1.
In anticipation of the immense college expenses, Joe and Jill started an annual investment
program on their child’s eighth birthday that will last until the eighteenth birthday. They
plan to invest the following amounts at the beginning of each year:
To avoid unpleasant surprises, they want to invest the money safely in the following
options: insured savings with 7.5% annual yield, 6-year government bonds that yield
7.9% and have a current market price equal to 98% of face value, and 9-year municipal
bonds yielding 8.5% and having a current market price of 1.02 of face value. How should
the money be invested ?
2. A gambler plays a game that requires dividing bet money among four choices. The game
has three outcomes. The following table gives the corresponding gain or loss per dollar
for the different options of the game.
The gambler has a total of $1500, which may be played only once. The exact outcome of
the game is not known a priori. Because of this uncertainty, the gambler’s strategy is to
maximize the minimum return produced by the three outcomes. How should the gambler
allocate the $1500 among the four choices? Solve the model using Solver or AMPL.
(Hint: The gambler’s net return may be positive, zero, or negative.)
3. Lewis (1996). Bills in a household are received monthly (e.g., utilities and home mort-
gage), quarterly (e.g., estimated tax payments), semiannually (e.g., insurance), or annually
(e.g., subscription renewals and dues). The following table provides the monthly bills for
next year.
To account for these expenses, the family sets aside $1000 per month, which is the
average of the total divided by 12 months. If the money is deposited in a regular savings
account, it can earn 4% annual interest, provided it stays in the account at least 1 month.
The bank also offers 3-month and 6-month certificates of deposit that can earn 5.5%
and 7% annual interest, respectively. Develop a 12-month investment schedule that will
maximize the family’s total return for the year. State any assumptions or requirements
needed to reach a feasible solution. Solve the model using Solver or AMPL.
4. Toolco has contracted with AutoMate to supply their automotive discount stores with
wrenches and chisels. AutoMate’s weekly demand consists of at least 1570 wrenches and
1250 chisels. Toolco cannot produce all the requested units with its present one-shift ca-
pacity, and must use overtime and possibly subcontract with other tool shops. The result
is an increase in the production cost per unit, as shown in the following table. Market
demand restricts the ratio of chisels to wrenches to at least 2:1.
a. Formulate the problem as a linear program, and determine the optimum production
schedule for each tool.
b. Explain why the validity of the model is dependent on the fact that the unit production cost is an
increasing function of the production quantity.
c. Solve the model using AMPL, Solver, or TORA.
5. The demand for ice cream at All-Flavors Parlor during the three summer months (June,
July, and August) is estimated at 500, 600, and 400 20-gallon cartons, respectively. Two
wholesalers, 1 and 2, supply All-Flavors with its ice cream. Although the flavors from the
two suppliers are different, they are interchangeable. The maximum number of cartons
either supplier can provide is 400 per month. Also, the price the two suppliers charge
change monthly according to the following schedule:
To take advantage of price fluctuation, All-Flavors can purchase more than is needed for a month
and store the surplus to satisfy the demand in a later month. The storage cost of an ice cream carton
is $5 per month. It is realistic in the present situation to assume that the storage cost is a function of
the average number of cartons on hand during the month. Develop a model to determine the
optimum schedule for buying ice cream from the two suppliers and find the optimum solution using
TORA, Solver, or AMPL.
6. The demand for an item over the next four quarters is 280, 400, 450, and 300 units,
respectively. The price per unit starts at $20 in the first quarter and increases by $1 each
quarter thereafter. The supplier can provide no more than 400 units in any one quarter.
Although we can take advantage of lower prices in early quarters, a storage cost of $3.80
is incurred per unit per quarter. In addition, the number of units that can be held over
from one quarter to the next must be 80 or less. Develop an LP model to determine the
optimum schedule for purchasing the item to meet the demand, and find the optimum
solution using AMPL, Solver, or TORA.
