Answer to Statistics question: Quantitative Methods
Joe is going to invest $250,000 in the development of new products. The new products have the following expected costs, yields, and degrees of risk.
Expected Expected Expected
Product Cost Yield Risk
A $100,000 0.20 8
B $50,000 0.10 4
C $50,000 0.15 10
D $150,000 0.10 0
Joe can do each product at its full cost or he may attempt a partial development and still expect a yield proportional to the level of expenditure on the product. Joe wants to limit his total weighted risk(degree of risk times budgeted amount) to 1000000 units; that is, an adopted plan for a $10000 expenditure with a degree of risk of 7 would be 70000 riskunits.
What should Joe invest to net the highest yield given his risk constraints?
Answer:
Decision Variable Product A Product B Product C Product D
100000 50000 0 150000
Objective function:
Maximize the yield 20000 5000 0 15000
Total Yield 40000
Constraints
Risk 800000 200000 0 0
Total Risk 1000000
Limit on Risk 1000000
Limit on investment in each product
Available 100000 50000 50000 150000
Used 100000 50000 0 150000
Run solver to solve the LP
See the solver output. Thus, the following investments should be made in four products
A 100000
B 50000
C 0
D 150000
Decision Variable Product A Product B Product C Product D
100000 50000 0 150000
Objective function:
Maximize the yield 20000 5000 0 15000
Total Yield 40000
Constraints
Risk 800000 200000 0 0
Total Risk 1000000
Limit on Risk 1000000
Limit on investment in each product
Available 100000 50000 50000 150000
Used 100000 50000 0 150000
The following investments should be made in 4 products:
A 0
B 0
C 0
D 0
This is an investment problem in linear programming. Please solve and show work
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Solution Summary
Word document contains complete formulation and explanation. The excel file contains formulation in Solver tool dialogue box and optimal solution.