Meeting on 1 Jan 2024 for Unique Paper Code: 2412082301 BCH Sem III Business Mathematics

1(a) A salesperson has the following record of sales during three weeks of a particular month in respect of items P, Q and R. She
earns sales commission at the rate of 2%, 2.5% and 1% respectively. The details of the sales and commission are given below:
Sales in units Total Commission
Weeks P Q R (₹)
First 400 200 200 27,000
Second 500 400 700 45,000
Third 400 600 400 54,000
Using matrix algebra, you are required to:
(i) Determine the selling price per unit of items P, Q and R. (4)
(ii) Total commission received by the salesperson in the fourth week if sales are 670, 150 and 400 units for products P, Q and
R respectively. (2) (6)

1 (a) (i) Computation of selling prices: (4)

Let the selling prices for the product P, Q and R be x, y and z respectively. The equations for total commission for the three weeks
can be presented on the basis of the sales(units) and the rates of commission on the products as follows.
400(0.02)𝑥 + 200(0.025)𝑦 + 200(0.01)𝑧 = 27000
500(0.02)𝑥 + 400(0.025)𝑦 + 700(0.01)𝑧 = 45000
400(0.02)𝑥 + 600(0.025)𝑦 + 400(0.01)𝑧 = 54000
Simplifying the above set of the linear equations, we get (1)
8𝑥 + 5𝑦 + 2𝑧 = 27000
10𝑥 + 10𝑦 + 7𝑧 = 45000
8𝑥 + 15𝑦 + 4𝑧 = 54000
The above system of equations can be expressed in matrix form as A X = B where
8 5 2 x 27,000
A= 10 10 7 X= y B= 45,000
8 15 4 z 54,000
|A| = 8 (10  4 − 15  7) − 10 (5  4 − 15  2) + 8 (5  7 − 10  2)
= 8 (− 65) − 10 (−10) + 8(15) = −520 + 100 + 120 = − 300 (1)
Since |A| ≠ 0, unique solution exists.
Using Matrix Inversion: (2)
X = A-1 B
10  4 − 15  7 − (5  4 − 15  2) 5  7 − 10  2
= − 65 = 10 = 15
− (10  4 − 7  8) 8  4 − 8  2 − (8  7 − 10  2)
Adjoint A =
= 16 = 16 = −36
10  15 − 10  8 − (8  15 − 8  5) 8  10 − 5  10
= 70 = − 80 = 30
(1)
–1 Adjoint A
A =
|A|

65/300 = 13/60 = 0.2167 −10/300 = −1/30 = − 0.0333 −15/300 = −1/20 = − 0.05

-1
A = −16/300 = − 4/75 = − 0.0533 −16/300 = − 4/75 = − 0.0533 36/300 = 3/25 = 0.12
−70/300 = −7/30 = − 0.2333 80/300 = 4/15 = 0.2667 −30/300 = −1/10 = − 0.10

13/60 = 0.2167 −1/30 = − 0.0333 −1/20 = − 0.05 27,000

X= −4/75 = − 0.0533 −4/75 = − 0.0533 3/25 = 0.12  45,000
−7/30 = − 0.2333 4/15 = 0.2667 −1/10 = − 0.10 54,000

13/60 (27000) − 1/30 (45000) − 1/20 (54000) 1650

= − 4/75 (27000) − 4/75 (45000) + 3/25 (54000) = 2640
− 7/30 (27000) + 4/15 (45000) − 1/10 (54000) 300
(1)
Alternatively, using Cramer's Rule (Determinant Method): (2)
27000 5 2
|Ax| = 45000 10 7 = 27000 (10  4 − 15  7) − 45000 (5  4 − 15  2) + 54000 (5  7 − 10  2)
54000 15 4 = 27000 (− 65) − 45000 (−10) + 54000 (15) = −17,55,000 + 4,50,000 + 8,10,000 = − 495000

|A𝑥| − 495000
𝑥= = = 1650 (½)
|A| −300
1
 8 27000 2
|Ay| = 10 45000 7 = 8 (45000  4 − 54000  7) − 10 (27000  4 − 54000  2) + 8 (27000  7 − 45000  2)
8 54000 4 = 8 (−198000) − 10 (0) + 8 (99000) = −15,84,000 + 7,92,000 = − 7,92,000

|A𝑦| −792000
𝑦= = = 2640 (½)
|A| −300
8 5
27000
|Az| = 10 45000 = 8 (10  54000 − 15  45000) − 10 (5  54000 − 15  27000) + 8 (5  45000 − 10  27000)
10
8 54000 = 8 (10,80,000) − 10 (−135000) + 8 (−45000) = 10,80,000 −13,50,000 + 3,60,000 = − 90,000
15
|A𝑧 | −90000
𝑧= = = 300 (½)
|A| −300
Thus, selling prices of the items P, Q and R are ₹1650, ₹2,640 and ₹300 respectively. (½)
(ii) Computation of Total Commission received in fourth week: (2)
P 1650
Selling Prices of the products P, Q and R are: X = Q 2640
R 300

Units sold of the products P, Q and R in the fourth week can be represented in a diagonal matrix as:
P Q R
P 670 0 0
S =Q 0 150 0
R 0 0 400
Sales (in ₹) in the fourth week for products P, Q and R can be computed: (1½)
11,05,500
Sales (₹) = S  X = 3,96,000
1,20,000
The rates of commission on sale of the three products can be represented in a 1  3 matrix:
P Q R
Commission (%) = 2.00% 2.50% 1.00%
Total Commission = Commission (%)  Sales (₹) = ₹33,210 (½)

2
1(a) OR
A manufacturer produces two products A and B that are processed on two machines I and II before completion. Machine I can
process either 25 units of product A or 10 units of product B per hour. Machine II can process 40 of product B or 20 units of
product A per hour.
Using matrix algebra determine the following:
(i) Monthly output of products A and B if machines I and II operate for 8 and 7 hours per day respectively in a 6-day working
week with 4 weeks in a month. (3)
(ii) Per unit cost of production if the cost of operating per hour on two machines is ₹25,000 and ₹30,000 respectively. (2)
(iii) Total cost of production. (1) (6)
Solution 1(a) OR: Given:
Processing Capacity of Hours per Days in Weeks in Time
Machines per hour day week Month Available
Machine Product A Product B (Hours)
I 25 10 8 6 4 192
II 20 40 7 6 4 168
If x and y units of Product A and B respectively are produced by the manufacturer then the given information can be presented as
a system of equations as follows. (1)
𝑥 𝑦
+ = 192  2𝑥 + 5𝑦 = 9600 (Production capacity of machine I)
25 10
𝑥 𝑦
+ = 168  2𝑥 + 1𝑦 = 6720 (Production capacity of machine II)
20 40
The above system of equations can be presented in the matrix form as:
2 5 𝑥 9600
[ ][ ] = [ ]
2 1 𝑦 6720
 A X = B
(i) Computation of monthly output of the products A and B:
|A| = − 8 Since |A| ≠ 0, unique solution exists. (1)
1 1 1 −5 9600 3000
X = A-1 B = (adj A) B = [ ][ ]=[ ]
|A| −8 −2 2 6720 720
Therefore, production of A and B is 3000 units and 720 units respectively. (1)
(ii) Per unit cost of production: Let matrix P represent the production capacity of machines and matrix C represents the cost of
operating per hour on two machines:
X Y
Machine I 1/25 1/10
P=
Machine II 1/20 1/40

Machine I Machine II
C= ₹ 25,000 ₹ 30,000
1/25 1/10
Cost of production per unit = C × P = [25000 30000] [ ]
1/20 1/40
= [25000(1/25) + 30000(1/20) 25000(1/10) + 30000(1/40)]
= [2500 3250]
Therefore, cost per unit of production of A and B is ₹2500 and ₹3250 respectively. (2)

(iii) Total cost of production = Cost per unit of production × Number of units
3000
= [2500 3250] [ ]= [98,40,000]
720
Therefore, total cost of production is ₹ 98,40,000. (1)

3
1(b) A hydro-electricity power plant in a small village generates electricity and water for irrigation which also serve as intermediate inputs in each
other’s production. To generate a unit of electricity, 0.40 units of electricity and 0.20 units of water are needed. Similarly, to produce a unit
of water, 0.50 units of water and 0.25 units of electricity are required. 0.25 and 0.15 units of labour are required to produce a unit of electricity
and a unit of water respectively and 0.15 and 0.10 units of capital are required to produce each unit of electricity and water respectively. The
wage rate and interest rate are ₹500 per man-day and 10% respectively. The village needs 1800 kW (kilowatt) electricity and 4400 cubic
feet of water for final consumption.
Using matrix algebra, you are required to:
(i) Write the balancing equations. (2)
(ii) Test the Hawkins-Simon conditions of viability of the system. (2)
(iii) Construct the input-output transaction table for the gross output required to satisfy the above final demand. (4)
(iv) Determine the equilibrium prices. (3)
(v) Compute the total value added. (1) (12)
Solution 1(b):
(i) Writing the balancing equations:
Technological coefficient matrix:
Electricity (x) Water (y)
Electricity (x) 0.4 0.25
A=
Water (y) 0.2 0.50
Coefficients of Primary Inputs: (1)
x y
Labour 0.25 0.15
Primary Inputs =
Capital 0.15 0.1
Demand:
X 1800
D=
Y 4400
Balancing Equations: (1)
x = 0.4 x + 0.25 y + 1800
y = 0.2 x + 0.50 y + 4400
(ii) Testing Hawkins-Simon conditions of viability of system: (2)
(a) Leontief's coefficient matrix: (½)
x Y
(I − A) = X 0.6 − 0.25
Y − 0.2 0.5
(b) |I − A| = 0.6  0.5 − (− 0.2  − 0.25) = 0.3 − 0.05 = 0.25 (½)
Hawkins-Simon conditions of viability: (1)
(1) Determinant of the Leontief’s matrix is 0.25 which is positive.
(2) The diagonal elements of the Leontief’s matrix, i.e. 0.6, 0.5 are positive.
Thus, the Hawkins-Simon conditions of viability are satisfied, and system is viable.
(iii) Input-output transaction table for the gross output required to satisfy the given final demand. (4)
(a) Calculation of the gross output. (2)
1 0.50 0.25 1800 1 900 + 1100 1 2000 8000
X = (I − A) D =
-1
[ ][ ]= [ ]= [ ]=[ ]
0.25 0.20 0.60 4400 .25 360 + 2640 .25 3000 12000
Thus, the gross output required to meet the final demand of 1800 tons, 4400 tons for products X and Y is 8000 tons and 12000 of
products X and Y respectively.
𝐿 𝑙 𝑙2 𝑥
(b) Total primary inputs required: [ ] = [ 1 ][ ] (1)
𝐾 𝑘1 𝑘1 𝑦
0.25 0.15 8000 3800
= =
0.15 0.10 12000 2400
Input-output transaction table: (1)
Consumers Final
Producer Gross Output
Electricity (x) Water (y) Demand
0.4  8000 0.25  12000 3200 + 3000 + 1800
Electricity (x) 1800
= 3200 = 3000 = 8000
0.2  8000 0.50  12000 1600 + 6000+ 4400
Water (y) 4400
= 1600 = 6000 = 12000
Primary
Total Requirement
Inputs
0.25  8000 0.15  12000 2000 + 1800
Labour -
= 2000 = 1800 = 3800
0.15  8000 0.10  12000 1200 + 1200
Capital -
= 1200 = 1200 = 2400

4
(iv) Equilibrium Prices: (3)
−1 T 𝑙1 𝑤 + 𝑘1 𝑖
P = [(I − A) ] [ ]
𝑙2 𝑤 + 𝑘2 𝑖
1 0.50 0.2 0.25(500) + 0.15(0.10)
= [ ][ ]
.25 0.25 0.6 0.15(500) + 0.10(0.10)
1 0.50 0.2 125 + 0.015 1 0.50 0.2 125.015 1 62.5075 + 15.002 310.038
= [ ][ ]= [ ][ ]= [ ]=[ ]
.25 0.25 0.6 75 + 0.010 .25 0.25 0.6 75.010 .25 31.25375 + 45.006 305.039
Thus, equilibrium prices for a unit of electricity and water are ₹ 310.038 and ₹ 305.039 respectively.
(v) Computation of the total value added: (1)
𝑝𝑥 310.038
Total Value Added = [𝑑𝑥 𝑑𝑦 ] [𝑝 ] = [1800 4400] [ ] = [558,068.40 + 1342,171.60] = [19,00,240]
𝑦 305.039
Alternatively,
𝑙 𝑤 + 𝑘1 𝑖 125.015
Total value added = [𝑥 𝑦] [ 1 ] = [8000 12000] [ ] = [10,00,120 + 9,00,120] = [19,00,240]
𝑙2 𝑤 + 𝑘2 𝑖 75.010
Thus, total value added is ₹19,00,240.

1 (b) OR
A manufacturing unit has three departments which produce output for inter departmental consumption and for the final consumers. The inter-
departmental flow of the products of three departments of the manufacturing unit are given as under:
Inter Department Consumption (in tons) Final Demand
Producers
Department X Department Y Department Z (in tons)
Department X 100 50 0 50
Department Y 0 20 40 40
Department Z 40 70 80 60
Labour required by department X, Y and Z is 60, 0 and 130 labour days respectively and wage rate is 310 per labour day.
Using matrices, you are required to:
(i) Compute equilibrium prices for the three departments based on the above table. (4)
(ii) Compute total value added. (2)
(iii) If the domestic demand changes by 50, 0 and 20 tons respectively for department X, Y and Z respectively, what should be the change in
gross output of each department in order to meet the demand? (2)
(iv) If the total labour available is 180 labour days, is the new gross output feasible? (2)
(v) Find the change in total value added. (2)
Solution 1 (b) OR:
Producers Inter Department Consumption Final Output
Department X Department Y Department Z Demand
Department X 100 50 0 50 200
Department Y 0 20 40 40 100
Department Z 40 70 80 60 250
Labour (Labour days) 60 0 130
(i) Computation of equilibrium prices for the three departments: (4)
1. Input-Output (Technological) coefficients Matrix (½)
0.50 0.50 0.00
A= 0.00 0.20 0.16
0.20 0.70 0.32
2. Leontief's Matrix (½)
0.50 -0.50 0.00
(I - A) = 0.00 0.80 -0.16
-0.20 -0.70 0.68
3. |I − A| = 0.2 (½)
4. Computation of (I −A)-1 (1)
0.432 0.340 0.080
Cof (I − A) = 0.032 0.340 0.080
0.160 0.450 0.400

2.16 1.70 0.40

(I −A)-1 = 0.16 1.70 0.40
0.80 2.25 2.00
5. Computation of Equilibrium Prices:
−1 T
𝑙1 𝑤
P = ( I – A)  [𝑙2 𝑤 ] (½)
𝑙3 𝑤
2.16 0.16 0.8 0.3  310
= 1.7 1.7 2.25 0  310
0.4 0.4 2 0.52  310

5
 2.16 0.16 0.8 93 329.84
= 1.7 1.7 2.25 0 = 520.80
0.4 0.4 2 161.2 359.60
Thus, equilibrium prices for Department X, Y and Z are ₹329.84, ₹520.80 and ₹359.60 respectively. (½)

(ii) Computation of total value added: (2)

𝑝𝑥 𝑙𝑥 𝑤
𝐓𝐕𝐀 = [ 𝑥𝑑 𝑑𝑦 𝑑 𝑝
𝑧 ] [ 𝑦 ] 𝑜𝑟 [ 𝑥 𝑦 𝑧 ] [ 𝑦 𝑤]
𝑙
𝑝𝑧 𝑙𝑧 𝑤
Total Value Added = ₹ 58,900

(iii) If the domestic demand changes by 50, 0 and 20 tons respectively for department X, Y and Z respectively, what should be the
change in gross output of each department in order to meet the demand? (2)

50
Change in Demand, ΔD = 0
20
ΔX = (I – A)−1 ΔD
0.50 -0.50 0.00 50 116
ΔX = 0.00 0.80 -0.16 0 = 16
-0.20 -0.70 0.68 20 80
Thus, the change in gross output (in tons) of department X, Y and Z is 116, 16 and 80 respectively.

(iv) If the total labour available is 180 labour days, is the new gross output feasible? (2)

Department X Department Y Department Z Total

Output 200 100 250
Labour required 60 0 130
Labour coefficients 200  60 = 0.3 0 250  130 = 0.52
New output 200 + 116 = 316 100 + 16 = 116 250 + 80 = 330
New Labour Required 316  0.3 = 94.8 0 330  0.52 = 171.6 266.4
Labour Required is 266.4 hours whereas the 180 labour hours are available therefore the new gross output is not feasible.
(v) Find the change in total value added. (2)
Department X Department Y Department Z Total
Change in Labour Hours 116  0.3 = 34.8 0 80  0.52 = 41.6 34.8 + 41.6 = 76.4

Change in Total Value Added = Change in Labour required × w = 76.4  ₹ 310 = ₹23,684

Alternatively,
329.84
ΔTVA = Change in Demand × P= 50 0 20 520.80 =₹23,684
359.60

6
2(a) An OTT service operator has a subscriber base of 2,000 subscribers, from each of whom he charges ₹300 per month. In order
to increase his subscriber base, he proposes to decrease the rate of monthly subscriptions. His assessment is that for every decrease
in ₹1, ten additional subscribers would seek subscription of the OTT service.
(i) Compute the decrease in service charge that would enable him to maximize his total revenues. (7)
(ii) The optimal number of subscribers. (1)
(iii) Maximum revenue earned by the service operator. (1) (9)
Solution 2(a): Let x denote decrease in monthly subscription in rupees.
The revised rate after decrease in monthly subscription shall be ( 300 − x ); since 10 subscribers opt for the OTT service for every
₹1 decrease in monthly subscription, the additional subscriber shall be10𝑥, which in turn implies that the subscriber base shall
increase to ( 2000 + 10 x ). Total revenue may be expressed as the revised rate of subscription multiplied by increased number of
subscribers.
R(𝑥) = (300 − 𝑥)(2000 + 10𝑥) = 600000 − 2000𝑥 + 3000𝑥 − 10𝑥 2
⇒ 𝐑(𝒙) = 600000 + 1000𝑥 − 10𝑥 2 (3)
First order condition for maximisation:
Obtain the first derivative of R( x) and set it equal to zero:
𝑑
R′ (𝑥) = (600000 + 1000𝑥 − 10𝑥 2 ) = 1000 − 20𝑥 = 0;
𝑑𝑥
⇒ 20𝑥 = 1000 ⇒ 𝑥 = 50. (3)
Second order condition:
Second derivative of R( x) needs to be less than zero.
d2
( R( x) ) = −20  0 (1)
dx2
Hence, the revenues are maximized when 𝑥 = 50. This implies that the subscription needs be reduced by ₹50.
(b) The optimal number of subscribers = ( 2000 + 10 x ) = 2000 + 10(50) = 2500 subscribers. (1)
(ii) Maximum revenue earned by the service operator = 2500 (300 – 50) = ₹6,25,000. (1)

Alternatively, we can use demand function to solve the above problem:

Let x denote the number of subscribers and p denote the service charge per subscriber.
Given: No. of Subscribers (x) Subscription (p)
2000 300
2010 299
p2 − p1
Using the point–slope formula p − p1 = ( x − x1 ) for the line through the above two points, the demand function can be
x2 − x1
299 − 300 −1
derived as p − 300 = ( x − 2000 )  p − 300 = ( x − 2000 )  10 p − 3000 = − x + 2000  x = 5000 − 10 p
2010 − 2000 10
Therefore, the required revenue function, R( p) = px  R( p) = 5000 p − 10 p 2 (3)
First order condition for maximising revenue:
R '( p) = 5000 − 20 p = 0  20 p = 5000  p = 250 (3)
Second order condition:
R ''( p) = −20 , which is negative therefore revenue is maximum. (1)
Thus, the decrease in subscription = Old subscription −New Subscription =₹300 − ₹250 = ₹50
(ii) The optimal number of subscribers: x = 5000 – 10p = 5000 – 10 (250) = 2500 subscribers. (1)
(iii) Maximum revenue earned by the service operator = 250  2500 = ₹6,25,000. (1)

2(a) OR A factory follows an economic order quantity system for maintaining stocks of one of its component requirements. The
annual demand is for 12,960 units, the cost of placing an order is ₹50, and the component cost is ₹100 per unit. The factory
has imputed 10% as the inventory carrying rate.
You are required to determine the following:
(i) Economic Order Quantity (EOQ) using calculus. (4)
(ii) Total cost of the EOQ. (1)
(iii) Optimal number of orders. (1)
(iv) Optimal interval for placing orders assuming that a year is equivalent to 360 days. (1)
(v) The discount rate that the supplier should offer to ensure that the purchase of 6480 units is equally attractive as the purchase
of EOQ? (2) (9)
Solution 2 (a) OR:
(i) Economic order quantity: Let 𝑥 be economic order quantity (EOQ) and C( x) be the total annual inventory cost respectively.
Annual Demand (D) = 12,960 units, Component Cost (P) = ₹100 per unit, Ordering cost (Co )= ₹50 per order
Holding/Carrying cost (Ch ) = 10 % of average rupee inventory = 10% (100) = ₹10 per unit
Annual inventory cost = Annual purchase cost + Annual ordering cost + Annual carrying cost
𝐷 𝑥
C(𝑥) = D  P + 𝐶𝑜 + 𝐶ℎ
𝑥 2
7
 12960 𝑥 6,48,000
C( x) = 12960 × 100 + 𝑥
× 50 + × 10 = 12,96,000 +
2 𝑥
+ 5𝑥 (1)
𝑑
First order condition to find the minimum C ( x) : Put [𝐶(𝑥)] = 0
𝑑𝑥
𝑑 6,48,000 648000 648000
[12,96,000 + + 5𝑥] = 0 ⇒ − +5 =0⇒ =5
𝑑𝑥 𝑥 𝑥2 𝑥2
2 648000
⇒𝑥 = = 129600 ⇒ 𝑥 = ± 360.
5
Since quantity cannot be negative,  EOQ = 360 units. (2)
Second order condition:
𝑑2 𝑑 𝑑 𝑑 648000
(𝐶(𝑥)) = [ (𝐶(𝑥))] = (− + 5)
𝑑𝑥 2 𝑑𝑥 𝑑𝑥 𝑑𝑥 𝑥2
1296000
= > 0 (∵ x being a physical quantity is always positive) (1)
𝑥3
Therefore, C ( x) is the minimum at 360 units, which is economic order quantity.

6,48,000
(ii) Total cost of EOQ: C(360) = 12,96,000 + + 5(360) = 12,96,000 + 1800 + 1800 = ₹12,99,600 (1)
360

(iii) Optimal Number of orders: No. of orders = Annual Demand ÷ EOQ = 12,960 ÷ 360 = 36 (1)
No. of days in Year 360
(iv) Optimal Interval: Optimal Interval = = = 10 days (1)
No. of Orders 36
Therefore, optimum order size is 360 units, number of orders is 36, optimal interval is 10 days and total inventory cost is ₹12,99,600.

(v) Required discount rate

Let the supplier offer d % discount rate, then revised total cost is:
𝑑 12960 𝑥 𝑑
𝐶(𝑥) = 12960 × 100 (1 − )+ × 50 + × 10% × 100 (1 − )
100 𝑥 2 100
Let us solve for the value of d given that 𝑥 = 6480 and 𝐶(𝑥) = 𝟏𝟐, 𝟗𝟗, 𝟔𝟎𝟎
𝑑 12960 6480 𝑑
𝐶(6480 ) = 1296000 (1 − ) + × 50 + × 10 (1 − ) = 12,99,600
100 6480 2 100
𝑑
⇒ (1 − ) [1296000 + 32400] + 100 = 12,99,600
100
100−𝑑
⇒ 1328400 ( ) = 12,99,500 ⇒ 13284(100 − 𝑑) = 12,99,500
100
⇒ 100 − 𝑑 = 97.82445 ⇒ 𝑑 = 2.1755
Thus, a discount rate of 2.1755% shall make the order size of 6480 units equally attractive. (2)

2(b) A transport company purchases a pickup truck at a cost of ₹90,00,000. The company estimates that the average cost of capital
and average operating cost is a function of x, i.e., the number of days the truck is used.
The salvage value of truck (in rupees) is expressed by the function 𝑆(𝑥) = 78,00,000 − 6,000𝑥 . The operating cost (OC) per day
is given by the function, OC(𝑥) = 8000 + 0.3𝑥.
Using calculus determine:
(i) The number of days the truck should be used before replacement if the objective is to minimize the sum of average capital.
(5)
(ii) Average depreciation of the truck per day. (2)
(iii) Average operating cost of the truck per day. (2)
Solution 2(b):
Given that the average cost of capital and average operating cost is a function of x, i.e., the number of days the truck is used.
Let Average Cost, 𝐶(𝑥) = Average Depreciation + Average Operating cost
Cost of machinery: ₹90,00,000
Salvage value: 𝑆(𝑥) = 78,00,000 − 6,000𝑥
Total depreciation: Cost ‒ Salvage value = 9000000 − (7800000 − 6000𝑥) = 1200000 + 6000𝑥
Total depreciation 1200000+6000𝑥 1200000
Average depreciation per day: = = + 6000
No. of days 𝑥 𝑥
Average cost of operation: 8000 + 0.3𝑥 (Given)
1200000 1200000
𝐶(𝑥) = + 6000 + 8000 + 0.3𝑥 = + 14000 + 0.3𝑥 (2)
𝑥 𝑥
Optimal time for replacement is the number of days at which total cost is minimum.
First order condition for minimum 𝐶(𝑥): Set first derivative of 𝐶(𝑥) w.r.t 𝑥 equal to zero and solve for x.
𝑑 𝑑 1200000 1200000
[𝐶(𝑥)] = [ + 14000 + 0.3𝑥] = 0 ⇒ − 2 + 0.3 = 0
𝑑𝑡 𝑑𝑥 𝑥 𝑥
1200000
⇒ 𝑥2 = = 4000000 ⇒ 𝑥 = ±2000.
0.3
As forward time period is positive, we get 𝑥 = 2000. (2)
Second order condition
d2 d d  d  1200000  2400000
C"(x ) = (C (x ) ) = dx ( C(x ) )  = dx − + 0.3  = .
dx 2 dx    x 2
 x3

8
 2400000
At 𝑥 = 2000, 𝐶 ″ (2000) = > 0. Therefore, 𝐶(𝑥) is minimum when 𝑥 = 2000. (1)
20003
Hence the truck should be replaced after being used for 2000 days.

(ii) Average depreciation of the truck per day.

1200000 12,00,000
Average depreciation per day = + 6000 = + 6000 = ₹12000 𝑝𝑒𝑟 𝑑𝑎𝑦 (2)
𝑥 2000

(iii) Average operating cost of the truck per day.

Average operating cost = 8000 + 0.3(2000) = 8000 + 600 =₹8,600 𝑝𝑒𝑟 𝑑𝑎𝑦 (2)

2(b) OR A monopolist has the following demand and average cost functions:
𝑥 400
𝑝 = 50 − and 𝐴𝐶 = 0.5𝑥 + 10 + , where p is price and x is quantity.
3 𝑥
(i) Find what is elasticity of demand when p = 30. (3)
(ii) Determine the level of output at which profit will be maximum. (3)
(iii) At the level of output computed in the part (ii), prove that the elasticity of average cost is equal to the elasticity of total cost
minus one. (3) (9)
p  dx 
Solution 2(b) OR: (i) The elasticity of demand is expressed as: d = −   
x  dp 
Given the demand function, p = 50 − x / 3 and p = 30; x = 3(50 − 30) = 60
30
d = −  ( −3) = 1.5 (3)
60
400
(ii) Given the average cost function AC = 0.5 x + 10 + , the total cost function may be expressed as:
x
 400 
C( x) = AC  x =  0.5 x + 10 +  x = 0.5 x + 10 x + 400
2
(½)
 x 
x2
Revenue function, R(x) = px = 50 x − (½)
3
 x2 
 − ( 0.5 x + 10 x + 400 ) = 40 x − x − 400
5 2
Profit function is: P( x) = R( x) − C( x) =  50 x − 2
 3  6
(½)
First order condition for profit maximisation:
Set first derivative of P( x) equal to zero and solve for x:
d  5 2  5
 40 x − x − 400  = 0  40 − x = 0  40(3) = 5 x  x = 24 (1)
dx  6  3
d2 d  5  5
Second order condition: ( P( x) ) = 40 − x  = −  0 (½)
dx 2
dx  3  3
Thus, the profit will be maximum when level of output is 24 units.
(iii) Proof that elasticity of average cost is equal to elasticity of total cost minus one at x = 24
(a) Elasticity of average cost at x = 24:
400 400
AC = 0.5x + 10 + = 0.5(24) + 10 + = 12 + 10 + 16.67 = 38.67
x 24
x  dAC  x d  400  x  400 
Elasticity of average cost:  AC =  =  0.5 x + 10 +  =  0.5 − 2 
AC  dx  AC dx  x  AC  x 
24  400 
At x = 24:  AC = 0.5 − 2  = 0.6201(0.5 − 0.6944) = −0.1207 (1)
38.67  24 
(b) Elasticity of Total cost at x = 24:
TC = 0.5 x 2 + 10 x + 400 = 0.5(242 ) + 10(24) + 400 = 288 + 240 + 400 = 928
x  dTC  x d 
0.5 x 2 + 10 x + 400 =
x
Elasticity of Total cost: TC =  =  x + 10
TC  dx  TC dx TC
24
At x = 24: TC = 34 = 0.8793 (1)
928
(c) Proof that elasticity of average cost is equal to the elasticity of total cost minus one:
TC − 1 = 0.8793 − 1 = −0.1207 = AC . (1)
Hence, elasticity of average cost is equal to elasticity of total cost minus one at profit maximising level of output.
9
3(a) Two firms A and B form a cartel for joint profit maximization. The cost function is C1 = 100 + 20𝑥1 + 2𝑥1 2 and C2 = 48 +
36𝑥2 + 2𝑥2 2 for firm A and B respectively, where 𝑥1 and 𝑥2 is the output of the firm A and B respectively. The market
demand is 𝑥 = 50 − 0.5 𝑝, where 𝑥 = 𝑥1 + 𝑥2 .
Find how many units of the product should be produced by each firm to maximise the joint profit. (5)
Compute the maximum joint profit and the price charged by the firms? (2 + 2) (9)

Solution 3(a): Given 𝑥 = 50 − 0.5 𝑝 ⇒ 𝑝 = 100 − 2 𝑥 and 𝑥 = 𝑥1 + 𝑥2 .

(a) Computation of output to maximise joint profit:
Total Revenue: R = 𝑥. 𝑝 = 100𝑥 − 2𝑥 2 = 100(𝑥1 + 𝑥2 ) − 2(𝑥1 + 𝑥2 )2
= 100𝑥1 + 100𝑥2 − 2(𝑥1 2 + 2𝑥1 𝑥2 + 𝑥2 2 ) = 100𝑥1 + 100𝑥2 − 2𝑥1 2 − 4𝑥1 𝑥2 − 2𝑥2 2

Total Cost = 𝐶1 + C2 = 100 + 20𝑥1 + 2𝑥1 2 + 48 + 36𝑥2 + 2𝑥2 2 = 148 + 20𝑥1 + 2𝑥1 2 + 36𝑥2 + 2𝑥2 2

Profit = Revenue – Cost

Profit, P = 𝑓(𝑥1 𝑥2 ) = 100𝑥1 + 100𝑥2 − 2𝑥1 2 − 4𝑥1 𝑥2 − 2𝑥2 2 − (148 + 20𝑥1 + 2𝑥1 2 + 36𝑥2 + 2𝑥2 2 )
= 80𝑥1 + 64𝑥2 − 4𝑥1 2 − 4𝑥1 𝑥2 − 4𝑥2 2 − 148 (2)

𝜕𝑃 𝜕𝑃
First order conditions for optimisation: Put = 0 and =0
𝜕𝑥1 𝜕𝑥2

(80 x1 + 64 x2 − 4 x12 − 4 x1 x2 − 4 x2 2 − 148) = 0 ⇒ 80 − 8𝑥1 − 4𝑥2 = 0 ⇒ 2𝑥1 + 𝑥2 = 20 … ①
x1

(80 x1 + 64 x2 − 4 x12 − 4 x1 x2 − 4 x2 2 − 148) = 0 ⇒ 64 − 4𝑥1 − 8𝑥2 = 0 ⇒ 𝑥1 + 2𝑥2 = 16 … ②
x2
Solving ① and ②
𝑥2 = 20 − 2𝑥1 ⇒ 𝑥1 + 2(20 − 2𝑥1 ) = 16 ⇒ 𝑥1 − 4𝑥1 = 16 − 40 ⇒ 3𝑥1 = 24 ⇒ 𝑥1 = 8 (1)
𝑥2 = 20 − 2(8) = 4 (1)
Second order conditions for maximisation:
(i) Find 𝑓𝑥1𝑥1 , 𝑓𝑥2𝑥2 , 𝑓𝑥1𝑥2
f x 
f x1 x1 = 1 = (80 − 8 x1 − 4 x2 ) = −8
x1 x1
f x 
f x2 x2 = 2 = (64 − 4 x1 − 8 x2 ) = −8
x2 x2
𝜕𝑓𝑥1 𝜕
𝑓𝑥1𝑥2 = = (80 − 8𝑥1 − 4𝑥2 ) = − 4
𝜕𝑥2 𝜕𝑥2
2
(ii) 𝑓𝑥1𝑥1 (𝑓𝑥2𝑥2 ) − (𝑓𝑥1𝑥2 ) = −8(−8) − (−4)2 = 48 > 0 ∴ profit function is optimal.
∵ 𝑓𝑥1𝑥1 , 𝑓𝑥2𝑥2 < 0, therefore profit is maximum. (1)
Thus, firms A and B should produce 8 and 4 units respectively in order to maximise the joint profit.

(b) Computation of Joint Profit:

Joint profit, P = 80(8) + 64(4) − 4(8) − 4(8)(4) − 4(4) − 148 = 640 + 256 − 256 − 128 − 64 − 148 = 300
2 2

Thus, the optimum levels of production by firm A and B is 8 and 4 units respectively which maximizes joint profit and the
maximum profit is ₹300. (2)

(c) Computation of price charged:

𝑥 = 50 − 0.5 𝑝 , where 𝑥 = 𝑥1 + 𝑥2 = 4 + 8 = 12
12 = 50 − 0.5 𝑝  0.5p = 38  p = 76 (2)
Thus, the firms should charge a price of ₹76 per unit in order to maximise their joint profit.

10
 3(a) OR (9)
0.4 0.6 −1
For the production function: 𝑸 = [ + ]
𝐾 𝐿
You are required to determine:
(i) Nature of returns to scale. (2)
(ii) Marginal Rate of Technical Substitution. (2)
(iii) Elasticity of substitution. (3)
(iv) Whether the production function satisfies the Euler’s theorem. (2)
0.4 0.6 −1
Solution 3(a)OR: Given production function: Q = f (L, K) = [ + ]
𝐾 𝐿
(i)Nature of returns to the scale:
0.4 0.6 −1 0.4 0.6 −1
f (𝜆L, 𝜆K) = [ + ] = (𝜆−1 )−1 [ + ] = 𝜆1 𝑄
𝜆𝐾 𝜆𝐿 𝐾 𝐿
Q is a linear homogeneous function of degree 1. Therefore, the returns to the scale are constant. (2)
𝜕 0.4 0.6 −1 0.4 0.6 −2 0.6
MP𝐿 [ + ] [𝐾+ 𝐿 ] 0.6 𝐾 2 𝐾2
𝜕𝐿 𝐾 𝐿 𝐿2
(ii) Marginal Rate of Technical substitution, r = = 𝜕 0.4 0.6 −1
= 0.4 0.6 −2 0.4
= = 1.5 (2)
MP𝐾 [ + ] [ + ] 0.4 𝐿2 𝐿2
𝜕𝐾 𝐾 𝐿 𝐾 𝐿 𝐾2
(iii)Elasticity of substitution: (3)
Q 𝜕 0.4 0.6 −1 0.6 −2 0.6
f L = MPL = 0.4
= [ + ] =[ + ]
L 𝜕𝐿 𝐾 𝐿 𝐾 𝐿 𝐿2

𝜕𝑄 𝜕 0.4 0.6 −1 0.4 0.6 −2 0.4

𝑓𝐾 = MP𝐾 = = [ + ] =[ + ]
𝜕𝐾 𝜕𝐾 𝐾 𝐿 𝐾 𝐿 𝐾2
𝜕2 𝑄 𝜕 0.6 0.4 0.6 −2 0.4 0.6 0.4 0.6 −3
𝑓𝐿𝐾 = = ( [ + ] ) = 2 ( 2) ( 2 ) [ + ]
𝜕𝐾𝜕𝐿 𝜕𝐾 𝐿2 𝐾 𝐿 𝐾 𝐿 𝐾 𝐿
0.4 0.6 −2 0.6 0.4 0.6 −2 0.4
𝑓𝐿 𝑓𝐾 [𝐾+ 𝐿 ] [𝐾+ 𝐿 ] 1
𝐿2 𝐾2
Elasticity of substitution: 𝜎 = = 0.4 0.6 −1 0.4 0.6 0.4 0.6 −3
=
𝑄 𝑓LK [ + ] 2( 2 )( 2 )[ + ] 2
𝐾 𝐿 𝐾 𝐿 𝐾 𝐿
(iv) Euler’s Theorem: According to the Euler’s theorem, value of homogeneous function corresponding to its degree of homogeneity
can be written as a sum of terms; each being a product of first order partial derivative and the corresponding independent variable.
𝜕𝑄 𝜕𝑄
Thus, for Q = f (L,K), a homogeneous function of degree 1, 𝐿 +𝐾 =𝑄
𝜕𝐿 𝜕𝐾
Q Q 𝜕 0.4 0.6 −1 𝜕 0.4 0.6 −1 0.4 0.6 −2 0.6 0.4 0.6 −2 0.4
L+ K= [ + ] L+ [ + ] K=[ + ] 2 L+ [K + L ] K
L K 𝜕𝐿 𝐾 𝐿 𝜕𝐾 𝐾 𝐿 K L L K2

0.4 0.6 −2 0.6 0.4 0.6 0.4 −1

=[ + ] [ + ]=[ + ] = Q
K L L K L K
Thus, Euler’s theorem is satisfied. (2)

3(b) When price of the smart phone averaged ₹4000, A Co. Ltd. sold 20 units every month. When the price dropped to an average
of ₹1000, 120 smart phones were sold every month. When the price was ₹4000, 200 smart phones were available per month for
sale. When the price reached ₹1000, only 50 remained. You are required to determine:
(i) Demand and supply functions, assuming both are linear. (1½ +1½) + 1 Equilibrium
(ii) Consumer’s and producer’s surplus. (2½ + 2½)
Solution 3(b): Let demand function be p = a + bx , where x is number of machines and p is price per unit.
Given x = 20 when p = 4000 and x = 120 when p = 1000
4000 = a + 20b… 
1000 = a + 120b… 
Solving  and 
4000 – 20b = 1000 – 120b  100b = – 3000  b = – 30
a = 4000 – 20 (–30) = 4000 + 600 = 4600
Demand function is p = 4600 – 30x (1½)
Let the supply function be p = c + dx where x is the number of machines demanded at price p per machine.
Given x = 200 when p = 4000 and x = 50 when p = 1000
4000 = c + 200 d… 
1000 = c + 50 d… 
Solving  and 
4000 – 200d = 1000 – 50d 150d = 3000  d = 20
c = 4000 – 200(20) = 4000 – 4000 = 0
Supply function is p = 20x (1½)
Equating demand and supply functions for equilibrium

Equilibrium, 4600 – 30x = 20𝑥 ⇒ 50𝑥 = 4600 ⇒ 𝒙𝒆 = 92

𝒑𝒆 = 20(92) = 1840 (1)

11
 𝒙𝒆 92
𝑪𝒐𝒏𝒔𝒖𝒎𝒆𝒓′ 𝒔 𝑺𝒖𝒓𝒑𝒍𝒖𝒔 = ∫ 𝒇(𝒙) 𝒅𝒙 − 𝒑𝒆 𝒙𝒆 = ∫ (4600 – 30x) 𝑑𝑥 − 1840(92)
𝟎 0
 2  92 2
30 x 30(92)
=  4600 x −  − 169280 = 4600 ( 92 ) − − 0 − 169280
 2 0 2
= 423200 − 126960 − 169280 = 126960
Thus, the consumers’ surplus is ₹1,26,960. (2½)
𝒙𝒆 92
′
𝑷𝒓𝒐𝒅𝒖𝒄𝒆𝒓 𝒔 𝑺𝒖𝒓𝒑𝒍𝒖𝒔 = 𝒑𝒆 𝒙𝒆 − ∫ 𝒔(𝒙) 𝒅𝒙 = 1840(92) − ∫ 20𝑥 𝑑𝑥
𝟎 0

92
20𝑥 2
= 169280 − [ ] = 169280 − [(10(92)2 ) − (0)] = 169280 − (84640) = 84,640
2 0
Thus, the producers’ surplus is ₹84,640. (2½)

3(b) OR The marginal revenue for a commodity is MR = 44 – 5 x. The marginal cost is MC = 3x + 13, and the cost of producing
75 units is ₹9,500. Determine
(i) Profit function. (3)
(ii) Profit or loss from selling 100 units. (2)
(iii) Profit maximizing output. (3)
(iv) Maximum profit. (1)
Solution 3(b) OR:
(i) Profit = Revenue – Cost
5𝑥 2
Revenue = R(x) = ∫ 𝑀𝑅𝑑𝑥 = ∫(44 − 5𝑥)𝑑𝑥 = 44𝑥 − + 𝑐
2
5𝑥 2
𝑊ℎ𝑒𝑛 𝑥 = 0, 𝑅(𝑥) = 0  0 + 𝑐  𝑐 = 0 ∴ 𝑅(𝑥) = 44𝑥 −
2

3𝑥 2
Cost = 𝐶(𝑥) = ∫ 𝑀𝐶𝑑𝑥 = ∫(3𝑥 + 13)𝑑𝑥 = + 13x + c
2
Given, cost of producing 75 units is 9500.
3(75)2 16875
C (75) = 9500 ⇒ + 13(75) + c = 9500 ⇒ + 975 + c = 9500
2 2
⇒ c = 9500 − 9412.5 = 87.5
3𝑥 2
 𝑪(𝒙) = + 13x + 87.5
2
5𝑥 2 3𝑥 2
Profit function, P = ∫(𝑀𝑅 − 𝑀𝐶)𝑑𝑥 = 44𝑥 − −( + 13x + 87.5) = 31𝑥 − 4𝑥 2 − 87.5 (3)
2 2

(ii) When x = 100, Profit (100) = 31(100) − 4(100)2 − 87.5 = 3100 − 40000 − 87.5 = −36,987.5
Thus, there is a loss of ₹36,987.5 (2)
31
(iii) For profit maximizing output, put MR = MC ⇒ 44 − 5𝑥 = 3𝑥 + 13 ⇒ 8𝑥 = 31 ⇒ 𝑥 = units
8
𝑑(𝑀𝑅) 𝑑(𝑀𝐶)
Second order condition: <
𝑑𝑥 𝑑𝑥
𝑑(𝑀𝑅) d(44−5x) 𝑑(𝑀𝐶) d(3x + 13)
= = −5, = = 3
𝑑𝑥 dx 𝑑𝑥 dx
𝑑(𝑀𝑅) 𝑑(𝑀𝐶)
∵ −5 < 3 ∴ <
𝑑𝑥 𝑑𝑥
31
Hence, profit is maximum for 𝑥 = . (3)
8
(iv) Maximum Profit: Profit = 31𝑥 − 4𝑥 2 − 87.5
31 31 2
For x = 31/8, Profit = 31 ( ) − 4 ( ) − 87.5 = − ₹27.4375 (Loss)
8 8
4(a) A piece of land leased with eucalyptus plantations shall start yielding timber and oil from the end of sixth year onwards for
30 years in all and is expected to yield an annual income of ₹ 120,000. Find the cash price of the land-lease if the money is worth
6% per annum.
Solution 4(a): Let i be rate of interest per period and d be number of periods of no yield and income, n be the number of periods
of yield and income, P be present value of Equated Annual Income (EAI), then Present value of annuity of ₹ 1 paid during the
period between d and n, 𝑃 = (𝑎𝑑+𝑛 ̅̅̅̅̅̅⌉𝑖% − 𝑎𝑑̅ ⌉𝑖% ).
We have i = 6% per annum; 𝑑 = 5 years; n = 30 years, EAI = ₹120,000. (1)
As per PVIFA table a35 6% = 14.49824636 and a5 6% = 4.21236379 .

(
Cash price of land-leased = EAI  a5+ 30 6% − a5 6% ) (1)
= 120000 × (14.49824636 − 4.21236379) = 120000 10.28588257 = 12,34,305.91
Therefore, the cash price of land leased is ₹ 12,34,305.91 (4)

12
4(b) A person is contemplating to install a photocopying machine at a cost of ₹10,00,000 with a productive life span of 6 years
during which the machine is to be maintained by the supplier free of cost. He knows that on an average, he can photocopy 3000
pages per day and charge 50 paise for each page from the customers. The toner cartridge needs replacement after 5000 pages at a
cost of ₹ 500. A loan can be obtained to buy this machine at 9% p.a. effective, find out whether the purchase of this machine is
worthwhile or not, assuming that the machine will be put to use in a year for 360 days?
Solution 4(b): Let us compute his yearly income from photocopying:
Revenue = No. of Pages  days  Price per page = 3000  360  0.5 = ₹5,40,000 (1)
Cost of toner cartridge used = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑇𝑜𝑛𝑒𝑟 𝑐𝑎𝑡𝑟𝑖𝑑𝑔𝑒𝑠 used per annum × Cost per toner
No. of pages × days 3000×360
= × Cost per toner = × 500 = 1,08,000 (1)
Pages per toner cartridge 5000
Income = Revenue – Cost = 5,40,000 – 1,08,000 = ₹ 4,32,000 per annum. (1)
PV = EAI  a n i % , i = 9% p.a., 𝑛 = 6 years, EAI = 4,32,000 per annum and a6 9% = 4.48591859 .
PV = 432000 × 4.48591859 = 19,37,916.83. (3)
Therefore, the investment is worthwhile because the present value of future stream of income amounting to ₹19,37,916.83 exceed
the initial investment of ₹ 10,00,000 in photocopying machine.

4(c) A loan of ₹ 50,000 due 10 years from now is instead to be paid off by three payments: ₹ 15,000 now, ₹10,000 in four years and
a final payment of ₹10000 at the end of n years. If the rate of interest is 5% compounded annually, find the value of n.
Solution 4(c):: The present value of the loan (due) must equal the present value of the three payments.
The two set of obligations can be represented on time line as below:
₹50,000
0 years (Now) 4 years n years 10 years
Focal date
₹15,000 ₹10,000 ₹10,000
The following equation of present values is formed:
50000 𝟏𝟎𝟎𝟎𝟎 10000
(1+0.05)10 = 15000+ 𝟒 +
(𝟏+𝟎.𝟎𝟓) 𝑛
(1+0.05)
⇒ 50000(0.6139) = 15000+𝟏𝟎𝟎𝟎𝟎(𝟎. 𝟖𝟐𝟐𝟕) + 𝟏𝟎𝟎𝟎𝟎(𝟏. 𝟎𝟓−𝒏 )
⇒ 30695 = 15000 + 8227 +𝟏𝟎𝟎𝟎𝟎(𝟏. 𝟎𝟓−𝒏 ) ⇒ 10000(1.05)−𝑛 = 7468
⇒ (1.05)−𝑛 = 0.7468 ⇒ −𝑛 𝑙𝑜𝑔(1.05) = log (0.7468) ⇒ −𝑛(0.0212) = 1. 8720
⇒ −𝑛(0.0212) = −0.128 ⇒ 𝑛 = 6.04
Therefore, the final payment needs to be made at the end of 6 years (approx.) from now.

4(d) A machinery that was installed at a cost of ₹90,000 on a diminishing balance method, stood at ₹30,618 after the end of five
years.
(i) Compute the average rate of depreciation at which the machinery has been depreciated during the period of five years.
(ii) The rate of depreciation applied in the first three years was 30%, 25% and 20% respectively. Find ‘k’ if depreciation at the rate
of k % per year was applied in the last two years.

Solution 4(d) Let C be the original cost of machine; n be the number of year for which the machine is depreciated, r be the rate of
depreciation, and S be the book value at the end of n years, then
Given: C = 90,000; S = 30,618; n = 5 years.
(i) To obtain average rate of depreciation using DB Method, 𝑆 = 𝐶 (1 − 𝑟)𝑛 (4)
⇒ 𝟑𝟎𝟔𝟏𝟖 = 𝟗𝟎𝟎𝟎𝟎(𝟏 − 𝒓)𝟓
30618
⇒ (1 − 𝑟)5 = = 0.3402 ⇒ 5 𝑙𝑜𝑔( 1 − 𝑟) = 𝑙𝑜𝑔( 0.3402)
90000
log(0.3402) 1.5318 −0.4682
 log(1 − r) = = = = −0.0936
5 5 5
⇒ 𝑙𝑜𝑔( 1 − 𝑟) = 1̄. 9064  (1 − r) = Anti log (1.9064)  1 − r = 0.8061
⇒ 𝑟 = 1 − 0.8061 = 0.1939 = 19.39%
(ii) Rate of depreciation in last two years: (2)
Let the rate depreciation in last two years be x p.a. then the book value at the end of 5 years:
S5 = C (1 − r1 )(1 − r2 )(1 − r3 )(1 − r4 )(1 − r5 )
⇒ 30618 = 90000(1 − .30)(1 − .25)(1 − .20)(1 − 𝑥)(1 − 𝑥)
⇒ (1 − .30)(1 − .25)(1 − .20)(1 − 𝑥)(1 − 𝑥) = 0.3402
0.3402
⇒ (1 − .30)(1 − .25)(1 − .20)(1 − 𝑥)2 = 0.3402 ⇒ (1 − 𝑥)2 = = 0.81
0.7 × 0.75 × 0.8
⇒ 1 − 𝑥 = 0.9 ⇒ 𝑥 = 1 − 0.9 = 0.1 = 10%

13
Alternatively, using average rate obtained in (i):
(1 − 0.3)(1 − 0.25)(1 − 0.2)(1 − 𝑥)2 = (1 − 𝑟)5
⇒ (1 − 0.3)(1 − 0.25)(1 − 0.2)(1 − 𝑥)2 = (1 − .194)5
⇒ (1 − 0.3)(1 − 0.25)(1 − 0.2)(1 − 𝑥)2 = (0.806)5 = 0.3402
0.3402
⇒ (1 − 𝑥)2 = = 0.81
0.7 × 0.75 × 0.8
⇒ 1 − 𝑥 = √0.81 = 0.9 ⇒ 1 − 𝑥 = 0.9 ⇒ 𝑥 = 1 − 0.9 = 0.1 = 10%
Therefore, average rate of depreciation is 19.4% p.a. and rate of deprecation in the last two years is 10% p.a.

5(a) An agriculturist has a hydroponic farm with 1000 acres. He produces spinach, cucumbers, and tomato. Whatever he raises is
fully sold in the market. He gets ₹10 for spinach per kg, ₹50 for cucumbers per kg and ₹40 for tomato per kg. The average
yield is 5000 kg of spinach per acre, 700 kg of cucumbers per acre and 800 kg of tomato per acre. To produce 200 kg of spinach
and cucumber each and to produce 100 kg of tomato, a sum of ₹250 is used for manure. The labour required for each acre to
raise the crop is 100 man-days for spinach and 50 man-days each for cucumbers and tomatoes. A total of 2000 man-days of
labour at a rate of ₹200 per man-day are available. Formulate this linear programming model to maximize the agriculturist’s
total profit. Do not solve. (6)
Solution 5(b): Formulation of LPP
Let 𝑥1 , 𝑥2 and 𝑥3 represent the area under cultivation of spinach, cucumber and tomato respectively in acres. (1)
Maximize Z = 23750𝑥1 + 24125𝑥2 + 8000𝑥3 (1)
Subject to the constraints:
𝑥1 + 𝑥2 + 𝑥3 ≤ 1000 (Area constraint) (1)
100𝑥1 + 50𝑥2 + 50𝑥3 ≤ 2000 (Man-days constraint) (1)
𝑥1 , 𝑥2 , 𝑥3 ≥ 0 (½)
Working Notes: Estimation of Net Profit: (1½)
Cost (b)
Crop Revenue (a) Net Profit (a – b)
Manure Labour
250
Spinach 5000(10)=50,000 5000 × = 6250 100  200 = 20000 ₹23,750
200
250
Cucumber 700(50)=35,000 700 × = 875 50  200 = 10000 ₹24,125
200
250 50  200 = 10000
Tomato 800(40)=32,000 800 × = 2000 ₹20,000
100

Solution 5(b) (i) 1. Complete Simplex Table: (4)

𝑪𝒋 8000 4000 9000 0 0 0
Basic Solution
𝑪𝒋 𝒙𝟏 𝒙𝟐 𝒙𝟑 𝑺𝟏 𝑺𝟐 𝑺𝟑
Variable 𝒃𝒊
8000 𝑥1 6 1 −5/6 0 1/6 0 −1/2
0 𝑆2 8380 0 55/9 0 −17/9 1 1/3
9000 𝑥3 62 0 17/9 1 −1/9 0 2/3
𝒁𝒋 6,06,000 8000 31000/3 9000 1000/3 0 2000
𝑪𝒋 − 𝒁𝒋 0 −19000/3 0 −1000/3 0 −2000
2. Testing optimality: 𝑪𝒋 − 𝒁𝒋 row contains non-positive values for all the variables therefore solution is optimal.
Yes, the production strategy is optimal.

(ii) Optimal solution 𝑥1 = 6, 𝑥2 = 0 and 𝑥3 = 62 and Z = 6,06,000. (1)

Thus, 6, 0 and 62 units of 64GB, 128GB and 256GB tablets respectively will be manufactured. Maximum profit is ₹6,06,000.

(iii) 64GB Tablet is not produced because it gives a loss of ₹19000/3 per unit as shown by the Cj − Zj value corresponding to the
decision variable x2. (1)

(iv) CPU processing operation represented by the slack variable S2 is unutilized because it remains as a basic variable in the optimal
solution. Its spare monthly processing capacity is 8380 units. (1)

(v) Shadow prices of the touch screen, CPU and battery processing operations are given by the absolute values of the slack variables
in the 𝑪𝒋 − 𝒁𝒋 (net evaluation row), i.e., ₹1000/3, ₹0 and ₹2000 respectively. (1)

(vi) No, there is no alternative product mix giving same total profit because none of the non-basic variable (x2, S1, S3) has zero in
the Cj – Zj row. (1)

(vii) CPUs processed to make all the tablets in the optimal solution is: 22 × 6 + 0 + 16 × 62 = 1124
Alternatively, Utilization = Availability − Spare capacity ⇒ 9504 − 8380 = 1124 (1)

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(viii) For finding the impact of producing 18 units of 128GB Tablet represented by 𝑥2 , reproduce 𝑥2 column of final simplex tableau:
Basic Variable Quantity 𝒙𝟐
𝑥1 6 −5/6
𝑆2 8380 55/9
𝑥3 62 17/9
𝒁𝒋 606000 31000/3
𝑪𝒋 − 𝒁𝒋 −19000/3
New product mix will be:
5
Units of 64GB Tablet (𝑥1 ) = 6 – [− (18)] = 21 units
6
Units of 128GB Tablet (𝑥2 ) = 18 units
17
Units of 256GB Tablet (𝑥3 ) = 62 – [ (18)] = 28 units
9
19000
New Revenue = 6,06,000 − (18) = ₹4,92,000 (2)
3

Solution 5 OR
(i) 1. Formulation of Primal LPP: (4)
Let 𝑥1 , 𝑥2 and 𝑥3 be the units of products A, B and C respectively.
Revenue per unit of product A, B and C can be calculated as: ₹30 p. u. of Product A (50 –20), ₹20 p. u. of Product B (50 –30) and
₹6 p. u. of Product C (22 –10) respectively. The LPP can be formulated as below:
Maximize 𝑍 = 30𝑥1 + 20𝑥2 + 12𝑥3 (Total Revenue)
Subject to the constraints:
8𝑥1 + 4𝑥2 + 3𝑥3 ≤ 640 (Centre I constraint)
4𝑥1 + 6𝑥2 + 2𝑥3 ≤ 540 (Centre II constraint)
𝑥1 + 𝑥2 + 𝑥3 ≤ 100 (Centre III constraint)
𝑥1 , 𝑥2 , 𝑥3 ≥ 0
2. Simplex Solution: 1. Introducing the slack variables 𝑆1 , 𝑆2 , 𝑆3 the LPP can be expressed as:
Maximize 𝑍 = 30𝑥1 + 20𝑥2 + 12𝑥3 + 0𝑆1 + 0𝑆2 + 0𝑆3
Subject to constraints:
8 𝑥1 + 4𝑥2 + 3𝑥3 + 𝑆1 = 640
4𝑥1 + 6𝑥2 + 2𝑥3 + 𝑆2 = 540
𝑥1 + 𝑥2 + 𝑥3 + 𝑆3 = 100
𝑥1 , 𝑥2 , 𝑥3 , 𝑆1 , 𝑆2 , 𝑆3 ≥ 0
2. The initial basic feasible solution is obtained by putting the decision variables equal to zero, i.e., 𝑥1 = 0, 𝑥2 = 0 and 𝑥3 = 0
and computing the values of the slack variables 𝑆1 = 640, 𝑆2 = 540, 𝑆3 = 100 and Z = 0.
Simplex Tableaux (3 Tables  3 =9)
𝑪𝒋 30 20 12 0 0 0
Basic Solution 𝒃𝒊
𝑪𝒋 𝒙𝟏 𝒙𝟐 𝒙𝟑 𝑺𝟏 𝑺𝟐 𝑺𝟑 Ratio =
Variable 𝒃𝒊 𝒂𝒊𝒋
0 𝑆1 640 8 4 3 1 0 0 640/8 = 80 →
0 𝑆2 540 4 6 2 0 1 0 540/4 = 135
0 𝑆3 100 1 1 1 0 0 1 100/1 = 100
𝒁𝒋 0 0 0 0 0 0 0
𝑪𝒋 − 𝒁𝒋 30↑ 20 12 0 0 0
30 𝑥1 80 1 0.5 0.375 0.125 0 0 80/0.5 = 160
0 𝑆2 220 0 4 0.5 − 0.5 1 0 220/4 = 55
0 𝑆3 20 0 0.5 0.625 − 0.125 0 1 20/0.6 = 40 →
𝒁𝒋 2400 30 15 11.25 3.75 0 0
𝑪𝒋 − 𝒁𝒋 0 5↑ 0.75 –3.75 0 0
30 𝑥1 60 1 0 −0.25 0.25 0 −1
0 𝑆2 60 0 0 −4.5 0.5 1 −8
20 𝑥2 40 0 1 1.25 −0.25 0 2
𝒁𝒋 2600 30 20 17.5 2.5 0 10
𝑪𝒋 − 𝒁𝒋 0 0 −5.5 −2.5 0 −10
Optimal Solution: 𝒙𝟏 = 40, 𝒙𝟐 = 60 and 𝒙𝟑 = 0 and the maximum value of the objective function Z = 2600. (1)
(ii) The shadow prices are ₹2.5 per hr., ₹0 per hr. and ₹10 per hr. for Centre I, II and III respectively. (1)
(iii) If the production capacity is to be expanded then the resource having highest shadow price is given priority, i.e., Centre III. (1)
(iv) Centre II has unutilized capacity of 60 hours. (1)
(v) The solution is not degenerate because none of the basic variables has a zero value in the quantity or solution column. (1)

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