the RHS value from 19 to 20 units, our OF value (or profit) will increase by $2 (from $46 to $48) If we decrease the RHS value from 19 to 18 units, our OF value (or profit) will decrease by $2 (from $46 to $44) Changes in RHS constraint coefficients If we increase the RHS of constraint #2 by 1 unit what are the implications with respect to our profit and the current optimal solution? Change IS within the ROF Increasing the RHS of constraint #2 by 1 unit (from 19 to 20) will increase our total profit from $46 to $48 (a marginal increase of $2) The optimal solution will involve the same binding constraints #2 and #3 Changes in RHS constraint coefficients We know that the optimal solution will change because the feasible region has changed and the point (5,3) is no longer optimal (or even a critical point) We don’t necessarily know exactly how the optimal solution will change (unless it’s a graphical problem, we can’t see the extreme points) We need to reformulate and resolve the problem with the RHS of constraint #2 = 20 Graphical change in RHS x2 Coincides with Con 3: x1 + x2 < 8 8 7 Coincides with Con 1: x1 < 6 6 5 4 3 2 Con 2: 2x1 + 3x2 < 19 Feasible Region 1 1 2 3 4 5 6 7 8 9 10 x1 Graphical change in RHS x2 Con 3: x1 + x2 < 8 8 7 The values of two critical points change! (x1 , x2) (0, 6.67) 6 5 (4, 4) 4 3 2 Con 1: x1 < 6 Feasible Region Con 2: 2x1 + 3x2 < 20 1 1 2 3 4 5 6 7 8 9 10 x1 Reformulate and resolve Example of how this is done Shadow prices The Sensitivity Report provides limited information on how changes in the RHS of each constraint will impact the final profit maximizing value associated with the optimal solution as well as the feasible region Shadow prices Some words of caution regarding interpretation of shadow prices The shadow price is generally only applicable for small increases in the RHS (the range of change is given by the ROF for each constraint) • As more resources are available and the RHS value increases, different sets of constraints become binding and change the optimal solution mix (the optimal values for x1 and x2) Shadow prices The shadow price for a non-binding constraint is always ZERO The logic: if a constraint is non-binding that means that the constraint is not part of the current optimal solution (there is some slack or surplus associated with the constraint) If the constraint is not part of the optimal solution, then the marginal value associated with that resource is 0 Sensitivity report Variable Cells Final Reduced Objective Allowable Allowable Cell Name Value Cost Coefficient Increase Decrease $B$1 X1 (# of units of product 1) 5 0 5 2 0.333333333 $B$2 X2 (# of units of product 2) 3 0 7 0.5 2 Constraints Cell Name $B$10 3) Constraint #3 LHS $B$8 1) Constraint#1 LHS $B$9 2) Constraint #2 LHS Final Shadow Constraint Allowable Allowable Value Price R.H. Side Increase Decrease 8 1 8 0.333333333 1.666666667 5 0 6 1E+30 1 19 2 19 5 1 Consider constraint #1: It is non-binding, and is not part of the optimal solution What is the marginal value of increasing the RHS value of constraint #1 by one unit? Shadow prices Con 1: Shadow price is 0 This makes since, as x1 < 6 is a non-binding constraint ROF con 1: (5 ≤ b1 ≤ ∞) How can the allowable increase be ∞? • In the optimal solution, the amount of resource x1 that is currently used is 5, which is less than the amount that is currently available (x1 < 6) • Therefore, increasing the amount of the resource that is available will not impact the optimal solution in any way Graphical look at shadow price Current optimal solution x2 Con 3: x1 + x2 < 8 is (5, 3) and occurs at the intersection of Con 2 and Con 3 8 7 Con 2: 2x1 + 3x2 < 19 Con 1 has a slack value of “1” at current optimal solution 6 5 4 3 2 (5, 3) What does this mean? Feasible Region Con 1: x1 < 6 1 1 2 3 4 5 6 7 8 9 10 x1 Graphical look at shadow Increasing the RHS of price Con 1 (even infinitely) x2 Con 3: x1 + x2 < 8 has NO impact on the optimal solution 8 7 Con 2: 2x1 + 3x2 < 19 6 5 4 3 2 We have 6 and only use 5 If we had 8, we would still use only 5 and it would not change the optimal solution (5, 3) Feasible Region Con 1: x1 < 8 1 1 2 3 4 5 6 7 8 9 10 x1 Shadow prices Con 1: The allowable decrease is 1 Further reducing the amount of the resource available (below 5 units) will change the optimal solution as Con 1 will become binding at values below 5 Graphical look at shadow price x2 Con 1 can be decreased by 1 unit without impacting the optimal solution Con 3: x1 + x2 < 8 8 7 Con 2: 2x1 + 3x2 < 19 We have 5 and use 5 6 If we further decrease Con 1, our feasible region becomes smaller and the current optimal solution is no longer feasible 5 4 3 2 (5, 3) Feasible Region Con 1: x1 < 5 1 1 2 3 4 5 6 7 8 9 10 x1 Shadow prices Con 2: Shadow price is 2 The marginal value of the resource is $2 within the ROF for con 2: (18 ≤ b2 ≤ 24) Allowable increase is 5 Allowable decrease is 1 This interpretation of the shadow price is applicable only within the ROF Optimal solution will involve binding constraints #2 and #3 as long as any changes in b2 occur within the ROF (18-24) Shadow prices Con 3: Shadow price is 1 The marginal value of the resource is $1 within the ROF for con 3: (6.33 ≤ b3 ≤ 8.33) Allowable increase is 0.33 Allowable decrease is 1.67 This interpretation of the shadow price is applicable only within the ROF Optimal solution involves binding constraints #2 and #3 as long as any changes in b3 occur within ROF(6.33 – 8.33) Shadow prices Graphically, the ROF is determined by finding the values of the RHS for each constraint such that the same two constraints that determined the original optimal solution continue to determine the new optimal solution for the problem ROF gives us the range of changes to the RHS of any one of the 3 constraints, so that the optimal solution still lies at the intersection of constraints #2 and #3 Shadow prices This does not mean that the optimal solution won’t change within the ROF, just that the same set of binding constraints (currently #2 and #3) will remain binding for changes to the RHS as long as changes occur within the ROF Within the ROF, the interpretation of the shadow price holds (shadow prices do not mean anything outside of ROF) Shadow prices For changes to the RHS outside of the ROF the problem must be reformulated and resolved to find the new shadow prices Only one RHS value can be changed at a time – does not apply to multiple simultaneous changes Does not apply to changes in LHS constraint coefficients Sensitivity report Variable Cells Final Reduced Objective Allowable Allowable Cell Name Value Cost Coefficient Increase Decrease $B$1 X1 (# of units of product 1) 5 0 5 2 0.333333333 $B$2 X2 (# of units of product 2) 3 0 7 0.5 2 Constraints Cell Name $B$10 3) Constraint #3 LHS $B$8 1) Constraint#1 LHS $B$9 2) Constraint #2 LHS Final Shadow Constraint Allowable Allowable Value Price R.H. Side Increase Decrease 8 1 8 0.333333333 1.666666667 5 0 6 1E+30 1 19 2 19 5 1 Assume the RHS of constraint #3 increases by 2 units. The ROF for constraint #3 is (6.33 ≤ b3 ≤ 8.33) – within this range, the shadow price remains valid and the same set of constraints remain binding Change is outside of the ROF – the report tells us nothing. Reformulate and resolve Olympic bike example Olympic Bike is introducing two new lightweight bicycle frames, the Deluxe (x1) and the Professional (x2) Both frames are made from different combinations of special aluminum and steel alloys. The anticipated unit profits are $10 (c1) for the Deluxe and $15 (c2) for the Professional A supplier delivers 100 lbs. of aluminum alloy and 80 lbs. of steel alloy per week. Each Deluxe frame requires 2lbs. of aluminum and 3 lbs. of steel. Each Professional frame requires 4 lbs. of aluminum and 2 lbs. of steel How many of each type of frame should Olympic produce each week? Olympic bike example Olympic bike example Olympic bike example X1 (# of Deluxe frames) X2 (# of Professional frames) 15 17.5 Objective Function (Maximize Profit) Constraints ST: 1) Constraint#1 (materials (aluminum) constraint) 1) Constraint#1 (materials (steel) constraint) 412.5 LHS RHS 100 80 100 80 Olympic bike example What happens if the per unit profit for the Deluxe frame (x1) changes from $10 (c1) to $20 – is the current solution still optimal? Olympic bike example Variable Cells Cell Name $B$1 X1 (# of Deluxe frames) $B$2 X2 (# of Professional frames) Final Reduced Objective Allowable Allowable Value Cost Coefficient Increase Decrease 15 0 10 12.5 2.5 17.5 0 15 5 8.333333333 Constraints Cell Name $B$8 1) Constraint#1 (materials (aluminum) constraint) LHS $B$9 2) Constraint#2 (materials (steel) constraint) LHS Final Shadow Constraint Allowable Allowable Value Price R.H. Side Increase Decrease 100 3.125 100 60 46.66666667 80 1.25 80 70 30 The current solution of 15 Deluxe and 17.5 Professional frames remains optimal As long as the OF coefficient for x1 (c1) is between $7.50 and $22.50 So, increasing c1 by $10 (from $10 to $20) is within the range of optimality, so the current optimal solution mix DOES NOT change – we will still produce 15 Deluxe and 17.5 Professional frames The profit maximizing solution will change from $412.50 to $562.50 because we Are gaining $10 additional $ for each Deluxe frame we produce (= 20(15)+15(17.5)) Olympic bike example What happens if the per unit profit for the Deluxe frame (c1) decreases from $10 to $6 – is the current solution still optimal? Olympic bike example Variable Cells Cell Name $B$1 X1 (# of Deluxe frames) $B$2 X2 (# of Professional frames) Final Reduced Objective Allowable Allowable Value Cost Coefficient Increase Decrease 15 0 10 12.5 2.5 17.5 0 15 5 8.333333333 Constraints Cell Name $B$8 1) Constraint#1 (materials (aluminum) constraint) LHS $B$9 2) Constraint#2 (materials (steel) constraint) LHS Final Shadow Constraint Allowable Allowable Value Price R.H. Side Increase Decrease 100 3.125 100 60 46.66666667 80 1.25 80 70 30 The current solution of 15 Deluxe and 17.5 Professional frames remains optimal As long as the OF coefficient for x1 (c1) is between $7.50 and $22.50 So, decreasing c1 by $4 (from $10 to $6) is OUTSIDE the range of optimality, and the solution mix WILL change – the current optimal solution WILL NOT remain optimal. We have to reformulate and re-solve the problem to identify the new optimal solution Olympic bike example What is the maximum amount Olympic should pay for 50 extra lbs. of aluminum alloy? Olympic bike example Variable Cells Cell Name $B$1 X1 (# of Deluxe frames) $B$2 X2 (# of Professional frames) Final Reduced Objective Allowable Allowable Value Cost Coefficient Increase Decrease 15 0 10 12.5 2.5 17.5 0 15 5 8.333333333 Constraints Cell Name $B$8 1) Constraint#1 (materials (aluminum) constraint) LHS $B$9 2) Constraint#2 (materials (steel) constraint) LHS Final Shadow Constraint Allowable Allowable Value Price R.H. Side Increase Decrease 100 3.125 100 60 46.66666667 80 1.25 80 70 30 The shadow price is interpreted as the marginal value of an extra pound (lb.) of aluminum (we already have paid for 100 lbs.) – what is the value of 50 additional lbs.? Shadow price of constraint #1 (aluminum constraint) = $3.125 per lb. The ROF for Con #1 is (53.3 ≤ b1 ≤ 160). Since the allowable increase is 60, the shadow price interpretation holds for 50 additional lbs. The value of 50 additional lbs. of aluminum alloy is 50 * $3.125 = $156.25 Non-intuitive shadow prices Constraints with variables naturally on both the left-hand (LHS) and right-hand (RHS) sides often lead to shadow prices that have a non-intuitive explanation Olympic bike example Let’s introduce an additional constraint The number of Deluxe frames produced (x1) must be greater than or equal to the number of Professional frames produced (x2) Olympic bike example Max 10x1 + 15x2 s.t. 2x1 + 4x2 < 100 3x1 + 2x2 < 80 x 1 > x2 x1 > 0 and x2 > 0 Objective Function “Regular” Constraints Non-negativity Constraints Olympic answer report Objective Cell (Max) Cell Name $B$4 Objective Function (Maximize Profit) Original Value Final Value 0 400 Variable Cells Cell Name $B$1 X1 (# of Deluxe frames) $B$2 X2 (# of Professional frames) Original Value Final Value Integer 0 16 Contin 0 16 Contin Constraints Cell Name $B$8 1) Constraint#1 (materials (aluminum) constraint) LHS $B$9 2) Constraint#2 (materials (steel) constraint) LHS $B$10 3) Constraint #3 (production constraint) LHS Cell Value Formula Status Slack 96 $B$8<=$C$8 Not Binding 4 80 $B$9<=$C$9 Binding 0 16 $B$10>=$C$10 Binding 0 Olympic sensitivity report Variable Cells Cell Name $B$1 X1 (# of Deluxe frames) $B$2 X2 (# of Professional frames) Final Reduced Objective Allowable Allowable Value Cost Coefficient Increase Decrease 16 0 10 12.5 25 16 0 15 1E+30 8.333333333 Constraints Cell Name $B$8 1) Constraint#1 (materials (aluminum) constraint) LHS $B$9 2) Constraint#2 (materials (steel) constraint) LHS $B$10 3) Constraint #3 (production constraint) LHS Final Shadow Constraint Allowable Allowable Value Price R.H. Side Increase Decrease 96 0 100 1E+30 4 80 5 80 3.333333333 80 16 -5 0 26.66666667 2.5 Olympic bike example Interpret the shadow prices of: Constraint #1 Olympic bike example Interpret the shadow prices of: Constraint #2 Olympic bike example Interpret the shadow prices of: Constraint #3 Olympic bike example Interpret the range of optimality for OF coefficient: c1 Olympic bike example Interpret the range of optimality for OF coefficient: c2 Reduced costs The reduced cost of a variable is typically the shadow price of the corresponding nonnegativity constraints If a decision variable has a positive value at the optimal solution, the reduced cost for that decision variable = 0 Reduced costs If a decision variable has a value of 0 at the optimal solution (produce zero of that thing), the reduced cost for that variable ≠ 0, and can be interpreted as: the amount the objective value will change if we increase the value of this variable to one the amount by which the objective coefficient would have to decrease in order to have a positive value for that variable in an optimal solution Summary Introduction to sensitivity analysis Changes in objective function coefficients Identify ROO • What does this mean graphically? • How are these changes interpreted? Changes in RHS values Identify ROF • What does this mean graphically? • How are these changes interpreted? Summary Interpretation of shadow prices Where to find these on the Sensitivity Report Olympic bike example
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