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Indian Institute of Management Bangalore

PGP 2009-10
Quantitative Methods I
Mid Term Examination


Time: 2 hours 30 minutes Name:____________________________

Maximum Marks: 50 Roll. No.________________ Section____

Question No. 1 2 3 4 5 Total
Maximum
Marks
3+2+2+2+4=13 2+3+4=9 2+2*1+2*1.5+4=11 3+6+2=11 3+3=6 50
Students
Score


I nstructions:
This is an open-book (1 text-book), open note exam; however you are not allowed to
share material with other students. Use of calculator is permitted, but not computer
(laptop). Please do not seek any clarifications.

To get any credit, you must

circle/clearly indicate your final answer (in the space, whenever provided);

answer all questions in the space provided,

State any assumptions that you make. Assumptions made should be
reasonable.

Show calculations and provide reasons to support your answers.

Do not attach any additional sheets; use the back sides, if necessary.
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1. A highway restaurant is trying to plan its capacity. It finds that on average during the
peak lunch hour, which is between 1pm and 2 pm, vehicles arrive at a rate of 1 vehicle
per 6 minutes. (Each vehicle on average has four customers, and they can all sit on one
table.) To avoid incurring a loss on a particular day, there should be at least 6 vehicles
arriving during the peak lunch hour period.

(a) What is the probability of the restaurant incurring a loss on any given day?
(3 marks)
X = number of vehicles arriving during peak lunch hour
X ~Poisson ( = 10)
P [incurring a loss] = P [X < 6] = 0.0671

x Prob
0 4.53999E-05
1 0.000453999
2 0.002269996
3 0.007566655
4 0.018916637
5 0.037833275
sum 0.067085963


(b) If more than 3 vehicles arrive during a ten minute period, there will be overcrowding
and the customers will either have to wait or may decide to leave. What is the
probability of this occurring on any given ten minute period? (2 marks)


Y = number of vehicles arriving during a 10-minute period
Y ~Poisson ( = 5/3)
P [overcrowding] = P [Y > 3] = 1 P [Y = 0] P [Y = 1] P [Y = 2] P [Y = 3] = 0.0883

y Prob
0 0.188876
1 0.314793
2 0.262327
3 0.145737
sum 0.911733
1 - sum 0.088267







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(c) They want to tackle the problem of overcrowding. The Manager feels that the peak
hour period should be divided into 10 minute intervals. If there are 3 or fewer vehicle
arrivals in any specific interval, there is no overcrowding in that interval. What is the
probability that there is overcrowding in exactly one such 10 minute intervals within
this peak hour period? (2 marks)


Z = number of overcrowded intervals (of 10-minute each)
Z~ Bin (n = 6, p = 0.0883)

P [Z = 1] = (

= 0.3337

(d) The 10-minute intervals are consecutively numbered and observed whether
overcrowded or otherwise. What is the probability that the 3
rd
overcrowded interval is
the 5
th
interval, starting from 1 pm? (2 marks)

P [3
rd
overcrowded interval is the 5
th
interval, starting from 1 pm]
= P [there are 2 overcrowded intervals in the first four 10-minute intervals] * P [5
th
10-
minute interval is overcrowded]
= (

* 0.0883 = 0.038858 * 0.0883 = 0.00343

(e) Given that on a particular day, the restaurant just barely avoids incurring a loss, what
is the chance that no vehicle arrived in the first 10 minutes of the peak lunch hour on
that day? (4 marks)

P [no arrivals in the 1
st
10-minute interval | number of arrivals = 6 in one hour]
= P [no arrivals in the 1
st
10-minute interval AND number of arrivals = 6 in one
hour]/P [number of arrivals = 6 in one hour]
=P [no arrivals in the 1
st
10-minute interval] *P [number of arrivals = 6 in next 50
minutes]/P [number of arrivals = 6 in one hour] = 0.334898


P [no arrivals in the 1
st
10-minute interval] = P [Y = 0] = 0.188876
P [number of arrivals = 6 in one hour] = P [X = 6] = 0.063055458
Let W = number of arrivals in 50 minutes; W ~ Poisson ( = 50/6)
P [number of arrivals = 6 in next 50 minutes] = P [W = 6] = 0.111805



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2. The ABC company produces detergent packets of 1 kg each for the lower income
segments. Its competitor announces that it guarantees that its 1 kg packets never fall short
on weight. ABC knows that its filling machines are set at 1.10 kg and that the standard
deviation of the quantity filled is 50 grams.

a. What percentage of the packets sold by ABC is below the 1 kg level?
(2 marks)

X = weight of detergent packet
X ~N ( = 1.1,
2
= 0.05
2
)
P [X < 1] = 0.022750132


b. If ABC wants at most 1% to be below 1 kg, then where must it set the mean
value for the filling machine? Assume that the standard deviation does not
change.
(3 marks)
Find mu such that P [X < 1] 0.01

(1 )/0.05 = -2.32634787 = 1.116317394

c. The production manager comes up with an alternative. He says with an investment of
Rs. 60,000, they can reduce the standard deviation to 35 grams and keep the mean setting
at the same level of 1.10 kg. Assigning a cost of Rs.3 to each packet that is of lower
weight than 1 kg (in terms of customer goodwill loss etc.), is this investment justified?
Assume that they sell a million packets a year and would want to recover the investment
in the first year of operations.
(4 marks)


P [X < 1| = 1.1, = 0.05] = 0.022750132
P [X < 1| = 1.1, = 0.035] = 0.002137
Saving in cost = Rs. 3 * 1000000 * (0.022750132 - 0.002137) = 61838.29

Investment is justified.
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3. Let X be the amount (in thousand INR) of money that may be spent on
advertisement for a product. It is decided that x, the possible values of X, can be:
0, 10 or 20. Let Y be the amount of additional profit (in lakh INR) that may be
generated due to the advertisement. y, the possible values of Y can be: 0, 1, 2, or
3. The joint probability (density) function of these two discrete random variables
X and Y is given by
( , ) (3 ) , for x,y as given above.
5
x
f x y c y

= +
`
)

a. Find the value of the constant c. Write down the joint distribution in a two-way
table format. (2 marks)

Y = 0 Y = 100, 000 Y = 200,000 Y = 300, 000 Marginal
X = 0 3c 2c c 0 6c
X = 10, 000 5c 4c 3c 2c 14c
X = 20, 000 7c 6c 5c 4c 22c
Marginal 15c 12c 9c 6c 42c

42c = 1; so, c = 1/42

b. What is the probability that the amount of money spent on advertisement is more
than or equal to INR 10,000 and the additional profit generated is less than or
equal to INR 200,000? (1 mark)


P [X 10, 000, Y 200,000] = 30c /42c = 30/42= 5/7= 0.7143


c. What is the probability that the amount of money spent on advertisement is less
than or equal to INR 10,000? (1 mark)


P [X 100,000] = 20c /42c = 20/42= 10/21= 0.4762


d. Given that the additional profit generated is INR 100,000 or more, what is the
probability that the amount of money spent on advertisement is more than or
equal to INR 10,000? (1.5 marks)

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The conditional distribution of X, given Y 100,000, is:

Y 100, 000
X = 0 3/27
X = 10, 000 9/27
X = 20, 000 15/27

P [X 10, 000|Y 100,000] = 24/27 = 8/9 = 0.8889



e. Given that the amount of money spent on advertisement is INR 20,000, what is
the expected value of the additional profit generated? (1.5 marks)

The conditional distribution of Y, given X = 20,000, is:



Y = 0 Y = 100, 000 Y = 200,000 Y = 300, 000
X = 20, 000 7/22 6/22 5/22 4/22

E [Y|X = 10,000] = 0*7/22 + 100,000*6/22 + 200,000*5/22 + 300,000*4/22
= 127272.7 = 1.2727*10
5







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f. Compute the correlation coefficient and interpret it. (4 marks)

E[X] = 0*6/42 + 10,000*14/42 + 20,000*22/42
= 13809.524 = 1.381* 10
4

E[Y] = 114285.714 = 1.143*10
5


E[X
2
] = 10,000
2
* 14/42 + 20,000
2
* 22/42 = 242857142.857 = 2.4286 * 10
8

Var (X) = E[X
2
] {E[X]}
2
= 0.521439*10
8


SD(X) = 0.722107333*10
4


E[Y
2
] = 100,000
2
* 12/42 + 200,000
2
* 9/42 +300,000
2
* 6/42
= 24285714285.714 = 2.4286*10
10


Var (Y) = E[Y
2
] {E[Y]}
2
= 1.122151*10
10

SD(Y) = 1.0593*10
5

E(XY) = 1.714286*10
9


Cov(X, Y) = 0.135803*10
9


Corr(X, Y) = 0.177534172

There is a weak positive correlation between X and Y.
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4. A small farmer is trying to figure out whether he should use the high yielding
variety (H) of seeds or the traditional (T) one. He has some idea that the costs will
go up, and that the high yield will depend on the monsoon since his land is not
irrigated. In addition to seed costs there are additional costs of fertilizer, and if he
uses H, the total cost (of irrigation and seed, combined) per acre will be Rs.4,000,
whereas if he uses T the total cost will be Rs.2000 per acre. The probability of
excellent monsoon is 0.25, good monsoon has probability of 0.35, and bad
monsoon has a probability of 0.4. If the monsoon is excellent, H gives a revenue
of Rs.10,000, and T only Rs.4,000. If the monsoon is good, H gives a revenue of
Rs.6,000, and T still gives Rs.4,000. If the monsoon is bad, H gives zero revenue,
and T gives Rs.3,000. All the revenue figures are per acre and naturally do not
take into account of cost of seed or irrigation.

a) What would you advise him to do in terms of variety of seeds to use? Give proper
objective quantitative argument in support of your advice. (3 marks)


Excellent Good Bad
Prior
Prob. 0.25 0.35 0.4
Expected
Payoff
Use H 6 2 -4 0.6
Use T 2 2 1 1.6

Best Decision: Use T
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b) Someone advises the Government that instead of giving subsidy, it should invest in
better forecasting. He shows some data that indicates that if the monsoon is excellent,
the forecast is also for excellent rain with probability 0.7, good rain with probability
0.2, and bad rain with probability 0.1. If the monsoon is good, the forecast is for
excellent rain with probability 0.2, good rain with probability 0.6, and bad rain with
probability 0.2. If the monsoon is bad, the forecast is for excellent rain with
probability 0.05, good rain with probability 0.1, and bad rain with probability 0.85.
How should the forecast information be used optimally? (Draw the complete decision
tree with all necessary computations in support) What is the value of this information
per acre for the farmer? (4+2 marks)



EVSI = 2.2 1.6 = 0.6

c) What is the value of perfect information? (2 marks)

EVPI = 0.25*6 + 0.35*2 + 0.4*1 1.6 = 1



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5. A box has 40 items. Consider an experiment where two items are chosen at random,
and if a particular designated item, say item A is selected, we stop. Else, we pick another
pair of items from the remaining 38 items and continue like this till item A is picked.

a) What is the chance that we have to draw more than 3 times (i.e. more than 3 pairs)?
(3 marks)

X = number of draws

[ ]
(

)
(

)
( )

( )

[ ] (

)
(

)
(

( )

( )

( )( )

[ ] (

)
(

)
(

( )

( )

( )( )

Continuing, we get

[ ]

[ ] [ ] [ ] [ ]

b) What is the expected number of draws before the item A is selected? (3 mark)

()

( )