MS&E 252 Handout #14

Decision Analysis I November 2
nd
. 2004

Page 1 oI 6 Midterm Solutions
Midterm- Solutions

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MS&E 252 Handout #14
Decision Analysis I November 2
nd
. 2004

Page 2 oI 6 Midterm Solutions

Score on HW Question (./1)
-15.00 -10.00 -5.00 0.00 5.00 10.00
Question 1
10% 50% 90%
Question 2
10% 50% 90%
Question 3
10% 50% 90%
Question 4
10% 50% 90%
Question 5
10% 50% 90%
Question 6
10% 50% 90%
Question 7
10% 50% 90%
Question 8
10% 50% 90%
Question 9
10% 50%90%
Question 10
10% 50% 90%
Question 11
10% 50% 90%
Question 12
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Question 13
10% 50% 90%
Question 14
10% 50% 90%
Question 15
10% 50% 90%
MS&E 252 Handout #14
Decision Analysis I November 2
nd
. 2004

Page 3 oI 6 Midterm Solutions
Probabilistic questions

1) Solution: c
The Iour steps oI the Decision Analysis Cycle are Formulate. Evaluate. Appraise and
Decide.

2) Solution: d
The three components oI the decision basis are preIerences. alternatives. and inIormation.
Choice (a) relates to his preIerences; choice (b) relates to his alternatives; choice (c)
relates to his inIormation. Choice (d) is commitment to action. which is not part oI the
decision basis.

3) Solution: b
I. is Ialse A distinction is observable iI the decision-maker will be able to observe
himselI which degree oI the distinction occurs.

II. is true Think oI the example given in class and in the problem sessions a study
identiIied a seemingly strange correlation between the number oI storks nests and the
number oI human births in a given location ('X and Y are relevant given &¨). However.
once the variable 'month oI the year¨ was introduced in the model. the number oI storks
nests and the number oI human births appear to depend solely on the month oI the year.
and not on each other ('X and Y are irrelevant given &¨).

III. is Ialse Someone could not have children and not have grand-children. ThereIore.
the two distinctions are not mutually exclusive. Conversely. someone could have children
and grand-children. and the two distinctions are thus not collectively exhaustive either.

4) Solution: a
The market values oI the automobiles do not aIIect Elisa`s value-in-use Ior them; hence
they have nothing to do with her PIBP.

5) Solution: d
I. is true In a closed bid auction. one should always bid an amount higher than or equal
to one`s PIBP (in Iact. one would even bid an amount strictly higher than one`s PIBP).

II. is true Alice would not oIIer more than her PIBP Ior a deal she wishes to purchase.

III. is true The Iact that Paul accepted to sell his certiIicate to Alice shows that his PISP
at the time at which the transaction took place was less than or equal to $60. ThereIore.
had he kept the certiIicate. his value oI clairvoyance would have been at least $40.




MS&E 252 Handout #14
Decision Analysis I November 2
nd
. 2004

Page 4 oI 6 Midterm Solutions
6) Solution: c
Statement I is Ialse because relevance is not a transitive property. Statement I is true
because relevance oI A to B implies relevance oI B to A. Statement III is true because it is
the deIinition oI relevance.

7) Solution: c
The original tree is as Iollows:










AIter Ilipping the tree. we obtain:










From the new tree. we can determine that given Susan sees Shark Tale. we should assign
an equal probability oI either John or Peter asking her.

8) Solution: a
Statement I and III are Ialse: we cannot delete arrows. Statement II is Ialse: iI we want to
Ilip the arrow that goes Irom B to C. we Iirst need to add one Irom A to C. Statement IV
is Ialse. no relevance statement can be made Irom a diagram.
1/3
2/3
1ohn
Peter
1/4
3/4
3/12
1/12
Garden State
Shark Tale
5/8
3/8
3/12
5/12
Garden State
Shark Tale
1/2
1/2
Garden State
Shark Tale
1/6
5/6
5/12
1/12
1ohn
Peter
1/2
1/2
3/12
3/12
1ohn
Peter
MS&E 252 Handout #14
Decision Analysis I November 2
nd
. 2004

Page 5 oI 6 Midterm Solutions
9) Solution: c
Statement I is correct. Statement II is Ialse: this would create a cycle. which is Iorbidden.
Statement III is true since A and B are conditioned on the same state oI inIormation (&
only). Statement IV is Ialse: B and C are not conditioned on the same state oI
inIormation.

10) Solution: c
Probability oI AlIie getting the iob oIIer should be p ÷ .45/(.9*.5 ¹ .69*.5). We have .5
· p · .75

11) Solution: b
Remember that the only assertions one can make Irom a relevance diagram come Irom
missing arrows. not Irom existing arrows. because a missing arrow states an irrelevance
assumption. whereas an existing arrow indicates a possibility oI relevance.

Choice (a) is not consistent with the relevance diagram Given degree X occurs.
observing diIIerent degrees oI the distinction Y will actually allow you to assign diIIerent
probability distributions on the degrees oI Z; the distribution is (.7. .3) iI Y occurs. and (1.
0) iI Y` occurs. This violates the irrelevance statement made by the relevance diagram.

Choice (b) is consistent with the relevance diagram The only irrelevance implied by (b)
is the Iact that Y and Z are irrelevant given X. which is the only assertion made by the
original relevance diagram.

Choice (c) is not consistent with the relevance diagram (c) implies that Y and X are
irrelevant given &. but we have an arrow going Irom X to on the relevance diagram. The
diagram is then not the best representation oI (c).

12) Solution: c
Statements II is correct (see directly on the tree). Statement I is correct (you need to Ilip
the positions oI B and C in the tree to see this). Statement III is incorrect (¦C1 ' B1. A1.
&}= ¦C1 ' B2. A1. } Ior example).

13) Solution: b
The relevance diagram in choice (b) is the only one that corresponds to the description
stated in the problem. Choice (a) is missing an arrow Irom 'Earthquake¨ to 'Burglar¨.
choice (c) has an unnecessary arrow Irom 'Burglar¨ to 'Call¨. and choice (d) has too
many arrows to represent the situation in the best way.

14) Solution: c
I. is true You only need to Ilip the arrow that goes Irom B to D to see this.

II. is Ialse PerIorm the Iollowing manipulations on the original diagram:
MS&E 252 Handout #14
Decision Analysis I November 2
nd
. 2004

Page 6 oI 6 Midterm Solutions
• Flip the arrow that goes Irom B to D;
• Add an arrow Irom B to A. so that you can Ilip the arrow that goes Irom A to C;
• In order to Ilip the arrow that goes Irom B to A. you now need to add an arrow
that goes Irom D to A. and you won`t be able anymore to prove irrelevance
between A and D given C and &.

III. is true PerIorm the Iollowing manipulations on the original diagram:
• Add an arrow Irom C to D;
• Add an arrow Irom B to A;
• Flip the arrow Irom A to C.
Once this is done. you can see that A and D are both conditioned on B and C. and there is
no arrow connecting them.

15) Solution: a
Statement I is Ialse The inIormation provided by Cassandra is as valuable as
'traditional¨ clairvoyance. All you need to do is do the opposite oI what she says iI she
says the outcome oI the tosses will be 'heads. pin down¨. call 'tails. pin up¨. Since your
PISP Ior the deal currently is $30. and since the value oI the deal with Iree clairvoyance is
$100. your PIBP Ior Cassandra`s services should be $70.

Statement II is Ialse The inIormation provided by Claire can be viewed as imperIect
inIormation on the outcome oI both tosses. since she will only tell you about the outcome
oI the coin toss. Her inIormation is useIul. and gives you one part oI the answer. but not
all oI it. ThereIore. the value oI Claire`s services should be less than or equal to the value
oI clairvoyance on both tosses. i.e. $70 per the computation we used above. Since
Cassandra`s services are worth exactly $70. II. is Ialse.





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