Acknowledgement
Acknowledgement
This study kits success is attributed first and foremost to Saint Jose Maria Escriva
the founder of opus dei and the inspiration to the formation of Strathmore University
and its values.
Much appreciation is also extended to Mr. Randhir Ahluwalia of Strathmore
University for his contribution, Mr. Paul Maloba for his contributon and
compilation of the book.
Acknowledgement is given to the books that were used in research for compilation of
this book; Applied Mathematics for Business Economics and Social Sciences, and
Quantitative Techniques 6th edition.
iii
QUANTITATIVE TECHNIQUES
iv
Contents
Contents
Acknowledgement.............................................................................................................. ii
Instructions for Students ................................................................................................... iii
Contents............................................................................................................................. iv
Course Description............................................................................................................. v
Index.................................................................................................................................. vi
LESSON ONE....................................................................................................................1
5. Probability.............................................................................................................157
LESSON SIX................................................................................................................... 185
7. Decision Theory....................................................................................................226
LESSON EIGHT............................................................................................................248
Course Description
Course Description
QUANTITATIVE TECHNIQUES
vi
Index
Index
Lesson One
LESSON ONE
Linear Algebra and Matrices
Contents
 Functions and graphs
 Linear equations, higher order equations, inequalities and simultaneous equations
 Matrix algebra
 Application of matrix algebra to inputoutput analysis and elementary Markovian
process.
QUANTITATIVE TECHNIQUES
1.1
Functions and graphs
A function is a mathematical relationship in which the value of a single dependent variable are
determined from the values of one or more independent variables. The following is an example
of a function in which y is said to be a function of x.
y = a + bx
In the above example, both x and y are variables this is because they may assume different values
throughout the analysis of the function. On the other hand, a and b are referred to as constants
because they assume fixed values.
The variable y is a dependant variable in the sense that its values are generated from an
independent variable x.
The collection of all the values of the independent variable for which the function is defined is
referred to as the domain of the function corresponding to this we have the range of the
function, which is the collection of all the values of the dependent variable defined by the
function
The fact that it is a function of x can also be denoted by the following general form
y = f(x)
Functions of a single independent variable may either be linear or non linear.
Linear functions can be represented by:
y = a + bx
Whereas non linear functions can be represented by functions such as:
i.
ii.
iii.
iv.
v.
vi.
y = 0 + 13 x + 2x3
y2 = 3x + 18
y = 2x2 + 5x + 7
ax2 + bx + cy + d = 0
xy = k
y = ax
Where , a, b, c, d, k = constants
Graph of a function
A graph is a visual method of illustrating the behaviour of a particular function. It is easy to see
from a graph how as x changes, the value of the f(x) is changing.
The graph is thus much easier to understand and interpret than a table of values. For example
by looking at a graph we can tell whether f(x) is increasing or decreasing as x increases or
decreases.
We can also tell whether the rate of change is slow or fast. Maximum and minimum values of
the function can be seen at a glance. For particular values of x, it is easy to read the values of f(x)
and vice versa i.e. graphs can be used for estimation purposes
Different functions create different shaped graphs and it is useful knowing the shapes of some
of the most commonly encountered functions. Various types of equations such as linear,
quadratic, trigonometric, exponential equations can be solved using graphical methods.
Equations
An equation is an expression with an equal sign (=)
Equations are classified into two main groups linear equations and non linear equations.
Examples of linear equations are
x + 13 = 15
7x + 6 = 0
Non linear equations in the variable x are equations in which x appears in the second or higher
degrees. They include quadratic and cubic equations amongst others. For example
STRATHMORE UNIVERSITY STUDY PACK
Lesson One
Example
i.
Solve 3x + 4 =  8
ii.
Solve
i.
3x + 4 = 8
y
=4
3
Solutions
3x + 4 4 = 8 4 (by subtraction rule)
3x = 12
(simplifying)
3x
12
=
3
3
x=4
ii.
y
3
(simplifying)
= 4 3
y = 12
(simplifying)
QUANTITATIVE TECHNIQUES
Solution by Factorization
The following are the general steps commonly used in solving quadratic equations by
factorization
(i) Set the given quadratic equation to zero
(ii) Transform it into the product of two linear factors
(iii) Set each of the two linear factors equal to zero
(iv) Find the roots of the resulting two linear equations
Example
Solve the following equation by factorization
i.
6x2 = 18x
ii.
15x2 + 16x = 15
Solutions
i.
6x2 = 18x
6x2 18x = 0..........................................................(step 1)
6x(x 3) = 0 ..........................................................(step 2)
6x = 0 ......................................................................(step 3)
and x 3 = 0
x = 0 or x = 3 ..................................................(by step 4)
ii.
15x2 + 16x = 15
15x2 + 16x 15 = 0 .............................................. (step 1)
(5x 3) = 0} Step 3
{3x + 5 = 0}
x=5
or + 3 ............................................(step 4)
Add the square of the coefficient of x to both sides of the equal sign. The
left hand side is now a perfect square
Lesson One
iii.
iv.
v.
Solve for x
Example
Solve by completing the square.
i.
3x2 = 9x
ii.
2x2 + 3x + 1 = 0
Solutions
i.
3x2 = 9x
or
(3x2  9x = 0)
x2  3x = 0 ...................................................................... (Step 1)
2
3 3
x 2 3x + =
2 2 .....................................(Step 2)
2
3 9
x =
2
4 ..............................................................(Step 3)
9
4 ...............................................................(Step 4)
x3 =
x=
3 3
2 2
3+3 3 3
or =
2
2 2
(= 3 or 0)
ii.
2x2 + 3x + 1 = 0
x2 +
or
(2x2 + 3x = 1)
3x
1
=  ..... (Step 1)
2
2
2
3x 3 3 1
+ =
X +
(Step 2)
2
2 4 4
2
3
1
.. (Step 3)
x + =
4
16
QUANTITATIVE TECHNIQUES
x+
3
4
x = 34 =
34 +
1
4
1
16
1
4
or  34 
1
4
x = 12 or x = 1
Solution by Quadratic Formula
Consider the general quadratic equation
ax 2 + bx + c = 0 where a 0
The roots of the equation are obtained by the following formula:
x=
b b 2 4ac
2a
Example
Solve for x by formula
5x2 + 2x 3 = 0
Solution
a = 5, b = 2, c =  3
x=
b b 2 4ac
2a
2 2 2 4(5)(3)
x=
2(5)
3
x = or 1
5
Inequalities
An inequality or inequation is an expression involving an inequality sign (i.e. >, <, , , i.e.
greater than, less than, less or equal to, greater or equal to) The following are some examples of
inequations in variable x.
3x + 3 > 5
x2 2x 12 < 0
The first is an example of linear inequation and the second is an example of a quadratic in
equation.
Lesson One
Solutions of inequations
The solutions sets of inequations frequently contain many elements. In a number of cases they
contain infinite elements.
Example
Solve and graph the following inequation
x 2 > 2 ; x w (where x is a subset of w)
Solution
x 2 > 2 so
x2+2>2+2
Thus, x>4
The solution set is infinite, being all the elements in w greater than 4
10
11
Example
Solve and graph
3x 7 <  13;
Solution
3x  7 < 13
3x  7 + 7 < 13 + 7
3x < 6
3x
6
<
3
3
x < 2
.. R Line
4
3
2
1
QUANTITATIVE TECHNIQUES
Then
M + P > N + P and
M1 + P >N1+ P
M P < N P and
M1 P N1 P
Example
Solve and graph the following:
i.
7 2x >  11 ;
ii.
5x + 4 2x 10 ;
iii.
3 2x + 1 < 7 ;
Solutions
i.
7  2x > 11
2x > 18 (subtraction rule)
2x
18
<
(bydivision rule)
2
2
x<9
Lesson One
line
Q
3 2 1 0
9 10 11
5x + 4 2x  10
ii.
7x + 4 10
7x 14
x2
(b y division rule)
Q
line 4
3
2
1
3 2x + 1 < 7
iii.
4 2x < 6
2 x < 3
( by division rule)
Q
line 4
3
2
1
1.2
Linear simultaneous equations:
Two or more equations will form a system of linear simultaneous equations if such equations be
linear in the same two or more variables.
QUANTITATIVE TECHNIQUES
10
For instance, the following systems of the two equations is simultaneous in the two variables x
and y.
2x + 6y = 23
4x + 7y = 10
The solution of a system of linear simultaneous equations is a set of values of the variables
which simultaneously satisfy all the equations of the system.
Solution techniques
a) The graphical technique
The graphical technique of solving a system of linear equations consists of drawing the graphs of
the equations of the system on the same rectangular coordinate system. The coordinates of the
point of intersection of the equations of the system would then be the solution.
Example
10
9
.
8
.
7
.
6
.
(2,4)
4
.
3
.
x + 2y = 10
2x + y = 8
1
10 11 12
13
Lesson One
11
2x 3y = 8 .. ........................................................(i).
3x + 4y = 5 .........................................................(ii).
Step 1
Multiply (i) by 3
6x 9y = 24 .......................................................................(iii).
Multiply (ii) By 2
6x + 8y =  10 ...................................................................(iv).
Subtract iii from iv.
17y = 34 .............................................................................(v).
y = 2
Step 2
Multiply (i) by 4
8x 12y = 32 . ...................................................................(vi)
Multiply (ii) by 3
9x + 12y = 15 .. .....................................................................(vii)
Add vi to vii
17x = 17 .. ............................................................................(viii)
x=1
Thus x = 1, y = 2
i.e. {1,2}
(i).
....... 3x + 4y = 5
(ii).
(iii)
Step 2
QUANTITATIVE TECHNIQUES
12
Substitute this value of x into equation (ii). And obtain an equation in y only
3x + 4y = 5
3 (4 + 3/2 y) + 4y = 5
8 y =  17 .
(iv)
Step 3
Solve the equation (iv). For y
8y = 17
y = 2
Step 4
Substitute this value of y into equation (i) or (iii) and obtain the value of x
2x 3y = 8
2x 3(2) = 8
x=1
Example
Solve the following by substitution method
2x + y = 8
3x 2y = 2
Solution
Solve the first equation for y
y = 8 2x
Substitute this value of y into the second equation and solve for x
3x 2y = 2
3x 2 (82x) = 2
x=2
Substitute this value of x into either the first or the second original equation and solve for y
2x + y = 8
(2) (2) + y = 8
y=4
1.3
MATRICES
A matrix is a rectangular array of items or numbers. These items or numbers are arranged in
rows and columns to represent some information.
The position of an element in one matrix is very important as well be seen later; therefore an
element is located by the number of the row and column which it occupies.
The size of a matrix is defined by the number of its rows (m) and column (n).
Lesson One
13
a b
For example =
and B =
c d
a b c
d e f
g h i
are (2 x 2) and (3 x 3) matrices since A has 2 rows and 2 columns and B has 3 rows and 3
columns.
A matrix A with three rows and four columns is given by one of:
a11 a12
A= a 21 a 22
a
31 a 32
a13
a 23
a 33
a14
a 24
a 34
or
A = ( a ij ) i = 1, 2, 3
j = 1, 2, 3, 4
where i represents the row number whereas j represents the column number
Properties of matrices
Equal Matrices
Two matrices A and B are said to be equal, that is
A=B
or
(a ) = (b )
ij
ij
If and only if they are identical if they both have the same number of rows and columns and the
elements in the corresponding locations in the two matrices should be the same, that is, aij = bij
for all i. And j.
Example
3 4 0 3 4 0
For example x =
x1
x2
.
.
.
xn
QUANTITATIVE TECHNIQUES
14
Transpose of a Matrix
The transpose of an mxn matrix A is the nxm matrix AT obtained by interchanging the rows and
columns of A.
A
=
aij
The transpose of A i.e. AT is given by
AT =
aij
aji
mxn
nxm
Example
Find the transposes of the following matrices
1 5 7
A= 2 1 4
0 9 3
B= ( b1 , b 2 , b3 , b 4 )
x1
C= x 2
x
3
Solution
T
i. A T
1 5 7
1 2 0
= 2 1 4 = 5 1 9
0 9 3
7 4 3
ii. BT = ( b1 , b 2 , b3 , b 4 )
b1
b
= 2
b3
b4
Lesson One
15
T
x1
T
iii. C = x 2 =
x
3
( x1 x 2 x 3 )
Square Matrix
A matrix A is said to be square when it has the same number of rows as columns
e.g.
2 5
A=
3 7
Diagonal matrices
It is a square matrix with zeros everywhere in the matrix except on the principal diagonal
e.g.
3 0 0
A = 0 1 0 , B =
0 0 7
9 0 0
0 0 0
0 0 0
1 0
I2 =
0 1
1 0 0
and I 3 = 0 1 0
0 0 1
2 2 unit matrix
3 3 unit matrix
Sub matrix
The sub matrix of the matrix A is another matrix obtained from A by deleting selected row(s)
and/or column(s) of the matrix A.
QUANTITATIVE TECHNIQUES
16
7 9 8
e.g, if A = 2 3 6
1 5 0
2 3 6
7 9
then A1 =
and A 2 =
1 5 0
1 5
are both sub matrices of A
OPERATION ON MATRICES
Matrix addition and subtraction
We can add any number of matrices (or subtract one matrix from another) if they have the same
sizes. Addition is carried out by adding together corresponding elements in the matrices.
Similarly subtraction is carried out by subtracting the corresponding elements of two matrices as
shown in the following example
Example: Given A and B, calculate A + B and A B
A=
6 1 10 5
4
2 5
3
9 13 6 0
12 4 7 3
B = 0 4 10 4
7 3 7
9
3
3 8
6 1 10 5 12 4 7 3 18
A+B= 3
4
2 5 + 0 4 10 4 = 3
0 12 9
9 13 6 0 7 3 7 9 2 16 1 9
2
6 1 10 5 12 4 7 3 6 5 17
AB= 3
4
2 5  0 4 10 4 = 3
8
8 1
9 13 6 0 7 3 7 9 16 10 13 9
If it is assumed that A, B, C are of the same order, the following properties are fulfilled:
a) Commutative law:
b) Associative law:
A+B =B+A
(A + B) + C
= A + (B + C) = A + B + C
Lesson One
17
Example
If A =
6 1 10 5
3 4 2 5
9 13 6 0
60 10 100 50
then (10)A = 30
40 20 50
90 130 60 0
Matrix Multiplication
a) Multiplication of two vectors
Let row vector A represent the selling price in shillings of one unit of commodity P, Q, R
respectively and let column vector B represent the number of units of commodities P, Q, R sold
respectively. Then the vector product A B will be equal to the total sales value
i. e.
A B =Total sales value
100
100
Rules of multiplication
i.
ii.
iii.
The row vector must have the same number of elements as the column vector
The first vector is a row vector and the second is a column vector
The corresponding elements in each vector are multiplied together and the results
obtained are added. This addition is always a single number
Going back to the example given before
100
QUANTITATIVE TECHNIQUES
18
a11 a12
a 21 a 22
Let A =
b12
b
and b = 11
b 21 b 22
d11 d12
d 21 d 22
Then A B = D =
A = 2 x 2 matrix
b13
b 23
d13
d 23
B = 2 x 3 matrix D = 2 x 3 matrix
Where
d11 = a11 b11 + a12 b21
d12 = a11 b12 + a12 b22
Example I
6 1
3 0 2
6 3 + 1 4 6 0 + 1 5 6 2 + 1 8
2 3
4 5 8
2 3 + 3 4 2 0 + 3 5 2 2 + 3 8
22 5 20
=
18 15 28
Example II
Matrix X gives the details of component parts used in the make up of two products P1 and P2
matrix Y gives details of products made on each day of the week as follows:
Matrix Y
Products
Matrix X
P1
Parts
A B C
P 3 4 2
Products 1
P2 2 5 3
Tues 2
Wed 3
Thur 2
Fri 1
Mon
P2
2
3
2
2
Lesson One
19
Use matrix multiplication to find the number of component parts used on each day of the week.
Solution:
After careful consideration, it will be easy to decide that the correct order of multiplication is
YXX (Note the order of multiplication). This multiplication is compatible and also it gives the
desired answer.
2
Y X = 3
2
1
3
2
2
1
3 4 2
2 5 3
5 x 2 matrix
A B
Mon
Tues
Wed
Thur
Fri
12
13
10
5
2 x 3 matrix
13+22
23+32
33+22
23+22
13+12
14+25 12+25
24+35 22+33
34+25 32+23
24+25 22+23
14+15 12+13
5 x 3 matrix
14
23 13
22 12
18 10
9 5
Interpretation
On Monday, number of component parts A used is 7, B is 14 and C is 8. in the same way, the
number of component parts used for other days can be interpreted.
(A)
a b
=
c d
= ad  cb
a b c
A = d e f
g h i
e f
= a
h i
d f
b
g i
a ( ei  fh )  b ( di  gf ) +c ( dh  eg )
simplify
QUANTITATIVE TECHNIQUES
d e
+c
g h
20
iii.
A=
Determinant of a 4 x 4 matrix
a b c d
e f g h
i j k l
m n o p
f g h
A = a j k l
n o p
e g h
b i k l
n o p
e f h
+c i j l
m o p
e f g
d i j k
m n o
Inverse of a matrix
Given a matrix A = (aij), the minor of an element aij in row i and column
j (call it mij), is the value of the determinant formed by deleting row i
and column j in matrix A.
Example
Lesson One
m11 =
m12 =
6 1
3 0
21
= 60 31 = 3
5 1
2 0
= 50 12 = 2
Similarly
m13 =
5 6
2 3
=15 12 = 3
m31 =
m 21 =
2 3
m 22 =
3 0
=0 9 = 9
2 3
6 1
= 2 18 = 16
m 32 =
4 3
m 23 =
2 0
= 06 =6
4 3
5 1
m33 =
= 4 15 = 11
4 2
2 3
= 12 4 = 8
4 2
5 6
= 24 10 = 14
+ +
Hence the cofactor of element a11 is m11 = 3, cofactor of a12 is m12 = +2 the cofactor of
element a13 is +m13 = 3 and so on.
Matrix of cofactors of A =
3 2
9 6
16 11
=
d
g
8
14
b c
e f
h i
QUANTITATIVE TECHNIQUES
22
A B C
= D E F
G H I
A B C
A D G
B E H i.e. change rows into columns and columns into rows (transpose)
C F I
a b c
is written as
i.e. A
1
1
(adjoint of the matrix of cofactors)
determinant
A D G
1
=
B E H
C F I
Where = aA + bB + cC
Lesson One
23
4 2 3
Hence inverse of 5 6 1
2 3 0
is found as follows
= (4 3) + (2
2) + (3 ( 3) = 1
A = 3
B=2
C=3
D=9
E = 6
F = 8
G = 16
H = 11
I = 14
Example
Solve the following
a) 4x1 + x2 5x3 = 8
2x1 + 3x2 + x3 = 12
3x1 x2 + 4x 3 = 5
b) 4x1 + 3x3 + 5x3 = 27
x1 + 6x2 + 2x3 = 19
3x1 + x2 + 3x3 = 15
c) 4x1 + 2x2 + 6x3 = 28
3x1 + x2 + 2x3 = 20
QUANTITATIVE TECHNIQUES
24
Solution
a) From a, we have
4 1 5 x1
8
2 3 1 x 2 = 12
3 1 4 x
5
3
A
We need to determine the minors and the cofactors for the above matrix
Definition
A minor is a determinant of a sub matrix obtained when other elements are detected as shown
below.
A cofactor is the product of (1) i + j and a minor where
i = Ith row i = 1, 2, 3 .
j = Jth row j = 1, 2, 3 .
1 4
1
1 5
3 1
2 1
3
4 5
3
2 1
2 3
3
= 13
= 1
= 16
= 11
= 31
= 6
= 7
Lesson One
25
3 1
4
2 3
= 7
= 14
13 11 7
1 31 7
16 6 14
13 1 16
CT = 11 31 6
7 7 14
4 1 5
= 2 3
1
3 1 4
Therefore
41 + 57
98
13 1 16
1
=
11 31 6
98
7 7 14
by multiplying the inverse on both sides of * we have,
QUANTITATIVE TECHNIQUES
26
13 1 16
1
11 31 6
98
7 7 14
4 1 5
2 3 1
3 1 4
13 1 16
1
11 31 6
=
98
7 7 14
8
12
5
98 0 0
1
=
0 98 0
98
0 0 98
1 0 0
= 0 1 0
0 0 1
x1
x2
x3
x1
x2
x
3
196
1
=
490
98
98
x1
2
x 2 = 5
x3
1
x1
2
= x2 = 5
x
3
1
X1 = 2, X2 = 5, X3 = 1
c) 4x1 + 2x2 + 6x3 = 28
3x1 + x2 + 2x3 = 20
10x1 + 5x2 + 15x3 = 70
4 2 6
3 1 2
10 5 15
4 2 6
3 1 2
10 5 15
x1
28
x 2 = 20
x
3
70
4
=
3 1 2 3 1
10 5 15 10 5
Lesson One
27
Hence the solutions of x1, x2, and x3 do no exist. The equations are independent
x1 =
b1a 22 b 2 a12
=
a11a 22 a12 a 21
b1 a12
b 2 a 22
a11 a12
a 21 a 22
and
x2 =
a11 b1
a 21 b 2
a11 a12
a21 a22
a11b 2  a 21b1
=
a11a 22  a12 a 21
Solutions of x1 and x2 obtained this way are said to have been derived using Cramers rule,
practice this method over and over to internalize it. It is advisable for exam situation since it is
shorter.
Example
Solve the following systems of linear simultaneous equations by Cramers rule:
2x1 5x2 = 7
i)
x1 + 6x2 = 9
ii)
x1 + 2x2 + 4x3 = 4
2x1 + x3 = 3
3x2 + x3 = 2
Solutions
i.
2x1 5x2 = 7
x1 + 6x2 = 9
2 5 x 1
7
1 6 x = 9
2
A
QUANTITATIVE TECHNIQUES
28
7 5
x1 =
9 6
=
2 5
1
87
2
= 5
17
17
2 7
x2 =
1 9
=
2 5
1
11
17
1 2 4
2 0 1
0 3 1
x1
x2
x3
4
3
2
4 2 4
3 0 1
x1 =
2 3 1
1 2 4
22
17
7
17
2 0 1
0 3 1
1 2 4
2 0 3
x3 =
0 3 2
1 2 4
2 0 1
0 3 1
1 4 4
2 3 1
x2 =
0 2 1
1 2 4
9
17
2 0 1
0 3 1
Lesson One
29
2 3 x
13
=
3 2 y
12
pre multiply both sides by the inverse of the matrix
2 3
3 2
= 5
2
5
1 2 3
=
5 3 2
3
3
5
2
5
2
5
3
5
2
5
2
5
=
3
2 3
3 2
Therefore x = 2
3
2
5 13
=
2
12
3
5
y=3
ii.
4x + 2y + 3z = 4
5x + 6y + 1z = 2
2x + 3y = 1
Solution:
Writing these equations in matrix format, we get
A
4 2 3
5 6 1
2 3 0
BX =
x
4
y = 2
z
1
QUANTITATIVE TECHNIQUES
30
3 9 16
= 2 6 11
3 8 14
3 9 16
2 6 11
3 8 14
hence x = 22
4 3 2
5 6 1
2 3 0
x
3 9 16
y = 2 6 11
z
3 8 14
4
22
2 = 15
1
18
y = 15 z = 18
(Note: under examination conditions it may be advisable to check the solution by substituting
the value of x, y, z into any of the three original equations)
MARKONIKOV CHAIN
Example 1
The probability transition matrix of the switching probabilities, consider that two brands G and
X share the market in the ratio of 60% to 40% respectively of customers. If in every week 70%
of Gs customers retain the brand but 30% switch to product x where as 80% of Xs customers
retain brand but 20% percent switch to brand G. Analyse the exchange in share market per
week.
G
X
G 0.7
0.2
State the system next week
X 0.3
0.8
G 60
X 40
0.7 0.2 60
50
=
0.3 0.8 40
50
Lesson One
31
0.7 0.2 50
45
=
0.3 0.8 50
55
and so on
This process can continue till equilibrium is reached.
0.7 0.2
0.3 0.8
G
G
=
X
X
0.7G + 0.2 X = G
0.2X = 0.3G
i.e.
G
X
or
or
0.3
=
0.2
0.3G + 0.8X = X
0.3X = 0.2X
3
2
Example 2
A marketing division toothpaste manufacturing company has worked out the following
transition probability matrices concerning the behaviors of customers before and after an
advertising campaign.
Transition probability matrix
(before advertising campaign)
TO
FROM
Our brand (State I)
Another Brand (sate II)
Our Brand
(State I)
0.8
0.4
Another Brand
(Sate II)
0.2
0.6
TO
FROM
Our brand (State I)
Another Brand (sate II)
Our Brand
(State I)
0.9
0.5
Another Brand
(Sate II)
0.1
0.5
If the advertising campaign costs Shs 20,000 per year, would it be worthwhile for the company
to undertake the campaign?
QUANTITATIVE TECHNIQUES
32
You may suppose there are 60,000 buyers of toothpaste in the market and for each customer
average annual profit of the company is Shs 2.50
Solution
Let P1 be the fraction share of our brand and P2 be the fraction share of another brand
Before Advertising
( P1
After Advertising
0.8 0.2
P2 )
= ( P1
0.4 0.6
( 0.8P1 + 0.4 P2
P2 )
0.2 P1 + 0.6 P2 ) = ( P1
( P1
P2 )
0.9 0.1
P2 )
= ( P1
0.5 0.5
( 0.9 P1 + 0.5P2
P2 )
0.1P1 + 0.5 P2 ) = ( P1
P2 )
Thus:
P1 = 2 3 and P2 =
P1 = 5 6 and P2 =
Before Advertising
P1 = 2 3
After Advertising
P1 = 5 6
brand
will
buy our brand
Lesson One
33
Example (B)
INPUT OUTPUT TABLE
TO
FROM
Agric
Industry
Service
Primary inputs
Total inputs
Final
Total
Agric
Industry
Service
Demand
Demand (output)
300
360
320
1080
2060
450
470
410
800
2130
610
500
520
270
1900
700
800
650
2060
2130
1900

NB: In the above table, one should be able to interpret the table e.g. of the total demand of
2060 metric tones from the agriculturalsector; 300 is produced for the agricultural sector, 360 for
industrial sector, 320 for the service sector and 1080 metric tones makes up the final demand.
The final demand is the additional demand besides the sectoral demand which is normally made
by other users e.g. government, foreign countries, other manufacturers not included in the other
sectors.
For production if items besides the inputs from other sectors namely labour capital e.t.c
Technical coefficients : (to sectors)
300
Agriculture 300 =
450 =
610 =
Industry
360 =
470 =
500 =
Service
320 =
410 =
520 =
2060
450
2060
610
2060
360
2130
470
2130
500
2130
320
1900
410
1900
520
1900
0.14
0.22
0.30
0.7
0.22
0.23
0.17
0.22
0.27
Agric
0.14
Industry
0.7
Service
0.17
Final
Total
Demand
1080 (y1)
Demand (output)
2060
QUANTITATIVE TECHNIQUES
34
Industry
Service
Primary inputs
0.22
0.30
x
2060(x1)
0.22
0.23
x
2130(x2)
0.22
0.27
x
1900(x3)
800 (y2)
270(y3)

2130
1900

0.22 0.22 0.22 x 2 + y 2 = x 2 ...................(*)
0.30 0.23 0.27 x
3
y3
x3
A
a11 a12
A = a 21 a 22
a
31 a 32
a13
a 23
a 33
y1
y = y2
y
3
x1
x = x2
x
3
Technical Coefficients
These show the units required from each sector to make up one complete product in a given
sector e.g. in the above matrix of coefficients it may be said that one complete product from the
agricultural sector requires 0.14 units from the agricultural sector itself, 0.22 from the industrial
sector and 0.30 from the service sector
NB: The primary inputs are sometimes known as value added
Example 1
Determine the total demand (x) for the industry 1, 2, 3 given the matrix of technical coefficients
(A), Capital and the final demand vector B.
1
A = 2
3
20
B = 10
30
34
Lesson One
35
X = (I A)1 B, Where X =
X1
X 2 is the demand vector
x
3
1 0 0
0.3 0.4 0.1
(I  A)1
of (I  A)
0.809
QUANTITATIVE TECHNIQUES
36
0.63 0.77 0.58 10 = X 2
0.23 0.31 0.44 30
X3
Therefore X =
30
X = 37.7
21.9
The total demand from the three industries 1, 2 and 3 is 30 from 1, 37.7 from 2 and 21.9 from 3.
Example 2
Three clients of Disrup, Ltd P, Q and Rare direct competitors in the retail business. In the first
week of the year P had 300 customers Q had 250 customers and R had 200 customers. During
the second week, 60 of the original customers of P transferred to Q and 30 of the original
customers of P transferred to R. similarly in the second week 50 of the original customers of Q
transferred to P with no transfers to R and 20 of the original customers of R transferred to P
with no transfers to Q.
Required
a) Display in a matrix the pattern of retention and transfers of customers from the first to the
second week
(4 marks)
b) Reexpres the matrix that you have obtained in part (a) showing the elements as decimal
fractions of the original numbers of customers of P, Q and R (2 marks) Refer to this re
expressed matrix as B
c) Multiply matrix B by itself to determine the proportions of the original customers that have
been retained or transferred to P, Q and R from the second to the third week. (4 marks)
d) Solve the matrix equation (xyz)B = (xyz) given that x + y + z = 1
(8 marks)
e) Interpret the result that you obtain in part (d) in relation to the movement of customers
between P, Q and R
(2marks)
(Total 20 marks)
Solution
a). Think of each row element as being the point from which the customer originated and each
column element as being the destination e.g. 210 customers move from P to P, 60 move
from P to Q and 30 move from P to R. The sum of the elements of the first row totalling
300, that is the number of customers originally with P.
Hence required matrix is
P 210 60 30
From Q 50 200 0
R 20
0 180
To
row total 300
b). The requirement of this part is to express each element as a decimal fraction of its
corresponding row total. The second row, first element is therefore 50/250, that is 0.2 and
the second element is therefore 200/250 that is 0.8.
36
Lesson One
37
0.2 0.8 0
0.1 0 0.9
Hence B =
0.2 0.8 0
0.1 0 0.9
c).
0.2 0.8 0
0.1 0 0.9
d).
(x
y x ) X 0.2 0.8 0 = ( x
0.1 0 0.9
y z)
Or
2y + z = 3x ...(i)
Or
The second row produces,
0.2x + 0.8y = y
Reducing to
0.2x = 0.2 y
X = y ..(ii)
Or
The third row produces
0.1x + 0.9z = z
Reducing to
0.1x = 0.1z
X = z .
(iii)
At this point you will notice that condition h (ii) and condition (iii) produce 2x + x = 3x when
substituted into condition (i), we therefore need extra condition x + y + z = 1 to solve the
problem.
Thus
x+x+x=1
Or
That is x = 1
Leading to
3x = 1
3
x= 1 ,
3
y= 1 ,
3
z= 1
QUANTITATIVE TECHNIQUES
38
e). In proportion terms this solution means that P, Q, and R will in the long term each have one
third of the total customers
Example 4
There are three types of breakfast meal available in supermarkets known as brand BM1, brand
BM2 and Brand BM3. In order to assess the market, a survey was carried out by one of the
manufacturers. After the first month, the survey revealed that 20% of the customers purchasing
brand BM1 switched to BM2 and 10% of the customers purchasing brand BM1 switched to
BM3. similarly, after the first month of the customers purchasing brand BM2, 25% switched to
BM1 and 10% switched to BM3 and of the customers purchasing brand BM3 0.05% switched to
BM1 and 15% switched to BM2
Required
i.
Display in a matrix S, the patterns of retention and transfers of customers from the first
to the second month, expressing percentage in decimal form.
(2marks)
Multiply matrix S by itself (that is form S2)
(5 Marks)
Interpret the results you obtain in part ii with regard to customer brand loyalty (3 marks)
ii.
iii.
Solution
The objective of the first part of the question was to test the candidates ability to formulate and
manipulate a matrix, then interpret the result of such manipulation.
a. i. The matrix showing the pattern of retention and transfer from the first to the second
month is
S = 0.25
0.05
0.20
0.65
0.15
0.10 BM1
0.10 BM2
0.80 BM3
(The second element in the first row shows the 20% movement from BM1 to BM2 and so on)
The product of matrix S with itself is demonstrated as follows
i.
0 .7 0
0 .2 5
0 .0 5
0 .2 0
0 .6 5
0 .1 5
0 .1 0
0 .1 0
0 .8 0
0 .7 0
0 .2 5
0 .0 5
0 .2 0
0 .6 5
0 .1 5
0 .1 0
0 .1 0
0 .8 0
0 .5 4 5 0
0 .3 4 2 5
0 .1 1 2 5
0 .2 8 5 0
0 .4 8 7 5
0 .2 2 7 5
0 .1 7 0 0
0 .1 7 0 0
0 .6 6 0 0
Where for example second element in the first row, that is 0.2850 is the result of multiplying the
corresponding elements of the first row of S by the second column of S and summing the
product.
0.2850 =
ii.
38
Lesson One
39
Of the original customers who buy BM2, 48.7% will remain loyal to the brand in
month three 34.25% will have switched to BM1 and 17% will have switched to
BM3
Of the original customers who buy BM3, 66% will remain loyal to the brand in
month three 11.25% will have switched to BM1 and 22.75% will have switched to
BM2
Alternatively
In month three 54.5% of the customers buying BM1 are original customers. 34.5%
came from BM2 originally and remaining 11.25% have switched from BM3 and so
on.
MARKOV CHAINS/PROCESSES
The Markov processes are defined as a set of trials which follow a certain sequence which
depend on a given set of probabilities known as transition probabilities. These probabilities
indicate how a particular activity or product moves from one state to another.
1. Brand Switching
By using the transitional probabilities we can be able to express the manner in which consumers
switch their tastes from one product to another.
2. Insurance industry
Markov analysis may be used to study the claims made by the insured persons and also decide
the level of premiums to be paid in future.
S1
S2
S3
S1 P11
S2 P21
S3 P31
P12
P22
P32
P13
P23
P33
Where S1, S2, S3 are states and P11 P12 e.t.c are probabilities
2. The outcome of each trial depends on the immediate preceding activities but not on the
previous activities
40
w= ( , , 0, )
b) Stochastic matrix
A matrix whose row elements are all non negative and also add up to 1.
Example (i)
0.1
0.0
=
0.5
0.3
A=
13
3
4
1
3
0
1
2
1
3
14
1
3
2
3
14
B= 1
3
0 1 0
1 1 1
C= 2 6 3
1 2 0
3 3
1
3
3
4
A is not stochastic matrix because the element in the 2nd row and 3rd column is negative.
B is not Stochastic matrix because the elements in the second row do not add up to 1
C is stochastic matrix because each element is non negative and they add up to 1 in each row.
A matrix P is said to be regular stochastic matrix if all the elements in P are all positive,
where m is a power, m = 1, 2, 3 e.t.c
Let A =
A2 =
A3 =
0 1
1 1
2 2
0 1
1 1
2 2
12
0 1
1 1 1
2 2
4
0 1 12
1 1 = 1
2 2 4
14
= 3
3
4
8
1
2
3
4
5
8
1
2
3
4
40
Lesson One
41
Since the elements in A2 and A3 are all positive then A is regular Stochastic matrix.
ABSORBING STATES
A state Si (I = 1, 2, 3 ) of a markov chain is called absorbing if the system remains in the state,
Si once it enters there. Thus a state, Si is absorbing if and only if the ith row of the transition
matrix p has a 1 on the main diagonal and zeroes every where else. See the following example.
The following matrix, P is a transition matrix of the markov chain.
S1 S2
P=
1
S1 4
S2 0
S3 1
2
S4
0
S5
0
S3 S4
1
4
0
4
0
4
0
4
0
S5
1
4
0
0
1
The States S2 and S5 are absorbing states since the 2nd and 4th rows have 1 on the main diagonal.
QUANTITATIVE TECHNIQUES
42
REINFORCING QUESTIONS
Work out these questions and compare with answers given in lesson 9
QUESTION ONE
Determine
a) f(1)
b) f(2)
1. f(x) = 5x + 2
2. f(x) = x2 + 3x+10
3. f(t) = 10 t + t3
4. f(u) =
QUESTION TWO
Solve
a)
2 x + 5 y = 20
4x + y = 4
b)
2x y = 9
x + 3 y = 6
c)
12 x 4 y = 18
4 x + y = 6
QUESTION THREE
Because of inreasing cost increasing cost energy, the population within Maueni district
seem to be shifting from the north to the south the transition matrix S describes the
migration behaviour observed between the regions.
to north to south
0.90 0.10
S =
0.05 0.95
from north
from south
determine whether the populations will attain an equillibrium condition and if so, the
population of the two regions.
QUESTION FOUR
A simple hypothetical economy of three industries A, B and C is represented in the following
table (data in millions of shillings).
42
Lesson One
User
Producer
A
B
C
43
Final
Demand
Total
Output
80
80
80
100
200
100
100
60
100
40
60
20
320
400
300
Determine the output vector for the economy if the final demand changes to 60 for A, 60 for B
and 60 for C
QUESTION FIVE
A tea blender uses two types of tea, T1, and T2, to produce two blends, B1 and B2 for sale. B1
uses 40% of available T1 and 60% of the available T2 whilst B2 uses 50% of the available T1 and
25% of the available T2.
Required:
a) Given that t1 kilos of T1 and t2 of T2 are made available to produce b1 kilos of B1 and b2
kilos of B2. Express the blending operation in the matrix format.
b) If 400 kilos of T1 and 700 kilos of T2 were made available for blending, what quantities of B1
and B2 would be produced?
c) If 600 kilos of B1 and 450 kilos of B2 were produced, use a matrix method to determine
what quantities of T1 and T2 would be used to produce the blends.
QUESTION SIX
2 2
3 3
Let A =
a) Find A2 and A3
b) If F(x) = x3 3x2 2x + 4I
Find F (A)
c) Find the inverse of matrix A
QUESTION SEVEN
A childs toy is marketed in three sizes standard size contains 10 squares (S), 15 triangles (T) and
6 hexagons (H). The deluxe set contains 15 S, 20 T, 6 H and 4 octagons (O). The super set
contains 24 T, 8 H, 16 H, 16 S and 6 (O). Squares cost 12 pence to produce, triangles cost 8p,
hexagons cost 18p and octagons 22p.
The standard set is sold at 6, the deluxe set for 10 and super for 15. The manufacturer
produces 100 standard sets, 80 deluxe sets and 50 super sets per week.
Use matrix form and matrix multiplications to find:
The cost of producing each set.
The number of each shape required each week
QUANTITATIVE TECHNIQUES
44
QUESTION EIGHT
Matrix N below shows the number of items of type A, B, and C in warehouses Y and W. Matrix
p shows the cost in pence per day of storing (S) and maintaining (M) one item each of A, B and
C
B C
Y 10 12 50
N=
W 60 0 20
S M
A 2 0.5
P = B 3 1.5
C 2 0.5
44
Lesson Two
45
LESSON TWO
Sets Theory and Calculus
2.1
Sets and set theory
A set is a collection of distinct objects. We may consider all the ocean in the world to be a set
with the objects being whales, sea plants, sharks, octopus etc, similarly all the fresh water lakes in
Africa can form a set. Supposing A to be a set
A = {4, 6, 8, 13}
The objects in the set, that is, the integers 4, 6, 8 and 13 are referred to as the members or
elements of the set. The elements of a set can be listed in any order. For example,
A = {4, 6, 8, 13} = {8, 4, 13, 6}
Sets are always precisely defined. Each element occurs once and only once in a set.
The notion is used to indicate membership of a set. represents non membership. However,
in order to represent the fact that one set is a subject of another set, we use the notion . A set
S is a subject of another set T if every element in S is a member of T
Example
If A = {4, 6, 8, 13} then
i)
4 {4, 6, 8, 13} or 4 A; 16 A
ii)
{4, 8} A; {5, 7} A; A A
ii.
The descriptive method involves the description of members of the set in such a way that one
can determine the elements of the set without difficulty.
The enumerative method requires that one writes out all the members of the set within the curly
brackets.
For example, the set of numbers 0, 1, 2, 3, 4, 5, 6 and 7 can be represented ass follows
P = {0, 1, 2, 3, 4, 5, 6, 7} ,
enumerative method
P = {X/x = 0, 1, 27}
descriptive method
Or
P = {x/0 x 7} where x is an interger.
QUANTITATIVE TECHNIQUES
46
46
Lesson Two
47
U
B
A
Intersection of sets
Example:
You are given the universal set
T = {1, 2, 3, 4, 5, 6, 7, 8}
And the following subjects of the universal set:
A = {3, 4, 5, 6,}
B = {1, 3, 4, 7, 8}
Determine the intersection of A and B
Solution
The intersection of A and B is the subject of T, containing elements that belong to both A and B
U
A
5
6
3
4
1
7
8
QUANTITATIVE TECHNIQUES
48
Example
Consider the following universal set T and its subjects C, D and E
T = {0, 2, 4, 6, 8, 10, 12}
C = {4, 8,}
D = {10, 2, 0}
E = {0}
Find
ii)
DE
CDE
iii)
Solution
ii)
D E = Shaded area
ii) C D E = {4, 8} {10, 2, 0} {0} = { } =
T
D
C
4; 8
2; 10
48
Lesson Two
49
A B = Shaded area
Example
Consider the universal set T and its subsets A, B and C below:
T = {a, b, c, d e, f}
A = {a, d}
B = {b, c, f}
C = {a, c, e, f}
Find
ii)
iii)
iv)
v)
Solution
i)
ii)
iii)
iv)
A B
AC
B C
A B C
A B = {a, d} {b, c, f} = {a, b, c, d, f}
A C = {a, d} {a, c, e, f} = {a, c, d, e, f}
B C = {b, c, f} {a, c, e, f} = {a, b, c, e, f}
A B C = {a, d} {b, c, f } {a, c, e, f} = {a, b, c, d, e, f} = T
Complement of a set
Venn diagram representing the complement of a set say A represented by A1 is illustrated below.
QUANTITATIVE TECHNIQUES
50
A1
A1
(A1)1
(B1)1
Solution
i)
ii)
iii)
i)
ii)
iii)
iv)
v)
vi)
vii)
viii)
A = A
AT = T
AA = A
A A= A
A T= A
A A1 = T
A A1=
(A1)1 = A
50
Lesson Two
51
n(T) = 12
n(H) = 16
y
12 y z 2
16 x y 2
2
x
4 x z 2
n(B) = 4
H = Hockey
T = Tennis
B = Basketball
QUANTITATIVE TECHNIQUES
52
Solution
N() = 250
Y
Tail end
P
14
Q
37
P + 12 + 59 = 147 giving P = 76
Q + 59 + 37 = 102 giving Q = 6
i)
ii)
x = 76 + 12 + 14 = 102
y = 12 + 59 + 6 = 77
z = 37 + 14 + 6 = 57
iii)
2.2
CALCULUS
Calculus is a branch of mathematics which explains how one variable changes in relationship to
another variable. It enables us to find the rate of change of one variable with respect to another
variable.
Example
i.
ii.
iii.
iv.
The rate at which business revenue is increasing at a particular stage when volume
of sales is increasing.
The rate at which costs are changing at a particular stage when volume of sales is
given
The evaluation of rate of change can help us to identify when the change in one
variable reaches a maximum or minimum.
Calculus may be used in production management when the production manager
wants to know
a) How much is to be manufactured in order to maximize the profits, revenues
e.t.c
52
Lesson Two
53
Change in y
Change in x
( y + dy ) y = dy
(x + dx ) x dx
Line AB
(y + dy)
B = (x + dx, y +dy)
dy
(x,y) = A
dx
(x + dx)
Rules of Differentiation
1. The constant function rule
If given a function y = k where k is a constant then
Example
Find the derivative of (i) y = 5
QUANTITATIVE TECHNIQUES
dy
dx
= 0
54
Solution
i. y = 5 dy =
dx
Illustration
y=5
slope =
dy 5 0
=
=0
dx
0
dy
Then
dy
= rx r 1
dx
Example
Find
dy for;
dx
(i).
y = x7
(ii).
(iii).
(iv).
y = x2
y = x3
y=x
Solution
i.
y = x7
dy = 7x 71 = 7x6
dx
ii.
y = x2
dy = 2 x(2  1)
54
Lesson Two
55
dx
y = x3
iii.
iv.
y=x
dy = 1x 11 = 1.x0= 1 (since x0=1)
dx
dy = rAxr1
dx
Examples.
Find the derivatives of
i.
y = 3x2 + 5x + 7
ii.
y = 4x2 2xb
Solution
i.
y = 3x2 + 5x + 7
2
dy d ( 3 x ) d ( 5 x ) d ( 7 )
=
+
+
dx
dx
dx
dx
= 6x + 5 + 0
= 6x + 5
ii.
y = 4x2 2xb
QUANTITATIVE TECHNIQUES
56
2
b
dy d ( 4 x ) d ( 2 x )
=
dx
dx
dx
= 8 x 2bx b 1
6. The product rule both factors are functions
The derivative of the product of two functions equals the derivative of the first function
multiplied by the second function PLUS the derivative of the second function multiplied by the
first function.
given that H ( x ) = h ( x ) .g ( x )
Then H ( x ) = h ( x ) .g ( x ) + h ( x ) .g ( x )
Example
Find
dy for
dx
i.
y = x2(x)
ii.
Solution
i.
y = x2(x)
d (x )
d ( x)
dy
= x.
+ x2 .
dx
dx
dx
2
= x.2 x + x 2 .1
= 2x2 + x2
= 3x 2
Note that y = x2(x) = x3. Directly differentiating this we get 3x2.
ii.
2 x. ( 2 x3 + x 2 3) + ( x 2 + 3) . ( 6 x 2 + 2 x )
10 x 4 + 4 x3 + 18 x 2
56
Lesson Two
57
7. Quotient Rule
The derivative of the quotient of two functions equals the derivative of the numerator times the
denominator MINUS the derivative of the denominator times the numerator, all which are
divided by the square of the denominator
h (x )
If given H (x) =
g (x )
h ( x ) . g ( x ) h ( x ) . g ( x )
then H ( x ) =
g ( x )
For example
Find
i.
ii.
dy for
dx
x
3 + x2
x
3x + 7
Solutions
i.
x
3 + x2
d (3 + x2 )
d ( x)
2
.(3 + x )
.x
dy
dx
dx
=
2
dx
(3 + x2 )
(3 + x ) (2 x ).x
(3 + x )
3 + x 2 2x 2
3 x2
=
3 + x2
3 + x2
ii.
y=
x3
(3x + 7)
dy
dx
(3x + 7 )2
Example
A farmer of a large farm of poultry announced that egg production per month follows the
equation;
QUANTITATIVE TECHNIQUES
58
3m3 m2
m2 + 10
Required
Determine the rate of change of w with respect to m (i.e. the rate at which the number of eggs
per month increase or decrease depending on the rate at which the kilos of layers marsh are
increased).
Solution
Let u = 3m3 m2
du = 9m2 2m
dm
Let v = m2 + 10
dv = 2m
dm
2
2
3
2
dw ( m + 10 )( 9m + 2m ) ( 3m m ) 2m
=
2
dm
( m2 + 10 )
(m
+ 10 )
3m 4 + 90m 2 20m
(m
+ 10 )
8. Chain Rule
This rule is generally applied in the determination of the derivatives of composite functions,
which can be defined as a function in which another function can be considered to have taken
the place of the independent variable. The composite function is also referred to as a function of
a function.
It is normally of the form y = (2x2 + 3)3. If we let u = (2x2 + 3), then y = u3.
In order to differentiate such an equation we use the formula
dy dy du
=
dx du dx
Solution
y = (2x2 + 3)3
Let u = 2x2 + 3
du = 2x
dx
58
Lesson Two
59
Let y = u3
dy
du
= 3u2
dy =
dx
dy . du = 3u2 x 4x = 12xu2
du dx
= 12x(2x2 + 3)2
Example
Consider the function
y = (x2 + 16x + 5)2
which can be decomposed into
y = u2
dy . du
du dx
For example
Find
5
dy
given y = ( 3 x 2 + 4 x )
dx
Solution
4
dy
= 5 ( 3x 2 + 4 x ) . ( 6 x + 4 )
dx
QUANTITATIVE TECHNIQUES
60
Solution
y = x2 y + 3x2 + 50
2
2
dy d ( x y ) d ( 3 x ) d ( 50 )
=
+
+
dx
dx
dx
dx
dy
dy
= y ( 2x ) + x2 + 6 x + 0
dx
dx
0 = 2 xy + x 2
dy dy
+ 6x
dx dx
0 = 2 xy + ( x 2 1)
( x 2 1)
dy
+ 6x
dx
dy
= 2 xy + 6 x
dx
dy ( 2 xy + 6 x )
=
dx
( x2 1)
Partial derivatives
These derivatives are used when we want to investigate the effect of one independent variable
on the dependent variable.
For example, the revenues of a farmer may depend on two variables namely; the amount of
fertilizer applied and also the type of the natural soil.
Let J = 30x2y + y2 + 50x + 60y
Where J = annual revenue in 000
x = type of soil
y = amount of fertilizer applied
Required
Determine the rate of change of the J with respect to x and y
Solution
J = 30x2y + y2 + 50x + 60y
Differentiating J with respect to x keeping y constant we have
dJ = 60xy + 50
dx
Differentiating Jwith respect to y keeping x constant we have
dJ = 30x2 + 2y + 60
dy
60
Lesson Two
61
dy
=0
C dx
dy
>0 B
dx
dy
<0
dx
x1
x2
x3
y = f ( x)
dy
> 0 Where X1 X < X2
dx
dy
< 0 Where X2 < X X3.
dx
Thus the first test of the maximum points require that the first derivative of a function equals
zero or
dy
= f ( x) < 0
dx
The second text of a maximum point requires that the second derivative of a function is negative
or
d2y
= f ( x ) < 0
dx 2
QUANTITATIVE TECHNIQUES
62
Example
Determine the critical value for the following functions and find out the critical value that
constitutes a maximum
y = x3 12x2 + 36x + 8
Solution
y = x3 12x2 + 36x + 8
then
dy
= 3x2 24x + 36 +0
dx
The critical values for the function are obtained by equating the first derivative of
iii.
the function to zero, that is:
= 0 or 3x2 24x + 36 = 0
dy
dx
Hence (x2) (x6) = 0
And x = 2 or 6
The critical values for x are x = 2 or 6 and critical values for the function are y = 40 or 8
ii. To ascertain whether these critical values of x will give rise to a maximum, we apply the
second text, that is
d2y
<0
d2x
= 3x2 24x + 36 and
dy
dx
= 6x  24
d2y
d2x
a) When x = 2
Then d2y = 12 <0
d2x
b) When x = 6
Then
d2y = +2 > 0
d2x
Hence a maximum occurs when x = 2, since this value of x satisfies the second condition. X = 6
does not give rise to a local maximum
b) Tests for relative minimum
There are two tests for a relative minimum point
i.
The first derivative, that is
dy = f(x) = 0
dx
The second derivative, that is
ii.
d2y = f(x) > 0
dx2
Example:
For the function
h(x) = 1/3 x3 + x2 35x + 10
Determine the critical values and find out whether these critical values are maxima or minima.
Determine the extreme values of the function
Solution
i.
Critical values
62
Lesson Two
63
The determinant of the maximum and the minimum points requires that we test the
value x = 5 and 7 by the second text
H(x) = 2x + 2
a) When x = 7 h(x) = 12 <0
b) When x = 5 h(x) = 12>0
There x = 7 gives a maximum point and x = 5 gives a minimum point.
iii.
Extreme values of the function
h(x) = 1/3 x3 + x2 35x + 10
when x = 7, h(x) = 189 2/3
when x = 5, h(x) = 98 1/3
The extreme values of the function are h(x) = 189 2/3 which is a relative maximum
and h(x) = 98 1/3 , a relative minimum
c) Points of inflexion
Given the following two graphs, points of inflexion can be determined at points P and Q as
follows:
y=g(x)
P
k1
QUANTITATIVE TECHNIQUES
64
Diagram (i)
y
y =f(x)
Q
k2
at
x < k1
g (x) < 0
g (x) > 0
at
x > k1
and at point Q when
at
x = k1
f(x) = 0
at
x < k1
f(x) > 0
f (x) < 0
at
x > k1
Example
Find the points of inflexion on the curve of the function
y = x3
Solution
The only possible inflexion points will occur where
d2y
=0
dx 2
From the function given
dy
d2y
= 3 x 2 and
= 6x
dx
dx 2
Equating the second derivative to zero, we have
6x = 0 or x = 0
We test whether the point at which x = 0 is an inflexion point as follows
d2y
< 0 which means a downward concavity
dx 2
d2y
When x is slightly larger than 0,
> 0 which means an upward concavity
dx 2
When x is slightly less than 0,
64
Lesson Two
65
Therefore we have a point of inflexion at point x = 0 because the concavity of the curve changes
as we pass from the left to the right of x = 0
Illustration
y=x3
point of
inflexion
0
Example
1. The weekly revenue Sh. R of a small company is given by
R = 14 + 81x
x3
Where x is the number of units produced.
12
Required
i.
Determine the number of units that maximize the revenue
Determine the maximum revenue
ii.
Determine the price per unit that will maximize revenue
iii.
Solution
i.
R = 14 + 18 x
x3
12
1
dR
= 81 .3 x 2
12
dx
d 2R
x
1
= 0 .3.2 x =
2
12
2
dx
QUANTITATIVE TECHNIQUES
66
put
dR
=0
dx
i.e. 81
1 2
x =0
4
which gives x = 18 or x = 18
d 2R
x
=
2
dx
2
thus when x = 18;
d 2R
= 9 which is negative indicating a maximum value
dx 2
2.3
INTEGRATION
It is the reversal of differentiation
An integral can either be indefinite (when it has no numerical value) or definite (have specific
numerical values)
It is represented by the sign f(x)dx.
Rules of integration
i.
adx = ax +c
where a = constant
Example
Find the following
a) 23dx
b) 2dx. (where is a variable independent of x, thus it is treated as a constant).
Solution
i.
23dx = 23x + c
ii.
2dx. = 2 x + c
x dx = n + 1 x
n
n +1
+c
66
Lesson Two
67
Example
Find the following integrals
a) x2dx
b) x5/2 dx
Solution
i)
ii )
x dx = x + c
x dx = x
2
1
3
52
32
2
3
+c
af ( x )dx = a f ( x ) dx
Example
Determine the following integrals
i.
ax3dx
ii.
20x5dx
Solution
a)
ax dx = a x dx
3
= a4 x 4 + c
b)
20 x dx = 20 20 x dx
5
= 103 x 6 + c
iv). Integral of sum of two or more functions
(4x2 + x3) dx
ii.
Solution
i)
( 4x
+ 12 x 3 dx = 4 x 2 dx + 12 x 3dx
= 43 x3 14 x 2 + c
ii )
( x
3
4
+ 73 x
7
12
+ x5 dx = x 4 dx + 73 x 2 dx + x 5 dx
1
= 74 x 4 + 76 x 2 + 16 x 6 + c
QUANTITATIVE TECHNIQUES
68
5. Integral of a difference
The integral
f ( x ) dx = F ( x ) + c a
b
= F ( b ) + c F ( a ) + c
= F (b ) F ( a )
Example
Evaluate
i.
(3x 2 + 3)dx
(x + 15)dx
ii.
Solution
a.
= (27 + 9 + c) (1 + 3 + c)
= 32
b.
= (12 + 75 + c) (0 + 0 + c)
= 87
The numerical value of the definite integral
the function f(x), the horizontal axis, and x=a and x=b see figure below
68
Lesson Two
69
y = f(x)
f(x)
Example
1. You are given the following marginal revenue function
MR = a + a1q
Find the corresponding total revenue function
Solution
( a + a q )dq
1
= aq a1q + c
1
2
Example 2
A firm has the following marginal cost function
MC = a a1q + a2 q 2
Find its total cost function.
Solution
The total cost C is given by
C
= MC.dq
= (a + a1q + a2q2).dq
= aq +
a1
2
q2 +
a2
3
q3 + c
QUANTITATIVE TECHNIQUES
70
Note: Exams focus: Note the difference between marginal function and total function. You
differentiate total function to attain marginal function, this is common in exams,
total profit = total revenue total cost.
Example 3.
Your company manufacturers large scale units. It has been shown that the marginal (or variable)
cost, which is the gradient of the total cost curve, is (92 2x) Shs. thousands, where x is the
number of units of output per annum. The fixed costs are Shs. 800,000 per annum. It has also
been shown that the marginal revenue which is the gradient of the total revenue is (112 2x)
Shs. thousands.
Required
i.
ii.
iii.
iv.
Solution
i.
Since the total costs are the sum of variable costs and fixed costs, the constant term in the
integral represents the fixed costs, thus if Tc are the total costs then,
Tc = 92x x2 + 800
or Tc = 800 + 92x  x2
ii.
As in the above case, the first step in determining the total revenue is to form the
indefinite integral of the marginal revenue
Thus (112  2x) dx = 112x x2 + c
Where c is a constant
The total revenue is zero if no items are sold, thus the constant is zero and if Tr represents the
total revenue, then
Tr = 112x x2
iii.
iv.
a) Tr = 112x x2
d (Tr )
= 112 x 2 x
dx
70
Lesson Two
71
d 2 (Tr )
= 2
dx 2
at the maximum point
d 2 (Tr )
=0
dx 2
that is 112 2 x = 0
d 2 (Tr )
= 2 this confirms the maximum
dx 2
d (Tc )
= 92 2 x
dx
d 2 (Tc )
= 2 x
dx 2
At this maximum point
d (Tc )
=0
dx
92 2x = 0
92 = 2x
x = 46 units per annum
since
d 2 (Tc )
= 2 x this confirms the maximum
dx 2
the maximum costs are Shs. (800 + 92 x 46  46 x 46) x 1000
= Shs. 2,916,000
QUANTITATIVE TECHNIQUES
72
REINFORCING QUESTIONS
QUESTION ONE
Find the derivative of
a)
y = 6x x
1
x2
b)
y=
c)
y = 1 + 2x
d)
y=
1
x
QUESTION TWO
A cost function is
Ksh.(c) = Q2 30Q + 200
Where Q = quantity of units produced
Find the point of minimum cost.
QUESTION THREE
250 members of a certain society have voted to elect a new chairman. Each member may vote
for either one or two candidates. The candidate elected is the one who polls most votes.
Three candidates x, y, z stood for election and when the votes were counted, it was found that,
59 voted for y only, 37 voted for z only
12 voted for x and y, 14 voted for x and z
147 voted for either x or y or both x and y but not for z
102 voted for y or z or both but not for x.
Required:
i)
How many voters did not vote?
How many voters voted for x only?
ii)
Who won the election?
iii)
QUESTION FOUR
The weekly revenue Ksh.R of a small company is given by:
R = 14 + 81x x3 where x is the number of units produced
12
Required:
a) Determine the number of units that maximize the revenue.
b) Determine the maximum revenue.
c) Determine the price per unit that will maximize the revenue
72
Lesson Two
73
QUESTION FIVE
A furniture firm has two operating departments; Production and sales. The firmss operating
costs are split between these two departments with the resultant period of fixed costs of
Shs.20,000 and Shs.6,000 respectively. The production department has a basic variable cost per
unit of Shs.6 plus additional variable cost per unit of Shs.0.0002 which relates to all the
manufactured items during the period. The sales department has a variable cost per unit of
Shs.2. The sales department receives the finished goods from the production department and
pay the basic variable cost per unit plus 80% of the same.
NB:
Required:
a) Calculate the quantity that maximizes the profits of the production department.
b) Calculate the selling price that maximizes the profits of the sales department.
c) Determine the firms profit as a result of adopting the quantity and selling prices
in i and ii.
d) Determine the quantity and selling price that maximize the ships profit. What is the
amount of this profit?
QUESTION SIX
a) Describe how quadratic equations can be used in decision making.
b) The demand for a commodity is given by p = 400 q. The average total cost of producing
the commodity is given by
ATC =
1000
+ 100 5q + q 2
q
Required
i) What does
1000
q
ii) Determine the output that leads to maximum profit and the profit at the
level of output.
(1 mark)
(9 marks)
c) Alpha industries sells two products, X and Y, in related markets, with demand functions
given by:
Px 13 + 2X + Y = 0
Py 13 + X + 2Y = 0
The total cost, in shillings, is given by:
TC = X + Y
Required:
Determine the price and the output for each good which will maximize profits.
(7 marks)
(Total: 20 marks)
QUANTITATIVE TECHNIQUES
74
QUESTION SEVEN
a) The following table shows the Fixed Cost (F) and the variable cost (V) of producing 1 unit
of X and 1 unit of Y:
Cost F
Cost V
Product
Y
8
12
X
5
4
(Shs 000)
When x units of X and y units of Y are produced, the total fixed cost is Shs.640,000 and total
variable cost is Shs.820,000. Express this information as a matrix equation and hence find the
quantities of x and y produced using matrix algebra.
(10 marks)
The marginal productivity of an industrial operation (the production of electric furnaces) is given
by:
f ( x) =
60
x2
+ 10
Where x is capitalization in millions of shillings. Given that, when the capitalization is Shs.
Million they can produce 62 of the furnaces per week.
Required:
a) How many furnaces they will be able to produce if their capitalization increased to Shs 10
million.
(10 marks)
b) What does the term marginal of productivity mean?
(Total: 20 marks)
Compare your solutions with those given in lesson 9
74
Lesson Two
75
Instructions:
Answer any THREE questions from SECTION I and TWO questions from SECTION II.
Marks allocated to each question are shown at the end of the question. Show all your workings
SECTION I
QUESTION ONE
a) Explain the importance of set theory in business.
(4 marks)
(8 marks)
b) By use of matrix algebra, develop the Leontief inverse matrix.
c) Digital Ltd. Manufactures and sells floppy disks at Nairobi Industrial Area.
The average total cost (ATC) and Average Revenue (AR) (in thousands of shillings)
of producing x floppy disks are given by the following functions:
ATC =
1 2 5
500
x x + 50 +
2
2
x
And
AR = 800 2x2
Where: x is the number of floppy disks produced
Required:
i) The profit function
ii) The number of floppy disks required to maximize profit
iii) The maximum profit
(3 marks)
(3 marks)
(2 marks)
(Total: 20 marks)
QUESTION TWO
Define the following terms as used in Markov analysis:
Markov process
Equilibrium or steady state
Absorbing state
Closed state
(2 marks)
(2 marks)
(2 marks)
(2 marks)
The manufacturer of Tamu Soft drinks has been facing stiff competition on its main brand
Tamucola soda. The management is considering an extensive advertising and rebranding
campaign for TamuCola soda. If the current branding remains, the transition matrix of
consumer between TamuCola and other brands will be as follows:
From
TamuCola
Others
To
TamuCola
Others
0.85
0.15
0.25
0.75
The advertising and rebranding campaign is expected to cost Sh.20 million each year.
QUANTITATIVE TECHNIQUES
76
There are 40 million consumers of soft drinks in the market and for each consumer the average
profitability is Sh.5 annually.
Required:
The equilibrium state proportion of consumers using TamuCola before the advertising
campaign.
(4 marks)
The equilibrium state proportion of consumers using TamuCola after the advertising
ii)
campaign.
(4 marks)
iii)
The expected annual profit increase or decrease after the advertising campaign. Would you
recommend the advertising campaign?
(4 marks)
(Total: 20 marks)
i)
QUESTION THREE
a) A market researcher investigating consumers preference for three brands of beverages
namely: coffee, tea and cocoa, in Ongata town gathered the following information:
From a sample of 800 consumers, 230 took coffee, 245 took tea and 325 took cocoa, 30
took all the three beverages, 70 took coffee and cocoa, 110 took coffee only, 185 took cocoa
only.
Required:
i)
Present the above information in a Venn Diagram.
ii)
The number of customers who took tea only.
The number of customers who took coffee and tea only.
iii)
The number of customers who took tea and cocoa only.
iv)
The number of customers who took none of the beverages.
v)
(4 marks)
(2 marks)
(2 marks)
(2 marks)
(2 marks)
b)
i)
ii)
Monday
132
Tuesday
110
Wednesday
128
Thursday
105
Required:
Test the hypothesis that the number of books borrowed does not depend
on the day of the week at the 1% significance level.
Friday
150
Total
625
(6 marks)
(Total: 20 marks)
QUESTION FOUR
a) The general multiple linear regression equation is expressed as:
n
Yi = o + i X i + i
i =1
Where
Yi is the response variable
Xi are the explanatory variables
o is the constant
76
Lesson Two
77
1 are the parameters, and
i is the error term
Required:
Express the above multiple linear regression equation in a matrix form. Clearly indicate the
size of each vector column and the matrix.
(10 marks)
b) Mambo Company Ltd. Manufactures five products V, W, X Y and Z. The company has
divided its sales team into three regions; A, B and C. The Matrix Q below represent the
expected sales quantities in thousands for each product in each sales region for the coming
year.
Q=
Region
B
C
20
35
30
10
42.5
5
15
35
17.5
22.5
A
50
40
25
10
25
V
W
X
Y
Z
products
T=
Components
2
1
1
2
0
2
1
1
0
3
0
1
3
2
1
1
3
3
4
0
2
1
1
1
V
W
X
Y
Z
products
The manufacture of each component requires the use of certain resources. The matrix M
below indicates the quantities of the three standard parts and the number of production
labour hours and assembly labour hours used to produce one unit of each component.
M=
Part 1
Part 2
Part 3
2
0
1
2
1
3
2
5
0
2
1
4
Productions
Labour hours
2
4
1
1
Assembly
hours
1
3
6
2
1
2
3 components
4
The costs of the resources in matrix M are Part 1 Sh.20, Part 2 Sh.10, Part 3 Sh.30 while
each labour hour in the production and assembly departments cost Sh.15 and Sh.5
respectively.
Required:
i) The total expected demand for each product.
ii) The quantities of each component needed in the production process.
iii) The quantities of each resource required in the production.
QUANTITATIVE TECHNIQUES
(2 marks)
(3 marks)
(3 marks)
78
(2 marks)
(Total: 20 marks)
QUESTION FIVE
The Young Childrens Fund (YCF) is planning its annual fundraising campaign for its
December school holiday camp for disadvantaged children. Campaign expenditures will be
incurred at a rate of Sh.10,000 per day. From past experience, it is known that contributions will
be high during the early stages of the campaign and will tend to fall off as the campaign
continues. The function describing the rate at which contributions are received is:
C (t) = 100t2 + 200,000
Where t = days of the campaign
C (t)
= rate at which contributions are received in shillings per day
The fund wants to maximize the net precedes from the campaign.
Required:
i) The number of days the campaign should be conducted to maximize the
net proceeds.
ii) The total campaign expenditure
iii) The total contributions expected to be collected
iv) Net proceeds from the campaign
(3 marks)
(2 marks)
(5 marks)
(1 mark)
The national office of a car rental company is planning its maintenance for the next year. The
companys management are interested in determining the companys needs for certain repair
parts. The company rents saloon cars, station wagons and double cab pickups. The matrix N
shown below indicates the number of each type of vehicle available for renting in the four
regions of the country.
Saloons
N=
160
150
100
120
Station
wagons
400
300
100
400
Double
cabs
500
200
150
300
Coast
Central
Western
Highlands
Four repair parts of particular interest, because of their cost and frequency of replacement, are
fan belts, spark plugs, batteries and tyres. On the basis of studies of maintenance records in
different parts of the country, the management have determined the average number of repair
parts needed per car during a year.
These are summarized in matrix R below:
Saloons
N=
17
12
9
4
Station
wagons
16
8
7
7
Double
cabs
15
5
5
6
Required:
i) The total demand for each type of car.
STRATHMORE UNIVERSITY STUDY PACK
Fan belts
Plugs
Batteries
Tyres
(3 marks)
78
Lesson Two
79
ii) The total number of each repair part required for the fleet.
(3 marks)
iii) If matrix C below contains the cost per unit in shillings for fan belts, spark plugs, batteries
and tyres, calculate the total cost s for all repair parts. C = (1250,800,6500,8000). (3 marks)
(Total: 20 marks)
SECTION II
QUESTION SIX
a) Define the following terms as used in inputoutput analysis:
i) Transactions table.
ii) Primary inputs.
iii) Technical coefficients.
(2 marks)
(2 marks)
(2 marks)
(4 marks)
c) A small economy has three main industries which are steel, motor vehicles and construction.
The industries are interdependent. Each unit of steel output requires 0.2 units from steel,
0.3 units from motor vehicles and 0.4 units from construction. A unit of motor vehicles
output requires 0.2 units from steel, 0.4 units from motor vehicles and 0.2 units from
construction. A unit of construction output requires 0.3 units from steel, 0.4 units from
motor vehicles and 0.1 units from construction. The final demand is 20 million units from
steel. 50 million units from motor vehicles and 30 million units from construction.
Required:
i) The technical coefficient matrix.
ii) Total output of each industry, given that the Lentiefs inverse matrix is
1__
0.192
0.46
0.43
0.30
0.24
0.60
0.24
(2 marks)
0.26
0.41
0.42
(3 marks)
iii) If the final demand from steel drops by 2 million units, and that from motor vehicles
increases by 10 million units, but there is no change in the final demand from construction,
what would be the change in the total output of constructions?
(5 marks)
(Total: 20 marks)
QUESTION SEVEN
a) Explain the purpose of Venn diagram
(3 marks)
b) A market study taken at a local sporting goods store, Maua Wahome Stores showed that of
the 200 people interviewed, 60 owned tents, 100 owned sleeping bags, 80 owned camping
stoves, and 40 owned both tents and camping stoves and 40 owned both sleeping bags and
camping stoves.
Required:
If 20 people interviewed owned a tent, a sleeping bag and a camping stove, determent how
many people owned only a camping stove. In this case, is it possible for 30 people to own
both a tent and a sleeping bag, but not a campaign stoves?
(6 marks)
QUANTITATIVE TECHNIQUES
80
Under One Thousand Shillings Corner Store is planning to open a new store on the
corner of Main and Crescent Streets. It has asked the Tomorrows Marketing company to
do a market study of randomly selected families within a five kilometers radius of the
store,.the questions it wishes Tomorrows Marketing Company to ask each homeowner
are:
i)
Family income
Family size
ii)
iii)
Distance from home to the store site
Whether or not the family owns a car or uses public transport
iv)
Required:
For each of the four questions, develop a random variable of interest to Under One Thousand
Shillings Corner Store. Denote which of these are discrete and which are continuous random
variables.
(11 marks)
(Total: 20 marks)
QUESTION EIGHT
Two CPA students were discussing the relationship between average cost and total cost. One
student said that since average cost is obtained by dividing the cost function by the number of
units Q, it follows that the derivative of the average cost is the same as marginal cost, since the
derivative of Q is 1.
Required:
Comment on this analysis.
(4 marks)
Gatheru and Karibu Certified Public Accountants have recently started to give business advice
to their clients. Acting as consultants, they have estimated the demand curve of a clients firm to
be;
AR = 200 Q
Where AR is average revenue in millions of shillings and Q is the output in units.
Investigations of the clients firms cost profile shows that marginal cost (MC) is given by:
MC = Q2 28Q + 211 (in millions of shillings)
Further investigations have shown that the firms cost when not producing output is Sh.10
million.
Required:
i) The equation of total cost.
ii) The equation of total revenue
iii) An expression for profit
iv) The level of output that maximizes profit.
v) The equation of marginal revenue.
(5 marks)
(2 marks)
(2 marks)
(5 marks)
(2 marks)
(Total: 20 marks)
80
Lesson Three
81
LESSON THREE
Descriptive Statistics and Index Numbers
Contents

i.
ii.
iii.
iv.
v.
vi.
Application of statistics
Measures of centra tendency
i.
Arithmetic mean
Median
ii.
Mode
iii.
Geometric mean
iv.
Harmonic mean
v.
Measures of dispersion
Simple range
Quartile deviation
Mean deviation
Standard deviation
Coefficient of mean deviation
Coefficient of quartile deviation
Skew ness and Kurtosis
Indices
QUANTITATIVE TECHNIQUES
82
3.1
Descriptive Statistics
a) Statistics
Definition: Statistics viewed as a subject is a process of collecting, tabulating and analyzing
numerical data upon which significant conclusions are drawn.
Statistics may also be defined as numerical data, which has been, collected from a given source
and for a particular purpose e.g. population statistics from the ministry of planning, Agricultural
statistics from the ministry of Agriculture
Statistics may also refer to the values, which have been obtained from statistical calculations e.g.
the mean, mode, range e.t.c.
b) Application of statistics
1. Quality Control
Usually there is a quality control departments in every industry which is charged with the
responsibility of ensuring that the products made do meet the customers standards e.g. the
Kenya bureau of standards (KeBS) is one of the national institutions which on behalf of the
government inspects the various products to ensure that they do meet the customers
specification.
The KeBS together with other control department have developed quality control charts. They
use these charts to check whether the products are up to standards or not.
2. Statistics may be used in making or ordering economic order quantities (EOQ). It is important
for a business manager to realize that it is an economic cost if one orders a large quantity of
items which have to be stored for too long before they are sold. This is because the large stock
holds a lot of capital which could otherwise be used in buying other items for sale.
It is also important to realize that the longer the items are stored in the stores the more will be
the storage costs
On the other hand if one orders a few items for sale he will incur relatively low storage expenses
but may not be able to satisfy all the clients. These may lose their customers if the goods are out
of stock. Therefore it is advisable to work out the EOQ which will be sufficient for the clients in
a certain period before delivery.
The EOQ will also ensure that minimal costs are incurred in terms of storage
3. Forecasting
Statistics is very important for business managers when predicting the future of a business for
example if a given business situation involves a dependent and independent variables one can
develop an equation which can be used to predict the output under certain given conditions.
4. Human resource management
Statistics may be used in efficient use of human resources for example we may give
questionnaires to workers to find out where the management is weak
By compiling the statistics of those who were signing it may be found useful to analyze such data
to establish the causes of resignation thus whether it is due to frustration or by choice.
3.2
Measures of Central Tendency
These are statistical values which tend to occur at the centre of any well ordered set of data.
Whenever these measures occur they do not indicate the centre of that data. These measures are
as follows:
The arithmetic mean
i.
The mode
ii.
iii.
The median
iv.
The geometric mean
v.
The harmonic mean
STRATHMORE UNIVERSITY STUDY PACK
82
Lesson Three
1.
83
This is commonly known as average or mean it is obtained by first of all summing up the
values given and by dividing the total value by the total no. of observations.
X
i.e. mean
=
n
Where x = no. of values
= summation
n = no of observations
Example
The mean of 60, 80, 90, 120
60 + 80 + 90 +120
4
350
4
= 87.5
The arithmetic mean is very useful because it represents the values of most observations in the
population.
The mean therefore describes the population quite well in terms of the magnitudes attained by
most of the members of the population
Class MP(x)
XA=d
fd
1600 1799
25
1699.5
600
15000
1800 1999
32
1899.5
400
12800
20002199
46
2099.5
200
9200
2200 2399
58
2299.5(A)
2400 2599
40
2499.5
200
8000
2600 2799
30
2699.5
400
12000
2800 2999
2899.5
600
4200
A = Assumed mean, this is an arbitrary number selected from the data, MP = mid point
Arithmetic mean
assumed mean +
2299.5 +53.78
fd
f
QUANTITATIVE TECHNIQUES
= 2299.5 +
12800
238
84
= 2245.72 hours
Actual mean =
A(assumed mean) +
32 +
fu
f
102
5
193
= 29.36 years
NB. The following statistical terms are commonly used in statistical calculations. They must
therefore be clearly understood.
i) Class limits
These are numerical values which limits uq extended of a given class i.e. all the observations in a
given class are expected to fall within the interval which is bounded by the class limits e.g. 15 &
19 are class limits as in the table of the example above.
ii) Class boundaries
These are statistical boundaries, which separate one class from the other. They are usually
determined by adding the lower class limit to the next upper class limit and dividing by 2 e.g. in
19 + 20
.
the above table the class boundary between 19 and 20 is 19.5 which is =
2
84
Lesson Three
2.
85
The mode
This is one of the measures of central tendency. The mode is defined as a value within a
frequency distribution which has the highest frequency. Sometimes a single value may not
exist as such in which case we may refer to the class with the highest frequency. Such a class
is known as a modal class
The mode is a very important statistical value in business activities quite often
business firms tend to stock specific items which are heavily on demand e.g. footwear,
clothes, construction materials (beams, wires, iron sheets e.t.c.
The mode can easily be determined form ungrouped data by arranging the figures
given and determining the one with the highest frequency.
When determining the values of the mode from the grouped data we may use the
following methods;i. The graphical method which involves use of the histogram
ii. The computation method which involves use of formula
Example
In a social survey in which the main purpose was to establish the intelligence quotient (IQ) of
resident in a given area, the following results were obtained as tabulated below:
IQ
No. of residents
1 20
21 40
41 60
61 80
81 100
101 120
121 140
6
18
32 fo
48 f1
27 f2
13
2
20
40
60
80
100
120
140
Required
Calculate the modal value of the IQs tabulated above using
i.
ii.
Formular
QUANTITATIVE TECHNIQUES
CF
6
24
56
104
131
144
146
86
Graphical method
50
40
30
20
10
20
40
60
80
100
120
140
Computation method
f1 f 0
Mode = L +
c
2f1 f 0 f 2
Where L = Lower class boundary of the class containing the mode
f0 = Frequency of the class below the modal class
f1 = Frequency of the class containing the mode
f2 = frequency of the class above the modal class
c = Class interval
( 48  32 ) 20
2 ( 48 )  32  27
= 69.14
3.

The median
This is a statistical value which is normally located at the center of a given set of data which
has been organized in the order of magnitude or size e.g. consider the set 14, 17, 9, 8, 20, 32,
18, 14.5, 13. When the data is ordered it will be 8, 9, 13, 14, 14.5, 17, 18, 20, 32
The middle number/median is 14.5
The importance of the median lies in the fact that it divides the data into 2 equal halves. The
no. of observations below and above the median are equal.
86
Lesson Three

87
In order to determine the value of the median from grouped data. When data is grouped the
median may be determined by using the following methods
i.
Graphical method using the cumulative frequency curve (ogive)
The formula
ii.
Example
Referring to the table in 105, determine the median using the methods above
No of resid
6
18
32
48
27
13
2
146
UCB
20
40
60
80
100
120
140
Cumulative Frequency
6
24
56
104
131
144
146
xv
160
140
120
100
80
60
40
20
20
40
60
80
100
120
n+1 146+1
=
2
2
ii Computation
The formula used is
QUANTITATIVE TECHNIQUES
140
160
88
n +1 Cfbm
Median = L + 2
c
cfmc
= 60 +
73.5  56
48
n +1
2
 Cfbm
cfmc
20
= 60 + 7.29
= 67.29
4.
Geometric mean
This is a measure of central tendency normally used to measure industrial growth rates.
It is defined as the nth root of the product of n observations or values
i.e. GM =
x1 x 2 ... x n
Example
In 1995 five firms registered the following economic growth rates; 26%. 32% 41% 18% and
36%.
Required
Calculate the GM for the above values
GM =
26 32 41 18 36
1.4150
1.5052
1.6128
1.2533
1.5563
7.3446
= 1/5 x 7.3446 = 1.46892
So GM = Antilog of 1.46892
= 29.43
88
Lesson Three
5.
89
Harmonic mean
This is a measure of central tendency which is used to determine the average growth rates for
natural economies. It is defined as the reciprocal of the average of the reciprocals of all the
values given by HM.
HM =
x1
x2
+ ...
x3
Example
The economic growth rates of five countries were given as 20%, 15%, 25%, 18% and 5%
Calculate the harmonic mean
1
The HM =
1 (1 +1 +1 +1 +1
5 20
15
25
10
5
1
0.2(0.05 + 0.07 + 0.04 + 0.10 + 0.2)
1
0.092
10.86%
6.

Weighted mean
This is the mean which uses arbitrarily given weights
It is a useful measure especially where assessment is being done yet the conditions prevailing
are not the same. This is particularly true when assessment of students is being done given
that the subjects being taken have different levels of difficulties.
Examples
The following table shows that marks scored by a student doing section 3 and 4 of CPA
Subject
STAD
BF
FA2
LAW
QT
FA3
Scores (x)
65
63
62
80
69
55
Weight (w)
50
40
45
35
55
60
w = 285
Weighted mean
QUANTITATIVE TECHNIQUES
wx
3250
2520
2340
2800
3795
3300
wx = 18005
90
Ewx
Ew
=
18005
285
= 63.17%
Merits and demerits of the measures of central tendency
i.
ii.
iii.
iv.
i.
ii.
If the data is not drawn from a normal population, then the a.m. may give a wrong
impression about the population
In some situations, the a.m. may give unrealistic values especially when dealing with
discrete variables e.g. when working out the average no. of children in a no. of
families. It may be found that the average is 4.4 which is unrealistic in human beings
The mode
Merits
i.
ii.
iii.
iv.
It can be determined from incomplete data provided the observations with the
highest frequency are already known
The mode has several applications in business
The mode can be easily defined
It can be determined easily from a graph
Demerits
i.
ii.
iii.
If the data is quite large and ungrouped, determination of the mode can be quite
cumbersome
Use of the formula to calculate the mode is unfamiliar to most business people
The mode may sometimes be non existent or there may be two modes for a given
set of data. In such a case therefore a single mode may not exist
The median
Merits
i.
ii.
90
Lesson Three
iii.
iv.
v.
91
Demerits
i.
ii.
iii.
In some situations where the no. of observations is even, the value of the median
obtained is usually imaginary
The computation of the median using the formulas is not well understood by most
businessmen
In business environment the median has got very few applications
i.
ii.
Demerits
i.
ii.
3.3

Measures of Dispersion
The measures of dispersion are very useful in statistical work because they indicate
whether the rest of the data are scattered around the mean or away from the mean.
If the data is approximately dispersed around the mean then the measure of dispersion
obtained will be small therefore indicating that the mean is a good representative of the
sample data. But on the other hand, if the figures are not closely located to the mean
then the measures of dispersion obtained will be relatively big indicating that the mean
does not represent the data sufficiently
The commonly used measures of dispersion are
a) The range
b) The absolute mean deviation
c) The standard deviation
d) The semi interquartile and quartile deviation
e) The 10th and 90th percentile range
f) Variance
a) The range

The range is defined as the difference between the highest and the smallest values in a
frequency distribution. This measure is not very efficient because it utilizes only 2 values
in a given frequency distribution. However the smaller the value of the range, the less
dispersed the observations are from the arithmetic mean and vice versa
The range is not commonly used in business management because 2 sets of data may
yield the same range but end up having different interpretations regarding the degree of
dispersion
QUANTITATIVE TECHNIQUES
92
This is a useful measure of dispersion because it makes use of all the values given see
the following examples
Example 1
In a given exam the scores for 10 students were as follows
Student
Mark (x)
xx
A
B
C
D
E
F
G
H
I
J
Total
60
45
75
70
65
40
69
64
50
80
618
1.8
16.8
13.2
8.2
3.2
21.8
7.2
2.2
11.8
18.2
104.4
Required
Determine the absolute mean deviation
Mean, x =
618
10
= 61.8
XX
Therefore
AMD =
104.4
10
= 10.44
Example 2
The following data was obtained from a given financial institution. The data refers to the loans
given out in 1996 to several firms
Firms (f)
3
4
1
5
6
f = 19
Amount of loan
per firm (x)
20000
60000
15000
12000
14000
fx
xx
x x .f
60000
240000
15000
60000
84000
fx = 459000
4157.9
35842.1
9157.9
12157.9
10157.9
12473.70
143368.40
9157.9
60789.50
60947.40
286736.90
Required
Calculate the mean deviation for the amount of items given
92
Lesson Three
X =
93
fx 459, 000
=
= 24157.9
19
f
AMD =
XX
f
286736.90
19
This is one of the most accurate measures of dispersion. It has the following
advantages;
i. It utilizes all the values given
ii. It makes use of both negative and positive values if they occur
The standard deviation reflects an accurate impression of how much the sample
iii.
data varies from the mean. This is because its suitability can also be tested using
other statistical methods
Example
A sample comprises of the following observations; 14, 18, 17, 16, 25, 31
Determine the standard deviation of this sample
Observation.
Total
X=
121
6
( x x)
( x x)
14
18
17
16
25
31
121
6.1
2.1
3.1
4.1
4.9
10.9
37.21
4.41
9.61
16.81
24.01
118.81
210.56
= 20.1
standard deviation, =
xx
n
210.56
6
= 5.93
QUANTITATIVE TECHNIQUES
94
Total
2
x x
=
n
n
X2
196
324
289
256
625
961
2651
2651 121
6
6
= 5.93
Example 2
The following table shows the parttime rate per hour of a given no. of laborers in the month of
June 1997.
No. of labourers
(f)
7
6
2
1
8
11
35
fx
fx2
1610
2400
700
450
1600
1650
8410
370300
960000
245000
202500
320000
247500
2345300
Calculate the standard deviation from the above table showing how the hourly payment were
varying from the respective mean
standard deviation, =
fx
f
fx

f
2345300 8410

35
35
67008.6 577372
9271.4
= 96.29
94
Lesson Three
95
In business statistical work we usually encounter a set of grouped data. In order to determine the
standard deviation from such data, we use any of the three following methods
i. The long method
ii. The shorter method
iii. The coded method
The above methods are used in the following examples
Example 3.1
The quality controller in a given firm had an accurate record of all the iron bars produced in may
1997. The following data shows those records
i.
Bar lengths
(cm)
201 250
251 300
301 350
351 400
401 450
451 500
501  550
No. of bars(f)
25
36
49
80
51
42
30
313
fx
fx2
5637.5
9918
15949.5
30040
21700.5
19971
15765
118981.50
1271256.25
2732409
5191562.25
11280020
9233562.75
9496210.50
8284507.50
47489526
standard deviation,
fx
f
=
fx

f
47489526 118981.50

313
313
= 84.99 cm
ii.
No. of
bars(f)
25
36
49
80
51
42
30
313
xA = d
fd
Fd2
225.5
275.5
325.5
375.5 (A)
425.5
475.5
525.5
150
100
50
0
50
100
150
3750
3600
2450
0
2550
4200
4500
1450
562500
360000
122500
0
127500
420000
675000
2267500
QUANTITATIVE TECHNIQUES
96
Standard deviation,
2267500 1450
313
313
7244.40 21.50
7222.90
fd
fd
f
= 84.99 cm
iii.
Bar lengths
(cm)
201 250
251 300
301 350
351 400
401 450
451 500
501  550
(f)
xA = d
d/c = u
fu
fu2
25
36
49
80
51
42
30
313
225.5
275.5
325.5
375.5 (A)
425.5
475.5
525.5
150
100
50
0
50
100
150
3
2
1
0
1
2
3
75
72
49
0
51
84
90
29
225
144
49
0
51
168
270
907
C = 50 where c is an arbitrary number, try picking a different figure say 45 the answer
should be the same.
Standard deviation using the coded method. This is the most preferable method among the three
methods
= c
fu
f
fu

f
907 29
= 50
313 313
= 50 1.6997
= 84.99
Variance
Square of the standard deviation is called variance.
96
Lesson Three
97
SIR =
Q3  Q1
2
Example 1
The weights of 15 parcels recorded at the GPO were as follows:
16.2, 17, 20, 25(Q1) 29, 32.2, 35.8, 36.8(Q2) 40, 41, 42, 44(Q3) 49, 52, 55 (in kgs)
Required
Determine the semi interquartile range for the above data
SIR =
Q3 Q1
2
44  25
2
19
2
= 8.5
No of retirees (f)
UCB
cf
50
69
70
90
52
40
11
29.5
39.5
49.5
59.5
69.5
79.5
89.5
50
119
189
279
331
371
382
Required
i. Determine the semi interquartile range for the above data
ii. Determine the minimum value for the top ten per cent.(10%)
iii. Determine the maximum value for the lower 40% of the retirees
QUANTITATIVE TECHNIQUES
98
Solution
The lower quartile (Q1) lies on position
N +1
382 + 1
4
= 95.75
the value of Q1
= 29.5 +
(95.75  50)
69
x 10
= 29.5 + 6.63
= 36.13
The upper quartile (Q3) lies on position
N + 1
= 3
4
382 + 1
=3
= 287.25
the value of Q3
= 59.5 +
( 287.25  279 )
52
10
= 61.08
The semi interquartile range =
Q3  Q1
2
61.08  36.13
=
2
= 12.475
= 12,475
ii. The top 10% is equivalent to the lower 90% of the retirees
The position corresponding to the lower 90%
90
(n + 1) = 0.9 (382 + 1)
100
= 0.9 x 383
= 344.7
98
Lesson Three
99
the benefits (value) corresponding to the minimum value for top 10%
= 69.5 +
( 344.7  331)
40
x 10
= 72.925
= 72925
iii. The lower 40% corresponds to position
=
40
100
(382 + 1)
= 153.20
(153.2  119 )
70
x 10
= 39.5 + 4.88
= 44.38
= 44380
Example
Using the above data for retirees calculate the 10th  90th percentile. The tenth percentile 10th
percentile lies on position
10
(382 + 1) = 0.1 x 383
100
= 38.3
= 19.5 +
(38.3 x 10)
50
= 19.5 + 7.66
= 27.16
The 90th percentile lies on position
QUANTITATIVE TECHNIQUES
100
90
(382 + 1) = 0.9 x 383
100
= 344.7
( 344.7  331) x 10
40
= 69.5 + 3.425
= 72.925
the required value of the 10th 90th percentile = 72.925 27.16 = 45.765
Example
The average distance covered by vehicles in a motor rally may be given as 2000 km with a
standard deviation of 5 km.
In another competition set of vehicles covered 3000 km with a standard deviation of 10 kms
NB: The 2 standard deviations given above are referred to as absolute measures of dispersion.
These are actual deviations of the measurements from their respective mean
However, these are not very useful when comparing dispersions among samples.
Therefore the following measures of dispersion are usually employed in order to assess the
degree of dispersion.
i.
Coefficient of mean deviation
=
Mean deviation
mean
Coefficient of quartile deviation
ii.
1 (Q  Q )
3
1
= 2
Q2
iii.
=
Standard deviation
mean
100
Lesson Three
iv.
101
Coefficient of variation
=
standard deviation
mean
100
C.O.V
=5
x 100
2000
= 0.25%
Second group of cars: mean = 3000 kms
Standard deviation = 10kms
C.O.V
= 10 x 100
3000
= 0.33%
Conclusion
Since the coefficient of variation is greater in the 2nd group, than in the first group we may
conclude that the distances covered in the 1st group are much closer to the mean that in the 2nd
group.
Example 2
In a given farm located in the UK the average salary of the employees is 3500 with a standard
deviation of 150
The same firm has a local branch in Kenya in which the average salaries are Kshs 8500 with a
standard deviation of Kshs.800
Determine the coefficient of variation in the 2 firms and briefly comment on the degree of
dispersion of the salaries in the 2 firms.
First firm in the UK
C.O.V = 150 x 100
3500
= 4.29%
Second firm in Kenya
C.O.V = 800 x 100
8500
= 9.4%
QUANTITATIVE TECHNIQUES
102
Conclusively, since 4.29% < 9.4% then the salaries offered by the firm in UK are much closer to
the mean given them in the case to the local branch in Kenya
combined mean =
n1 x1 + n2 x2
n1 + n2
n1s12 + n1 ( m x1 ) + n2 s22 + n2 ( m x2 )
2
n1 + n2
Example
A sample of 40 electric batteries gives a mean life span of 600 hrs with a standard deviation of
20 hours.
Another sample of 50 electric batteries gives a mean lifespan of 520 hours with a standard
deviation of 30 hours.
If these two samples were combined and used in a given project simultaneously, determine the
combined new mean for the larger sample and hence determine the combined or pulled standard
deviation.
Size
40(n1)
50 (n1)
x
600 hrs(x1)
520 hrs (x2)
=
Combined mean
s
20hrs (s1)
30 hrs (s2)
40 ( 600 ) + 50 ( 520 )
40 + 50
50, 000
90
= 555.56
102
Lesson Three
103
SKEWNESS
 This is a concept which is commonly used in statistical decision making. It refers to the
degree in which a given frequency curve is deviating away from the normal distribution
 There are 2 types of skew ness namely
Positive skew ness
i.
ii.
Negative skew ness
1. Positive Skewness
 This is the tendency of a given frequency curve leaning towards the left. In a
positively skewed distribution, the long tail extended to the right.
In this distribution one should note the following
The mean is usually bigger than the mode and median
i.
The median always occurs between the mode and mean
ii.
There are more observations below the mean than above the mean
iii.
This frequency distribution as represented in the skewed distribution curve is characteristic of
the age distributions in the developing countries
frequency
Positively skewed
frequency curve
frequency
Negatively skewed
frequency curve
Mode
Mean
Median
Long tail
Mean
Median
Mode
Normal distribution
2. Negative Skewness
This is an asymmetrical curve in which the long tail extends to the left
NB: This frequency curve for the age distribution is characteristic of the age distribution in
developed countries
 The mode is usually bigger than the mean and median
 The median usually occurs in between the mean and mode
 The no. of observations above the mean are usually more than those below the
mean (see the shaded region)
MEASURES OF SKEWNESS
 These are numerical values which assist in evaluating the degree of deviation of a
frequency distribution from the normal distribution.
 Following are the commonly used measures of skew ness.
1. Coefficient Skewness
( mean  median )
= 3
Standard deviation
2. Coefficient of skewness
QUANTITATIVE TECHNIQUES
104
mean  mode
Standard deviation
NB: These 2 coefficients above are also known as Pearsonian measures of skewness.
3. Quartile Coefficient of skewness
Q3 + Q1  2Q2
=
Q3 + Q1
Where Q1 = 1st quartile
Q2 = 2nd quartile
Q3 = 3rd quartile
NB: The Pearsonian coefficients of skewness usually range between ve 3 and +ve 3. These are
extreme value i.e. +ve 3 and ve 3 which therefore indicate that a given frequency is negatively
skewed and the amount of skewness is quite high.
Similarly if the coefficient of skewness is +ve it can be concluded that the amount of skew ness
of deviation from the normal distribution is quite high and also the degree of frequency
distribution is positively skewed.
Example
The following information was obtained from an NGO which was giving small loans to some
small scale business enterprises in 1996. the loans are in the form of thousands of Kshs.
Loans
46 50
51 55
56 60
61 65
66 70
71 75
76 80
81 85
86 90
91 95
Total
xa=d
15
10
5
0
5
10
15
20
25
30
d/c= u
3
2
1
0
+1
+2
+3
+4
+5
+6
fu
96
124
97
0
92
166
156
160
105
66
428
Fu2
288
248
97
0
92
332
468
640
525
396
3086
UCB
50.5
55.5
60.5
0
70.5
75.5
80.5
85.5
90.5
95.5
cf
32
94
191
0
403
486
538
57.8
599
610
Required
Using the Pearsonian measure of skew ness, calculate the coefficients of skew ness and hence
comment briefly on the nature of the distribution of the loans.
c ( fu )
Arithmetic mean = Assumed mean +
f
= 63 +
( 428 5 )
610
= 66.51
It is very important to note that the method of obtaining arithmetic mean (or any other statistic) by minusing
assumed mean (A) from X and then deviding by c can be abit confusing, if this is the case then just use the
straight forward method of:
Arithmetic mean =
f .x
f
104
Lesson Three
105
fu
f
fu

f
3086 428

610 610
=5
= 10.68
n +1
2
=
= 60.5 +
= 60.5 +
( 305.5  191)
120
(114.4 )
120
610 + 1
2
= 305.5
Median = 65.27
Therefore the Pearsonian coefficient
= 3
( 66.51 65.27 )
10.68
= 0.348
Comment
The coefficient of skewness obtained suggests that the frequency distribution of the loans given
was positively skewed
This is because the coefficient itself is positive. But the skewness is not very high implying the
degree of deviation of the frequency distribution from the normal distribution is small
Example 2
Using the above data calculate the quartile coefficient of skewness
Q3 + Q1  2Q2
Quartile coefficient of skewness =
Q3 + Q1
The position of Q1 lies on
610 + 1
4
= 152.75
(152.75  94 ) 5 = 58.53
97
= 3
QUANTITATIVE TECHNIQUES
106
Q2 position:
i.e. 2
( 610 +1)
4
= 305.5
Conclusion
Same as above when the Pearsonian coefficient was used
KURTOSIS
 This is a concept, which refers to the degree of peaked ness of a given frequency
distribution. The degree is normally measured with reference to normal distribution.
 The concept of kurtosis is very useful in decision making processes i.e. if is a
frequency distribution happens to have either a higher peak or a lower peak, then it
should not be used to make statistical inferences.
 Generally there are 3 types of kurtosis namely;Leptokurtic
i.
Mesokurtic
ii.
Platykurtic
iii.
Leptokurtic
A frequency distribution which is lepkurtic has generally a higher peak than that
a)
of the normal distribution. The coefficient of kurtosis when determined will be
found to be more than 3. thus frequency distributions with a value of more
than 3 are definitely leptokurtic
b)
Some frequency distributions when plotted may produce a curve similar to that
of the normal distribution. Such frequency distributions are referred to as
mesokurtic. The degree of kurtosis is usually equal to 3
When the frequency curve contacted produces a peak which is lower that that
c)
of a normal distribution when such a curve is said to be platykurtic. The
coefficient of such is usually less than 3
 It is necessary to calculate the numerical measure of kurtosis. The commonly used
measure of kurtosis is the percentile coefficient of kurtosis. This coefficient is
normally determined using the following equation
( Q3  Q1)
Percentile measure of kurtosis, K (Kappa) = 12
P90  P10
Example
Refer to the table above for loans to small business firms/units
Required
Calculate the percentile coefficient of Kurtosis
90
P90 =
( n +1) = 0.9 ( 610 +1)
100
= 0.9 (611)
106
Lesson Three
107
= 549.9
The actual loan for a firm in this position
( 549.9  538 ) x 5 = 81.99
(549.9) = 80.5 +
40
P10 =
10
(n + 1) = 0.1 (611) = 61.1
100
( 61.1 32 )
62
x 5 = 52.85
= 0.9 (611)
= 549.9
( Q3  Q1)
P90  P10
( 73.83  58.53)
81.99  52.85
= 0.26
Since 0.26 < 3, it can be concluded that the frequency distribution exhibited by the distribution
of loans is platykurtic
Kurtosis is also measured by moment statistics, which utilize the exact value of each
observation.
i. M1 the first moment = M1 =
M2 =
= Mean M1 or M1
X
M3 =
X
M4 =
QUANTITATIVE TECHNIQUES
108
( x m)
M4 =
f
Moment coefficient of Kurtosis
Where m is mean
M4
S4
Example
Find the moment coefficient of the following distribution
x
f
12
1
14
4
16
6
18
10
20
7
22
2
X
12
14
16
18
20
22
f
1
4
6
10
7
2
30
xf
12
56
96
180
140
44
528
(xm)
5.6
3.6
1.6
.4
2.4
4.4
(xm)2
31.36
12.96
2.56
0.16
5.76
19.36
(xm)2f
31.36
51.84
15.36
1.60
40.32
38.72
179.20
(xm)4f
983.45
671.85
39.32
0.256
232.24
749.62
2,676.74
528
= 17.6
30
179.20
30
= 35.677
( x m)
M4 =
f
= 5.973
2, 676.74
30
89.22
35.677
= 89.22
= 2.5
Note Coefficient of kurtosis can also be found using the method of assumed mean.
3.4
Indices
An index number is an attempt to summarize a whole mass of data into one figure. The single
figure shows how one year differs from another year.
It is a statistical devise used to measure the change in the level of prices, wages output and other
variables at given times, relative to their level at an earlier time which is taken as the base for
comparison purposes
108
Lesson Three
109
Pn
100 (an unweighted price index)
Po
Qn
100 (an unweighted quantity index)
Qo
Where pn is the price of a commodity in the current year (the year for which the price index to
be calculated)
Where po is the price of the same commodity in the base year (the year for comparison
purposes)
Similarly Qn and Qo are defined in the same way
p q
P q
p q
Pq
LASPEYRES INDEX
PAASCHES INDEX
n n
q p
q p
q q
q p
100
p q
P q
n
n n
100
o n
Value index =
100
100
100
( ) w
=
w
pn
po
100
Where w0 are the proportions of the total expected in the basic period. This formula is
frequently used to calculate retail price index.
1985
100
1986
104
1987
108
1988
109
1989
112
1990
120
QUANTITATIVE TECHNIQUES
1991
125
1992
140
110
1985
Previous index
100
1986
104
1987
108
1988
109
112
1990
120
1991
125
1992
140
Recalculated index
100
100 = 89.3
112
104
100 = 92.9
112
108
100 = 96.4
112
109
100 = 97.3
112
112
100 = 100
112
120
100 = 107.1
112
125
100 = 111.6
112
140
100 = 125.0
112
When changing the base year, it is advisable to update the weights used in the base year.
100
104
1987
108
1988
109
1989
112
1990
120
1991
125
1992
140
Recalculated chainbased
index
100
104
100 = 104
100
108
100 = 103.8
104
109
100 = 100.9
108
112
100 = 102.8
109
120
100 = 107.1
112
125
100 = 104.2
120
140
100 = 112
120
fixedbased index
100(1985 base year
104
100 = 104
100
108
100 = 108
100
109
100 = 109
100
112
100 = 112
100
120
100 = 120
100
125
100 = 125
100
140
100 = 140
100
110
Lesson Three
111
( )W
=
W
pn
po
100
The index is used by the Government as a guide in determining the minimum wages, pension
rates unemployed benefits (in UK e.t.c). Trade unions use it as a basis for their wages claims.
Deflation
Indexes may be used to deflate time series so that comparisons between periods may be made in
real terms
It is a process of reducing a value measured in current period prices to its equivalent in the base
period prices. The deflated value is what would have been necessary to purchase the same
amount of goods as the present value can purchase in the current period
Deflation Factor =
p q
p q
n
100
Retail index
100
120
6,000
140
6,500
170
7,200
200
Real earnings
5000 = 5000
100
= 4,583.3
5,500
120
100
6,000
= 4,285.7
140
100
= 3,823.5
6,500
170
100
= 3,600.0
7,200
200
QUANTITATIVE TECHNIQUES
112
Price on 1.1.1990
Shs 10
Shs 12
Shs 20
Shs 5
Price on 1.1.1991
Shs 12
Shs 15
Shs 25
Shs 6
Using an unweighted geometric index, calculate the index of share prices at 1.1.1991 if 1.1.1990
is the base date, index 100
Solution
1
1
12 15 25 6 4 27000 4
4
2.25
=
=
(
)
10 12 20 5 12000
= 1.225
index = 122.5
Inflation
The inflation rate for a given period can be calculated using the following formula;
Current retail price index
100
Inflation =
Retail price index in the base year
Marshal Hedge Worth Index
Marshal Hedge worth index =
p (p
p (q
n
+ qn )
+ qn )
100
112
Lesson Three
113
QUANTITATIVE TECHNIQUES
114
QUESTION ONE
a)
b)
c)
d)
QUESTION TWO
The managers of an import agency are investigating the length of time that customers take to
pay their invoices, the normal terms for which are 30 days net. They have checked the payment
record of 100 customers chosen at random and have compiled the following table:
Payment in
5 to 9 days
10 to 14 days
15 to 19 days
20 to 24 days
25 to 29 days
30 to 34 days
35 to 39 days
40 to 44 days
Number of customers
4
10
17
20
22
16
8
3
Required:
a) Calculate the arithmetic mean.
b) Calculate the standard deviation
c) Construct a histogram and insert the modal value.
d) Estimate the probability that an unpaid invoice chosen at random will be between 30 and
39 days old.
QUESTION THREE
The price of the ordinary 25p shares of Manco PLC quoted on the stock exchange, at the close
of the business on successive Fridays is tabulated below
126
125
128
124
127
120
127
126
127
122
122
113
117
114
106
105
112
114
111
121
129
130
120
116
116
119
122
123
131
135
131
134
127
128
142
138
136
140
137
130
Required
a) Group the above date into eight classes.
b) Calculate cumulative frequency, the median value, quartile values and the
semiquartile range.
c) Calculate the mean and standard deviation of your frequency distribution.
d) Compare and contrast the values that you have obtained for:
The median and mean
i)
The semiinterquartile range and the standard deviation
ii)
(Total:
(4 marks)
(4 marks)
(7 marks)
(5 marks)
20 marks)
114
Lesson Three
115
QUESTION FOUR
Define the coefficient of variation.
The following table gives profits (in ten thousands of shillings) of two supermarkets over a
duration of one year.
Month
January
February
March
April
May
June
July
August
September
October
November
December
i)
ii)
Supermarket A
65
48
15
28
41
59
41
10
24
56
92
120
Supermarket B
28
33
20
23
69
45
53
15
35
57
99
136
Required:
Compute the coefficient of variation for each supermarket.
Indicate for which supermarket the variability of profits is relatively greater.
QUESTION FIVE
Prodco PLC manufactures an item of domestic equipment which requires a number of
components which have varied as various modifications of the model have been used. The
following table shows the number of components required together with the price over the last
three years of production.
COMPONENT
A
B
C
D
Prices
3.63
2.11
10.03
4.01
1981
Quantity
3
4
1
7
Prices
4.00
3.10
10.36
5.23
1982
Quantity
2
5
1
6
Prices
4.49
3.26
12.05
5.21
1983
Quantity
2
6
1
5
Required:
a) Establish the base weighted price indices for 1982 and 1983 based on
1981 for the item of equipment.
b) Establish the current weighted price indices for 1982 and 1983 based on
1981 for the item of equipment.
c) Using the results of (a) and (b) as illustrations, compare and contrast
Laspeyres and Paasche price index numbers.
(Total:
QUANTITATIVE TECHNIQUES
(8 marks)
(8 marks)
(4 marks)
20 marks)
116
QUESTION SIX
a) A company manufacturing a product known as 257 uses five components in its assembly.
The quantities and prices of the components used to produce a unit of K257 in 1982, 1983
and 1984 are tabulated as follows:
COMPONENT
A
B
C
D
E
i)
ii)
iii)
1982
Quantity Prices
10
3.12
6
11.49
5
1.40
9
2.15
50
0.32
1983
Quantity Prices
12
3.17
7
11.58
8
1.35
9
2.14
53
0.32
1984
Quantity Prices
14
3.20
5
11.67
9
1.31
10
2.63
57
0.32
Required:
Calculate Laspyeres type price index number for the cost of one unit of K257
for 1983 and 1984 based on 1982.
(6 marks)
Calculate Paasche type price index numbers for the cost of one unit of K257
for 1983 and 1984 based on 1982.
(6 marks)
Compare and contrast the Laspeyre and Paasche priceindex numbers you
have obtained in (i) and (ii)
(3 marks)
Required:
Explain the usefulness of an index of Industrial Production and an index of retail prices to both
sides in a series of pay negotiations.
(5 marks)
(Total: 20 marks)
QUESTION SEVEN
The data given below indicates the prices and production of some horticulatural products in
Central Territory:
Produce
Cabbages
Tomatoes
Onions
Spinach
Production
(1000 boxes)
1980
48,600
22,000
47,040
43,110
1990
62,000
37,440
61,430
55,720
1990
150
310
200
170
116
Lesson Three
117
Required:
Calculate the increase or decrease in prices from 1980 on the basis of the following indices:
a)
b)
c)
d)
e)
Mean relatives
Laspeyres index
Paasche index
Marshall Hedgeworth index
Fishers index.
QUANTITATIVE TECHNIQUES
118
LESSON FOUR
Measures of Relationships and Forecasting
Correlation
Regression analysis
Multiple Linear Regression
Time series analysis and forecasting
118
Lesson Four
4.1
119
Correlation
This is an important statistical concept which refers to interrelationship or association between
variables.
The purpose of studying correlation is for one to be able to establish a relationship, plan and
control the inputs (independent variables) and the output (dependent variables)
In business one may be interested to establish whether there exists a relationship between the
i.
Amount of fertilizer applied on a given farm and the resulting harvest
Amount of experience one has and the corresponding performance
ii.
Amount of money spent on advertisement and the expected incomes after sale of
iii.
the goods/service
There are two methods that measure the degree of correlation between two variables these are
denoted by R and r.
(a) Coefficient of correlation denoted by r, this provides a measure of the strength of
association between two variables one the dependent variable the other the independent
variable r can range between +1 and 1 for perfect positive correlation and perfect
negative correlation respectively with zero indicating no relation i.e. for perfect positive
correlation y increase linearly with x increament.
(b) Rank correlation coefficient denoted by R is used to measure association between two
sets of ranked or ordered data. R can also vary from +1, perfect positive rank
correlation and 1 perfect negative rank correlation where O or any number near zero
representing no correlation.
SCATTER GRAPHS
 A scatter graph is a graph which comprises of points which have been plotted but are
not joined by line segments
 The pattern of the points will definitely reveal the types of relationship existing between
variables
 The following sketch graphs will greatly assist in the interpretation of scatter graphs.
QUANTITATIVE TECHNIQUES
120
y
Dependant variable
x
x
x
x
x
x
x
x
Independent variable
NB: For the above pattern, it is referred to as perfect because the points may easily be
represented by a single line graph e.g. when measuring relationship between volumes of sales
and profits in a company, the more the company sales the higher the profits.
y
Quantity sold
x
x
X
x
x
x
x
x
x
10
20
Price
This example considers volume of sale in relation to the price, the cheaper the goods the bigger
the sale.
120
Lesson Four
121
High positive correlation
y
Dependant variable
xx
xx
x
x
xx
xx
xx
xx
x
xxx
x
x
independent variable
y
quantity sold
x
x
xx
x
xx
x
x
x
x
xx
x
price
QUANTITATIVE TECHNIQUES
122
No correlation
600
x
x
400
x
x
x
200
x
x
20
30
40
50
0
10
h) Spurious Correlations
 in some rare situations when plotting the data for x and y we may have a group showing
either positive correlation or ve correlation but when you analyze the data for x and y
in normal life there may be no convincing evidence that there is such a relationship.
This implies therefore that the relationship only exists in theory and hence it is referred
to as spurious or non sense e.g. when high passrates of student show high relation with
increased accidents.
Correlation coefficient
 These are numerical measures of the correlations existing between the dependent and
the independent variables
 These are better measures of correlation than scatter graphs (diagrams)
 The range for correlation coefficients lies between +ve 1 and ve 1. A correlation
coefficient of +1 implies that there is perfect positive correlation. A value of ve shows
that there is perfect negative correlation. A value of 0 implies no correlation at all
 The following chart will be found useful in interpreting correlation coefficients
122
Lesson Four
123
__ 1.0 }
}
__ 0.5 }
}
__0
}
}
__0.5}
}
__1.0}
There are usually two types of correlation coefficients normally used namely;
n xy x y
n x 2 ( x ) n y 2 ( y )
2
note that this formula can be rearranged to have different outlooks but the resultant is always
the same.
Example
The following data was observed and it is required to establish if there exists a relationship
between the two.
X
15
24
25
30
35
40
45
65
70
75
Y
60
45
50
35
42
46
28
QUANTITATIVE TECHNIQUES
20
22
15
124
Solution
Compute the product moment coefficient of correlation (r)
X
Y
X2
Y2
15
60
225
3,600
24
45
576
2,025
25
50
625
2,500
30
35
900
1,225
35
42
1,225
1,764
40
46
1,600
2,116
45
28
2,025
784
65
20
4,225
400
70
22
4,900
484
75
15
5,625
225
X = 424
r=
r=
Y = 363
= 21,926
XY
900
1,080
1,250
1,050
1,470
1,840
1,260
1,300
1,540
1,125
2
= 15,123
XY = 12,815
n xy x y
n x 2 ( x ) n y 2 ( y )
2
25, 762
= 0.93
The correlation coefficient thus indicates a strong negative linear association between the two
variables.
124
Lesson Four
R=1
125
6 d 2
n ( n 2 1)
Where d = difference between the pairs of ranked values.
n = numbers of pairs of rankings
Example
A group of 8 accountancy students are tested in Quantitative Techniques and Law II. Their
rankings in the two tests were.
Student
Q. T. ranking
Law II ranking
d
d2
A
2
3
1
1
B
7
6
1
1
C
6
4
2
4
D
1
2
1
1
E
4
5
1
1
F
3
1
2
4
G
5
8
3
9
H
8
7
1
1
= 22
6 d 2
n ( n 1)
2
= 1
6 22
8 ( 82 1)
= 0.74
Thus we conclude that there is a reasonable agreement between students performances in the
two types of tests.
NOTE: in this example, if we are given the actual marks then we find r. R varies
between +1 and 1.
Tied Rankings
A slight adjustment to the formula is made if some students tie and have the same ranking the
adjustment is
t3 t
where t = number of tied rankings the adjusted formula becomes
12
6
R=1
( d + )
n ( n 1)
2
t 3 t
12
Example
Assume that in our previous example student E & F achieved equal marks in Q. T. and were
given joint 3rd place.
QUANTITATIVE TECHNIQUES
126
Solution
Student
A
B
C
D
E
F
G
H
Q. T. ranking
2
7
6
1
3
3
5
8
6
R = 1
( d + )
n ( n 1)
t 3 t
12
Law II ranking
3
6
4
2
5
1
8
7
1
d
1
1
2
1
1
2
3
1
6 26 1 2 + 212 2
8 ( 8 1)
d2
1
1
4
1
2
6
9
1
= 26 1 2
since t = 2
= 0.68
NOTE:It is conventional to show the shared rankings as above, i.e. E, & F take up the 3rd and
4th rank which are shared between the two as 3 each.
ii. Coefficient of Determination
This refers to the ratio of the explained variation to the total variation and is used to measure the
strength of the linear relationship. The stronger the linear relationship the closer the ratio will be
to one.
Coefficient determination =
Explained variation
Total variation
1st assessor
6
1
3
7
8
2
4
5
10
9
2nd assessor
5
3
4
6
7
1
8
2
9
10
126
Lesson Four
127
REQUIRED
Calculate the rank correlation coefficient and hence comment briefly on the value obtained
d
d2
A
B
C
D
E
F
G
H
J
K
6
1
3
7
8
2
4
5
10
9
5
3
4
6
7
1
8
2
9
10
1
2
1
1
1
1
4
3
+1
1
1
4
1
1
1
1
16
9
1
1
d2 = 36
R=1
6 d 2
n ( n 2 1)
=1
6 36
10 (102 1)
=1
216
990
= 1 0.22
= 0.78
Comment: since the correlation is 0.78 it implies that there is high positive correlation between
the ranks awarded to the contestants. 0.78 > 0 and 0.78 > 0.5
Example
Contestant
A
B
C
D
E
F
G
H
1st
assessor
1
5 (5.5)
3
2
4
5 (5.5)
7
8
2nd assessor
2
3
4
1
5
6.5
6.5
8
1
2.5
1
1
1
1
0.5
0
d2
1
6.25
1
1
1
1
0.25
0
d2 = 11.25
R=
1
6 d 2
n ( n 1)
=1
=1
6 11.25
8 ( 63)
67.5
504
QUANTITATIVE TECHNIQUES
128
Math
92
82
60
87
72
60
52
50
47
59
Rank correlation r =
r
1
3
5(5.5)
2
4
5(5.5)
8
9
10
7
1=1
Accounts
67
88
58
80
69
77
58
60
32
54
r
5
1
7(7.5)
2
4
3
7(7.5)
6
10
9
d
4
2
2
0
0
2.50
0.5
3
0
2
d2
16
4
4
0
0
6.25
0.25
9
0
4
d2 = 43.5
6 d 2
n ( n 2 1)
6 43.5
261
=1
2
990
10 (10 1)
Example
(Product moment correlation)
The following data was obtained during a social survey conducted in a given urban area
regarding the annual income of given families and the corresponding expenditures.
Family
A
B
C
D
E
F
G
H
J
K
Total
(x)Annual
income 000
420
380
520
610
400
320
280
410
380
300
4020
(y)Annual
expenditure 000
360
390
510
500
360
290
250
380
240
270
3550
xy
x2
Y2
128
Lesson Four
129
Required
Calculate the product moment correlation coefficient briefly comment on the value obtained
The produce moment correlation
r=
n xy x y
n x 2 ( x ) n y 2 ( y )
2
Workings:
4020
= 402
10
X =
r=
Y=
3550
= 355
10
= 0.89
Comment: The value obtained 0.89 suggests that the correlation between annual income and
annual expenditure is high and positive. This implies that the more one earns the more one
spends.
4.2
REGRESSION
 This is a concept, which refers to the changes which occur in the dependent variable as
a result of changes occurring on the independent variable.
 Knowledge of regression is particularly very useful in business statistics where it is
necessary to consider the corresponding changes on dependant variables whenever
independent variables change
 It should be noted that most business activities involve a dependent variable and either
one or more independent variable. Therefore knowledge of regression will enable a
business statistician to predict or estimate the expenditure value of a dependant variable
when given an independent variable e.g. consider the above example for annual incomes
and annual expenditures. Using the regression techniques one can be able to determine
the estimated expenditure of a given family if the annual income is known and vice
versa
 The general equation used in simple regression analysis is as follows
y = a + bx
Where y = Dependant variable
a= Interception y axis (constant)
b = Slope on the y axis
x = Independent variable
The determination of the regression equation such as given above is normally
i.
done by using a technique known as the method of least squares.
Regression equation of y on x i.e. y = a + bx
QUANTITATIVE TECHNIQUES
130
x x
x
x x
x
x
x
x
x
The following sets of equations normally known as normal equation are used to determine the
equation of the above regression line when given a set of data.
y = an + bx
xy = ax + bx2
Where y = Sum of y values
xy = sum of the product of x and y
x = sum of x values
x2= sum of the squares of the x values
a = The intercept on the y axis
b = Slope gradient line of y on x
NB: The above regression line is normally used in one way only i.e. it is used to estimate the y
values when the x values are given.
Regression line of x on y i.e. x = a + by
 The fact that regression lines can only be used in one way leads to what is known as a
regression paradox
 This means that the regression lines are not ordinary mathematical line graphs which
may be used to estimate the x and y simultaneously
 Therefore one has to be careful when using regression lines as it becomes necessary to
develop an equation for x and y before doing the estimation.
The following example will illustrate how regression lines are used
Example
An investment company advertised the sale of pieces of land at different prices. The following
table shows the pieces of land their acreage and costs
130
Lesson Four
131
Piece of land
A
B
C
D
E
F
G
H
J
(x)Acreage Hectares
2.3
1.7
4.2
3.3
5.2
6.0
7.3
8.4
5.6
x =44.0
xy
529
255
1890
1023
2860
3540
5402
7140
2969
xy= 25607
Required
Determine the regression equations of
i. y on x and hence estimate the cost of a piece of land with 4.5 hectares
ii. Estimate the expected average if the piece of land costs 900,000
y = an + bxy
xy = ax + bx2
By substituting of the appropriate values in the above equations we have
4400 = 9a + 44b .. (i)
25607 = 44a + 254.96b ..(ii)
By multiplying equation . (i) by 44 and equation (ii) by 9 we have
193600 = 396a + 1936b .. (iii)
230463 = 396a + 2294.64b ..(iv)
By subtraction of equation . (iii) from equation (iv) we have
36863 = 358.64b
102.78 = b
by substituting for b in .. (i)
4400 = 9a + 44( 102.78)
4400 4522.32 = 9a
122.32 = 9a
13.59 = a
Therefore the equation of the regression line of y on x is
Y = 13.59 + 102.78x
When the acreage (hectares) is 4.5 then the cost
(y) = 13.59 + (102.78 x 4.5)
= 448.92
= 448, 920
Note that
Where the regression equation is given by
y= a + bx
Where a is the intercept on the y axis and
b is the slope of the line or regression coefficient
n is the sample size
then,
intercept a =
y b x
n
QUANTITATIVE TECHNIQUES
x2
5.29
2.89
17.64
10.89
27.04
36
53.29
70.56
31.36
x2 = 254.96
132
Slope b =
n xy x y
n x 2 ( x )
Example
The calculations for our sample size n = 10 are given below. The linear regression model is
y = a + bx
Table
Distance x miles
3.5
2.4
4.9
4.2
3.0
1.3
1.0
3.0
1.5
4.1
x = 28.9
The Slope b =
Time y mins
16
13
19
18
12
11
8
14
9
16
y = 136
xy
56.0
31.0
93.1
75.6
36.0
14.3
8.0
42.0
13.5
65.6
xy = 435.3
x2
12.25
5.76
24.01
17.64
9.0
1.69
1.0
9.0
2.25
16.81
x2 = 99.41
y2
256
169
361
324
144
121
64
196
81
256
y2= 1972
= 5.91
We now insert these values in the linear model giving
y = 5.91 + 2.66x
or
Delivery time (mins) = 5.91 + 2.66 (delivery distance in miles)
The slope of the regression line is the estimated number of minutes per mile needed for a
delivery. The intercept is the estimated time to prepare for the journey and to deliver the goods,
that is the time needed for each journey other than the actual traveling time.
132
Lesson Four
133
4.3
Multiple Linear Regression Models
There are situations in which there is more than one factor which influence the dependent
variable
Example
Cost of production per week in a large department depends on several factors;
Total numbers of hours worked
i.
Raw material used during the week
ii.
iii.
Total number of items produced during the week
Number of hours spent on repair and maintenance
iv.
It is sensible to use all the identified factors to predict department costs
Scatter diagram will not give the relationship between the various factors and total costs
The linear model for multiple linear regression if of the type; (which is the line of best fit).
y = + b1x1 +b2x2 + + bnxn
We assume that errors or residuals are negligible.
In order to choose between the models we examine the values of the multiple correlation
coefficient r and the standard deviation of the residuals .
A model which describes well the relationship between y and xs has multiple correlation
coefficient r close to 1 and the value of which is small.
Example
Odino chemicals limited are aware that its power costs are semi variable cost and over the last
six months these costs have shown the following relationship with a standard measure of output.
Month
1
2
3
4
5
6
Required
i.
Using the method of least squares, determine an appropriate linear relationship
between total power costs and output
ii.
If total power costs are related to both output and time (as measured by the number
of the month) the following least squares regression equation is obtained
Power costs = 4.42 + (0.82) output + (0.10) month
Where the regression coefficients (i.e. 0.82 and 0.10) have t values 2.64 and 0.60
respectively and coefficient of multiple correlation amounts to 0.976
Compare the relative merits of this fitted relationship with one you determine in (a).
Explain (without doing any further analysis) how you might use the data to forecast
total power costs in seven months.
Solution
a)
Output (x)
12
18
19
20
24
30
x = 123
x2
144
324
361
400
576
900
x2 = 2705
y2
38.44
64.00
73.96
108.16
104.04
153.76
y2 = 542.36
QUANTITATIVE TECHNIQUES
xy
74.40
144.00
163.40
208.00
244.80
372.00
xy= 1,206.60
134
b=
n xy x y
n x 2 ( x )
6 2705 (123)
376.2
= 0.342
1101
1
(y bx)
n
1
(55.8 0.342) 123
6
= 2.29
(Power costs) = 2.29 + 0.342 (output)
= 0.96
This show a strong correlation between power cost and output. The multiple correlation when
both output and time are considered at the same time is 0.976.
We observe that there has been very little increase in r which means that inclusion of time
variable does not improve the correlation significantly
The value for time variable is only 0.60 which is insignificant as compared with a t value of 2.64
for the output variable
In fact, if we work out correlation between output and time, there will be a high correlation.
Hence there is no necessity of taking both the variables. Inclusion of time does improve the
correlation coefficient but by a very small amount.
If we use the linear regression analysis and attempt to find the linear relationship between output
and time i.e.
Month
1
2
3
4
5
6
Output
12
18
19
20
24
30
134
Lesson Four
135
The value of b and a will turn out to be 3.11 and 9.6 i.e. relationship will be of the form
Output = 9.6 + 3.11 month
For this equation forecast for 7th month will be
Output = 9.6 + 3.11 7
= 9.6 + 21.77
= 31.37 units
Using the equation , Power costs = 2.29 + 0.34 output
= 2.29 + 0.34 31.37
= 2.29 + 10.67
= 12.96 i.e. 12,960
y = ab x
y = ax b
and
Both of these can be reduced to linear model. Simple or multiple linear regression methods are
then used to determine the values of the coefficients
i.
Exponential model
y = ab x
Take log of both sides
log y = log a + log bx
log y = log a + xlog b
Let log y = Y and log a = A and log b = B
Thus we get Y = A + Bx. This is a linear regression model
ii.
Geometric model
y = ax b
using the same technique as above
log y = log a + blog x
Y = A + bX
Where Y = log y
A = log a
X = log x
Using linear regression technique (the method of least squares), it is possible to calculate the
value of a and b
QUANTITATIVE TECHNIQUES
136
1.
Moving Average
Periodical data e.g. monthly sales may have random fluctuation every month despite a general
trend being evident. Moving average helps in smoothing away these random changes.
A moving average is the forecast for a period that takes the average of the previous periods.
Example:
The table below represents company sales, calculate 3 and 6 monthly moving averages, for the
data
Months
Sales
January
1200
February
1280
March
1310
April
1270
May
1190
June
1290
July
1410
August
1360
September
1430
October
1280
November
1410
December
1390
Solution.
These are calculated as follows
Jan + Feb + Mar
1200 + 1280 + 1310
=
Aprils forecast =
3
3
Feb + Mar + Apr 1280 + 1310 + 1270
=
Mays forecast =
3
3
And so on
Similarly for 6 monthly moving average
July forecast =
And so on
April
May
June
July
August
September
October
November
December
1257
1292
1305
1325
1327
1363
Note:
When plotting moving average on graphs the points are plotted as the midpoint of the period of
the average, e.g. in our example the forecast for April (1263) is plotted on mid Feb.
136
Lesson Four
137
QUANTITATIVE TECHNIQUES
138
138
Lesson Four
1.
139
Time series analysis: trend and seasonal variation using regression on the data
The following data will be used to illustrate how the trend and seasonal variation are calculated.
Example 1
1
2
3
4
Year
Quarter 3
62
75
77
92
Quarter 4
29
31
48
53
It will be apparent that there is a strong seasonal element in the above data (low in Quarter 1 and
high in Quarter 3) and there is a generally upward trend.
The steps in analyzing the data and preparing a forecast are:
Step 1:
Calculate the trend in the data using the least squares method.
Step 2:
Estimate the sales for each quarter using the regression formula
established in step 1.
Step 3:
Calculate the percentage variation of each quarters actual sales from the
estimates, obtained in step 2.
Step 4:
Step 5:
Solution
Step 1
Calculate the trend in the data by calculating the linear regression line y = a + bx.
Year 1
Year 2
Year 3
x (quarters)
1
2
3
4
x (sales)
20
32
62
29
xy
20
64
186
116
x2
1
4
9
16
5
6
7
8
21
42
75
31
105
252
525
248
25
36
49
64
9
10
11
12
23
39
77
38
207
390
847
576
81
100
121
144
QUANTITATIVE TECHNIQUES
140
Year 4
13
14
15
16
x=136
27
39
92
53
y= 710
351
546
1380
848
xy= 6661
169
196
225
256
x2 =1496
Steps 2 and 3
Use the trend line to calculate the estimated sales for each quarter.
For example, the estimate for the first quarter in year 1 is
estimate = 28.74 + 1.84 (1) = 30.58
The actual value of sales is then expressed as a percentage of this estimate. For example, actual
sales in the first quarter were 20 so the seasonal variation is
Actual sales
20
%=
= 65%
Estimate
30.58
Year 1
Year 2
Year 3
x (quarters)
y (sales)
Trend
Actual
%
Trend
1
2
3
4
20
32
62
29
30.58
32.42
34.26
36.10
65
99
181
80
5
6
7
8
21
42
75
31
37.94
39.78
41.62
43.46
55
106
180
71
9
10
11
12
23
39
77
48
45.30
47.14
48.98
50.82
51
83
157
94
140
Lesson Four
141
Year 4
13
14
15
16
27
39
92
53
52.66
54.50
56.34
58.18
51
72
163
91
Q4
%
80
71
94
91
336
84%
These then are the average variations expected from the trend for each of the quarters; for
example, on average the first quarter of each year will be 56% of the value of the trend. Because
the variations have been averaged, the amounts over 100% (Q3 in this example). This can be
checked by adding the average and verifying that they total 400% thus:
56% + 90% + 170% + 84% = 400%.
On occasions, roundings in the calculations will make slight adjustments necessary to the
average variations.
Step 5
Prepare final forecasts based on the trend line estimates from trend estimates and percentages
variation table (i.e. 30.58, 32.42, etc) and the averaged seasonal variations from the table above.
(i.e. 56%, 90%, 170% and 84%)
The seasonally adjusted forecast is calculated thus:
Year 2
Y (sales)
1
2
3
4
20
32
62
29
Seasonally adjusted
forecast
17.12
29.18
58.24
30.32
5
6
7
8
21
42
75
31
21.24
35.80
70.75
36.51
QUANTITATIVE TECHNIQUES
142
Year 3
Year 4
9
10
11
12
23
39
77
48
25.37
42.43
83.27
42.69
13
14
15
16
27
39
92
53
29.49
49.05
95.78
48.87
Notes:
a)
b)
c)
Quarter 18 = 55.67
19 = 108.29
20 = 55.05
Time series decomposition is not an adaptive forecasting system like moving averages
and exponential smoothing.
Forecasts produced by such an analysis should always be treated with caution.
Changing conditions and changing seasonal factors make long term forecasting a
difficult task.
The above illustration has been an example of a multiplicative model. This is the
seasonal variations were expressed in percentage or proportionate terms. Similar steps
would have been necessary if the additive model had been used except that the
variations from the trend would have been the absolute values. For example, the first
two variations would have been
Q1: 20 30.58 = absolute variation = 10.58
Q2: 32 32.42 = absolute variation =  0.42
And so on.
The absolute variations would have been averaged in the normal way to find the
average absolute variation, whether + or , and these values would have been used to
make the final seasonally adjusted forecasts.
142
Lesson Four
2.
143
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
20
32
62
29
21
42
75
31
23
39
77
48
27
39
92
53
3 point moving
average (1)
38
41
37.3
30.7
46
49.3
43
31
46.3
54.7
50.7
38
52.7
61.3
Actual
%
Trend
58
90
167
76
53
102
177
71
51
84
162
98
54
76
174
98
20 + 32 + 62
= 38 which is entered opposite period 2
3
The next calculated:
32 + 62 + 29
= 41, and so on
3
The regression line y = a + bx of the moving average values is calculated in the normal manner
and results in the following:
y = 33.06 + 1.32x
This is used to calculate the trend line:
e.g.
The percentage variations are averaged as previously shown, resulting in the following values:
QUANTITATIVE TECHNIQUES
144
Q2
89
Q3
170
Q4
86
The trend line and the average seasonal variations are then used in a similar manner to that
previously described.
For example, to extrapolate future sales for the next year (i.e. quarters 17, 18, 19 and 20) is as
follows:
Quarter 17
Forecast sales = (33.06 + 1.32(17)) 0.54 = 29.97
A similar process produces the following figures:
Quarter
18 = 50.57
19 = 98.84
20 = 51.13
Forecast errors
Differences between actual results and predictions may arise from many reasons. They may arise
from random influences, normal sampling errors, choice of the wrong forecasting system or
alpha value or simply that the future conditions turn out to be radically different from the past.
Whatever the cause(s) management wish to know the extent of the forecast errors and various
methods exist to calculate these errors.
A commonly used technique, appropriate to time series, is to calculate the mean squared error of the
deviations between forecast and actual values then choose the forecasting system and/or
parameters which gives the lowest value of mean squared errors, i.e. akin to the least squares
method of establishing a regression line.
1
14
2
17
3
15
4
23
5
18
6
22
7
27
144
Lesson Four
Solution
Years (x)
1
2
3
4
5
6
7
x=28
145
Sales (y)
14
17
15
23
18
22
27
y = 136
xy
14
34
45
92
90
132
189
x2
1
4
9
16
25
36
49
xy=596
x2= 140
136 = 7a + 28b
596 = 28a + 140b
b = 1.86
And substituting in one of the equations we obtain
a = 12
Regression line = y = 12 + 1.86x
Or,
= 12 + 1.86 (8)
=26.88 i.e. 26,888 units
QUANTITATIVE TECHNIQUES
146
QUESTION TWO
Explain the difference between Linear model, exponential model and geometric model, and
write down their formulas
QUESTION THREE
An analysis of representatives car expenses shows that the expenses are dependent on the miles
travelled (x) and the type of journey (x). the general form is:
y = a + b1x1 + b2x2
Calculations have produced the following values (where y is expenses per month)
y = 86 + 0.37x1 + 0.08x2
r2x1 = 0.78
r2x2 = 0.16
R = 0.88
Interpret these values
QUESTION FOUR
Month
January
February
March
April
May
June
July
August
September
October
November
December
January
Required.
Provide 3 month, 6 month and 12 month moving average.
146
Lesson Four
147
QUESTION FIVE
The manager of a company is preparing revenue plans for the last quarter of 1993/94 and for
the first three quarters of 1994/5. The data below refer to one of the main products:
Revenue
000
1990/91
1991/92
1992/93
1993/94
AprilJune
Quarter 1
000
49
50
51
50
JulySept
Quarter 2
000
37
38
40
42
OctDec
Quarter 3
000
58
59
60
61
JanMarch
Quarter 4
000
67
68
70

Required:
a) Calculate the fourquarterly moving average trend for this set of data.
b) Calculate the seasonal factors using either the additive model or the multiplicative model,
but not both.
c) Explain, but do not calculate how you would use the results in parts (a) and (b) of this
question to forecast the revenue for the last quarter of 1993/4 and for the first three
quarters of 1994/95.
QUANTITATIVE TECHNIQUES
148
QUESTION SIX
A company has a fleet of vehicles and is trying to predict the annual maintenance cost per
vehicle. The following data have been supplied for a sample of vehicles:
Vehicle number
Age in years
1
2
3
4
5
6
7
8
9
10
(x)
2
8
6
8
10
4
4
2
6
10
Maintenance cost
Per annum
X 10
(y)
60
132
100
120
150
84
90
68
104
140
Required:
a) Using the least squares technique calculate the values of a and b in the equation
y = a + bx, to allow managers to predict the likely maintenance cost, knowing the age of the
vehicle.
b) Prepare a table of maintenance costs covering vehicles from 1 to 10 years of age, based on
your calculations in (a).
c) Estimate the maintenance costs of a 12yearold vehicle and comment on the validity of
making such an estimate.
QUESTION SEVEN
A company is building a model in order to forecast total costs based on the level of output. The
following data are available for last year:
Month
January
February
March
April
May
June
July
August
September
October
November
December
Output
000 units
(x)
16
20
23
25
25
19
16
12
19
25
28
12
Costs
000
(y)
170
240
260
300
280
230
200
160
240
290
350
200
Required:
a) State two possible reasons for the large variation in output per month.
b) Plot a graph of output and costs, and comment on the relationship observed.
STRATHMORE UNIVERSITY STUDY PACK
148
Lesson Four
149
c) Using the least square technique, calculate the values of a an b in the equation y = a + bx in
order to predict costs given the output, and explain the meaning of the calculated values.
QUESTION EIGHT
Your company has been selling data base and spreadsheets for the last four years and has found
the business to vary with season. The quarterly sales figures for the last four years are shown in
table 6b1 and table 6b2 shows the deviation from the trend at the appropriate periods
Table 6b1
Quarterly sales in 000s
Year
1983
1984
1985
1986
1987
Q2
360
430
500
590
Q3
530
750
660
710
Q4
354
395
509
521
Q1
Q2
Q3
128
145
165
37
12
43
276
153
153
Q4
42
93
15
Q1
304
340
374
440
Table 6b2
Seasonal deviation from trend in 000s
Year
1983
1984
1985
1986
Required
i.
establish the trend figures from the data in the two tables
establish the seasonal variations for the four year period
ii.
using your results from parts (i) and (ii) forecast sales for 1987 quarter 2
iii.
QUESTION NINE
1. The directors of your company wish to make a serious study of the heating costs of the ****
block. The data for the last sixteen quarterly periods are tabulated as follows.
Heating costs in
Quarter
Year
1980
1981
1982
1983
1984
Q1
Q2
Q3
1730
1950
1860
1910
1554
1595
1709
1721
1504
1540
1574
1640
QUANTITATIVE TECHNIQUES
Q4
1560
1630
1700
1790
150
150
Lesson Four
151
Instructions:
Answer any THREE questions from SECTION I and TWO questions from SECTION II.
Marks allocated to each question are shown at the end of the question. Show all your workings
SECTION I
QUESTION ONE
a) In the just concluded higher education seminar at Shoppers Paradise, Nairobi, the College of
Business Administration of Highland University states in some of its promotional material
that the average graduate of the college earns over Sh.3 million a year. Assume, for
simplicity, that only four people have graduated to date; Sam, Tom, Jackie and Mary who
earn Sh.1.6 million, Sh.1.8 million, Sh.1.8 million and Sh.2 million respectively in a year.
Required:
Compute the mean, median and the mode. Is the colleges claim correct?
(3 marks)
b) Let us change our assumption about the number of graduates in (a) above and instead
assume that five people have graduated. They consist of the four listed above and Suki who
earns Sh.5.3 million per year.
Required:
Compute the mean, median and the mode for the five graduates. Is the colleges claim
correct?
(3 marks)
c) Changing our assumption one more time about the number of graduates, let us assume that
six people have graduated. They consist of the four original ones, Suki, who earns Sh.5.3
million a year; and Bob who earns Sh.6.7 million a year.
Required:
i) Compute the mean, median and mode for the six graduates. Is the colleges claim correct?
(2 marks)
ii) Comment on what happened to the mean, median and mode as you moved from part (a)
to (b) to (c) of this problem.
(2 marks)
iii) What do the results in (ii) above suggest about the relative stability of the mean, median
and the mode?
(2 marks)
iv) How do you feel about the ethics of this college in claiming that their average graduates
earn over Sh.3 million a year?
(2 marks)
d) Genuine athletic Company Ltd., manufactures weightlifting equipment. The companys
topoftheline equipment are used in events such as the Olympics and other prestigious
professional weightlifting competitions. Consequently, it is very important that if a barbell
plate is stamped say, 50 kilogrammes, it weighs very close to 50 kilogrammes. In addition,
a barbell plate must have a hole just slightly larger than 1 centimeter in diameter so that it
will slip onto the 1 centimeter diameter bar easily but fit smoothly when it is in place.
A recent sampling of barbell plates of 10 and 50 kilogrammes revealed the following
information:
QUANTITATIVE TECHNIQUES
152
i)
ii)
iii)
iv)
Required:
Determine whether the production process associated with one size of barbell plant
produced more variable results than the production process associated with the other size.
(6 marks)
(Total: 20 marks)
QUESTION TWO
a) The index of industrial production in the Utopian country by July 2001 is given below:
Sector
Mining and quarrying
Manufacturing:
Food, drink and tobacco
Chemicals
Metal
Engineering
Textiles
Other manufacturing
Construction
 Gas, electricity and water
Weight
41
77
66
47
298
67
142
182
80
106
109
72
86
70
91
84
115
Required:
i) Calculate the index of industrial production for all industries and manufacturing industries.
(6 marks)
(4 marks)
ii) Comment on your results.
b) Explain some of the uses of index numbers.
c) What are some of the limitations of index numbers?
(5 marks)
(5 marks)
(Total: 20 marks)
QUESTION THREE
Leisure Publishers Ltd. recently published 20 romantic novels by 20 different authors. Sales
ranged from just over 5,000 copies for one novel about 24,000 copies for another novel. Before
publishing, each novel had been assessed by a reader who had given it a rating between 1 and 10.
The managing director suspects that the main influence on sales is the cover of the book. The
illustrations on the front covers were drawn either by artist A or artist B. the short description
on the back cover of the novel was written by either editor C or editor D.
A multiple regression analysis was done using the following variables:
Y
Sales (million of shillings)
X1
1 if front cover is by artist A
2 if front cover is by artist B
152
Lesson Four
X2
X1
153
readers rating
1 if the short description of the novel is by editor C
2 if the short description of the novel is by editor D
0.307729
1
Sum of squares
375.37
66.903
Mean square
125.12
1.1814
Standard error
2.54389
0.961897
0.298272
0.922233
F Value
38.375
42.284
0.081428
40.457741
0
0.123094
1
0.674104
0.310838
0.627329
1
F ratio
29.923
Required:
a) The regression equation.
(3 marks)
(3 marks)
b) Does the regression analysis provide useful information? Explain.
c) Explain whether the covers were more important for sales than known quality of the novels.
(4 marks)
d) State with 95% confidence the difference in sales of a novel if its cover illustrations were
done by artist B instead of artist A.
(5 marks)
e) State with 95% confidence the difference in sales of a novel if its short description was by
editor D and not editor C.
(5 marks)
(Total: 20 marks)
QUESTION FOUR
a) Explain the difference between regression and correlation analysis .
(4 marks)
b) Explain why the existence of a significant correlation does not imply causation. (2 marks)
c) A bakery bakes cakes under the brand name super cakes. Irene Juma, the manageress does
not know the cost of each cake. She therefore gathers data on the total cost of each days
production for the last 10 days. The results are shown in the table below;
QUANTITATIVE TECHNIQUES
154
i)
ii)
Day
Number of cakes
(00 units)
1
2
3
4
5
6
7
8
9
10
22.5
21.0
27.5
21.5
30.0
20.0
24.0
26.5
18.3
17.0
23.0
21.6
23.3
24.0
28.2
22.4
23.1
25.3
20.1
16.5
Required:
Estimate the total cost function using the ordinary least squares method. State the fixed
cost and unit cost.
(11 marks)
If each cake is sold at Sh.10, determine the break even number of cakes.
(3 marks)
(Total: 20 marks)
QUESTION FIVE
Differentiate between additive model and the multiplicative model as used in time series analysis.
(4 marks)
The sales data of XYZ Ltd. (in millions of shillings) for the years 2001 and 2004 inclusive are as
given below:
Quarter
Year
2001
2002
2003
2004
1
40
42
46
54
2
64
84
78
78
3
124
150
154
184
Required:
i) The trend in the data using the least squares method.
ii) The estimated sales for each quarter of year 2004.
iii) The percentage variation of each quarters actual sales for year 2004.
4
58
62
96
106
(8 marks)
(4 marks)
(4 marks)
(Total: 20 marks)
SECTION II
QUESTION SIX
a) Explain the following terms as used in index numbers:
i) Price index
ii) Quantity index
iii) Composite index
iv) Value index
(2 marks)
(2 marks)
(2 marks)
(2 marks)
b) The following prices and quantities reflect the average weekly consumption pattern of a
certain family for the years 2001 and 2002.
154
Lesson Four
155
Year 2001
Price (p0)
Quantity (q0)
Sh.
15
2
30
2
30
3
50
1
Item
Oranges (kg)
Milk (Litres)
Bread (Loafs)
Eggs (Dozens)
Year 2002
Price (p1)
Quantity (q1)
Sh.
25
1
35
2
40
3
65
1
Required:
i) Price relatives for each item
ii) Laspeyres price index
iii) Paasche price index
(4 marks)
(4 marks)
(4 marks)
(Total: 20 marks)
QUESTION SEVEN
Explain three methods of fitting a trend in time series analysis.
(6 marks)
The quarterly sales data for Chuce hardware are given below:
Year
2000
2001
2002
2003
2004
1
(Sh. Million)
8.5
9.5
10.4
9.5
10.9
Quarter
2
3
(Sh. Million)
(Sh. Million)
10.4
7.5
12.2
8.8
13.5
9.7
11.7
8.4
13.7
10.1
Required:
(a)
The centred fourquarter moving averages.
(b)
The specific seasonal variation for each quarter
The typical seasonal indices
(c)
Explain the third quarter typical seasonal index
(d)
4
(Sh. Million)
11.8
13.6
13.1
12.9
15.0
(6 marks)
(3 marks)
(3 marks)
(2 marks)
(Total: 20 marks)
QUESTION EIGHT
a) A machine produces circular bolts and as a quality control test, 250 bolts were selected
randomly and the diameter of their heads measured as follows:
Diameter of head (cm)
0.9747
0.9749
0.9750
0.9752
0.9753
0.9755
0.9756
0.9758
0.9759
0.9761
0.9762
0.9764
0.9765
0.9767
0.9768
0.9770
0.9771
0.9773
0.9774
0.9776
0.9777
0.9779
0.9780
0.9782
Number of components
2
6
8
15
42
68
49
25
18
12
4
1
QUANTITATIVE TECHNIQUES
156
Required:
b)
Determine whether the customer is getting reasonable value if the label on the circular
i)
bolt advertises that the average diameter of the head is 0.97642 cm.
(8 marks)
In what situation would weighted mean be used?
(3 marks)
ii)
Describe briefly how to estimate the median on a grouped frequency distribution
iii)
graphically?
(3 marks)
iv)
Why is the mode not used extensively in statistical analysis?
(3 marks)
The standard deviation is the natural partner to the mean. Explain
(3 marks)
(Total: 20 marks)
156
Probability
157
LESSON FIVE
Probability
Contents
 Probability theory
 Bayes Theorem and conditional probability
 Permutations and combinations
 Discrete probability distributions
 Continuous probability distribution
QUANTITATIVE TECHNIQUES
158
Lesson Five
5.1

PROBABILITY
Probability is a very popular concept in business management. This is because it covers
the risks which may be involved in certain business situations. It is a fact that when a
business investment is being arranged, the outcome is usually uncertain. Therefore the
concept of probability may be used to describe the degree of uncertainty of a
particular business outcome
Probability may therefore be defied as the chances of a given event occurring.
Numerically, probability values range between 0 and 1. a probability of 0 implies that
the event cannot occur at all. A probability of 1 implies that the event will certainly
occur.
Therefore other events have their probabilities with values lying between 0 and 1
The formular used to determine probability is as follow
r Favourable outcomes
Probability (x) = =
n
Total outcomes
(ii)
(iii)
P(R or B) =
20
80
or
=
25
80
9
80 4
Number of black balls in the bag
Total number of balls
0
80
= P(R )
= P(B )
=0
20 25
+
80 80
16
Note: in probability or is replaced by a plus (+) sign. See addition rule.
Common terms
Events: an event is a possible outcome of an experiment or a result of a trial or an observation.
158
Probability
159
E1
E2
E1 E2 =
E1
E2
E1 E2
Consider a survey in which a random sample of registered voters is selected. For each voter
selected their sex and political party affiliation are noted. The events KANU and woman
are not mutually exclusive because the selection of KANU does not preclude the possibly that
the voter is also a woman.
Independent Events
Events are said to be independent when the occurance of any of the events does not affect the
occurrence of the other(s).
e.g. the outcome of tossing a coin is independent of the outcome of the preceeding or
succeeding toss.
Example
From a pack of playing cards what is the probability of;
(i)
Picking either a Diamond or a Heart mutually exclusive
(ii)
Picking eigher a Flower or an Ace indepent events
Solutions.
(i)
P(Diamond or Heart)
= P(Diamond) + P(Heart)
QUANTITATIVE TECHNIQUES
160
Lesson Five
13
52
= 0.5
(ii)
13
52
26
52
P(Flower or Ace)
= P(Flower) + P(Ace) P(Flower and Ace)
13 4
1
+
=
52 52 52
4
=
= 0.31
52
Note: that the formula used incase of independent events is different to the one of
mutually exclusive.
Rules of Probability
(a)
Additional Rule This rule is used to calculate the probability of two or more mutually
exclusive events. In such circumstances the probability of the separate events must be
added.
Example
What is the probability of throwing a 3 or a 6 with a throw of a die?
Solution
P(throwing a 3 or a 6) = 1 + 1 = 1
6
6
3
(b)
Multiplicative rule
This is used when there is a string of independent events for which individual
probability is known and it is required to know the overall probability.
Example
What is the probability of a 3 and a 6 with two throws of a die?
Solution
P(throwing a 3) and P(6)
= P(3) and P(6) = 1 1 = 1
6
6
36
Note:
1)
2)
160
Probability
(c)
161
Conditional probability
This is the probability associated with combinations of events but given that some prior
result has already been achieved with one of them.
Its expressed in the form of
P(xy) = Probability of x given that y has already occurred.
P ( xy )
conditional probability formula.
P(xy) =
P( y )
Example:
In a competitive examination. 30 candidates are to be selected. In all 600 candidates appear in a
written test, and 100 will be called for the interview.
(i)
What is the probability that a person will be called for the interview?
(ii)
Determine the probability of a person getting selected if he has been called for the
interview?
(iii)
Probability that person is called for the interview and is selected?
Solution:
Let event A be that the person is called for the interview and event B that he is selected.
(i)
P(A) =
(ii)
P(BA) =
(iii)
100
600
30
= 1
3
100 10
P(AB) = P(A) P(BA)
= 1 3 = 3 = 1
6
10
60
20
=
Example:
From past experience a machine is known to be set up correctly on 90% of occasions. If the
machine is set up correctly then 95% of good parts are expected but if the machine is not set up
correctly then the probability of a good part is only 30%.
On a particular day the machine is set up and the first component produced and found to be
good. What is the probability that the machine is set up correctly.
Solution:
This is displayed in the form of a probability tree or diagram as follows:
GP = 0.95
CS = 0.9
IS = 0.1
CS GP
CS Correct Setting
IS Incorrect Setting
BP = 0.05
GP = 0.3
CS BP
GP Good Product
IS GP
BP Bad Product
BP = 0.7
IS BP
QUANTITATIVE TECHNIQUES
162
Lesson Five
Example
In a class of 100 students, 36 are male and studying accounting, 9 are male but not studying
accounting, 42 are female and studying accounting, 13 are female and are not studying
accounting.
Use these data to deduce probabilities concerning a student drawn at random.
Solution:
Accounting A
Male M
Female F
Total
45
P(M) =
P(F) =
P(A) =
()
36
42
78
100
55
100
78
P A =
Not accounting A
9
13
22
Total
45
55
100
= 0.45
= 0.55
100
22
100
= 0.78
= 0.22
36
100
= 0.36
162
Probability
163
()
P(A and M )
P(A)
Bayes rule/Theorem
This rule or theorem is given by
P(AB) =
( )
P (A ) P B A
P(B)
Its used frequently in decision making where information is given the in form of conditional
probabilities and the reverse of these probabilities must be found.
Example
Analysis of questionnaire completed by holiday makers showed that 0.75 classified their holiday
as good at Malindi. The probability of hot weather in the resort is 0.6. If the probability of
regarding holiday as good given hot weather is 0.9, what is the probability that there was hot
weather if a holiday maker considers his holiday good?
Solution
P(AB) =
( )
P (A ) P B A
P(B)
QUANTITATIVE TECHNIQUES
164
Lesson Five
P(HG) = Probability of (there was) hot weather given that the holiday has been rated
as good).
P(H )P G H (0.6 )(0.9 )
=
=
P(G)
0.75
= 0.72.
P( A ) = 0.4
P(C) = 0.7
P( C ) = 0.3
i.
P(B) = 0.5
P(~B) = 0.5
(A
C)
(A
C)
(A
C)
ii.
P
(A
C)
(A
C)
(A
C)
164
Probability
165
= P( A ) x P( B ) x P( C )
= 0.4 x 0.5 x 0.3
= 0.06
P(at least 2 working).
= P(exactly 2 working) + P(all three working)
v.
= 0.44 + 0.21
= 0.65
P(at most 2 working).
= P(Zero working) + P(one working) + P(two working)
= 0.06 + 0.29 + 0.44
= 0.79
vi.
5.3
Definition
Permutation
 This is an order arrangement of items in which the order must be strictly observed
Example
Let x, y and z be any three items. Arrange these in all possible permutations
2nd
Y
Z
X
Z
Y
X
1st
X
X
Y
Y
Z
Z
3rd
Z
Y
Z
X
X
Y
NB: The above 6 permutations are the maximum one can ever obtain in a situation where there
are only 3 items but if the number of items exceeds 3 then determining the no. of permutations
by outlining as done above may be cumbersome. Therefore we use a special formula to
determine such permutations. The formula is given below
The number of permutations of r items taken from a sample of n items may be provided as
n
Pr =
n!
(n  r )!
where; ! = factorial
e.g.
i.
P3 =
3!
(3 3)!
3 21
0!
note; 0! = 1
QUANTITATIVE TECHNIQUES
166
Lesson Five
ii.
P3
=
=
iii.
P5
6
=6
1
5!
(5  3)!
5 4 3 21
1 2
60
(7  5)!
7!
7 65 4 3 21
21
5040
2
2520
Example
There are 6 contestants for the post of chairman secretary and treasurer. These positions can be
filled by any of the 6. Find the possible no. of ways in which the 3 positions may be filled.
Solution
Chairman
Secretary
Treasurer
6
5
4
Therefore the no of ways of filing the three positions is 6 x 5 x 4 = 120
6
P3
=
=
6!
(6  3)!
65 4 3 21
3 2 1
720
6
120
Combinations
Definition
A combination is a group of times in which order is not important.
For a combination to hold at any given time it must comprise of the same items but if a new
item is added to the group or removed from the group then we have a new combination
Example
3 items x, y and z will have 6 different permutations but only one combination.
The following formular is usually used to determine the no. of combinations in a given situation.
n
Cr =
n!
r !( n r ) !
Example
i.
C7 =
8!
7!( 8 7 ) !
166
Probability
167
8! 8 7!
=
7!1! 1 7!
=8
ii.
C4 =
=
6!
4!( 6 4 ) !
6! 6 5 4!
=
4!2! 4! 2 1
= 15
iii.
8!
3!5!
8 7 6 5!
=
3 2 1 5!
C3 =
= 56
Example
There is a committee to be selected comprising of 5 people from a group of 5 men and 6
women. If the selection is randomly done. Find the possibility of having the following
possibilities (combinations)
i.
Three men and two women
At least one man and at least one woman must be in the committee
ii.
One particular man and one particular woman must not be in the committee (one
iii.
man four women)
Solution
i.
C3 6C2
11
C5
note that this formula can be fed directly to your scientific calculator and attain a solution.
5!
6!
3!2! 4!2!
11!
5!6!
5 4 3 2 1 6 5 4! 5 4 3 2 1 6!
3 2 1 2 1 2 1 4! 1110 9 8 7 6!
27
77
QUANTITATIVE TECHNIQUES
168
Lesson Five
ii.
P(at least one man and at least one woman must be in the committee)
The no. of possible combinations of selecting the committee without any woman = 5C5
The probability of having a committee of five men only
5
C5
1
=
C5 462
11
6!
5!1!
11!
5!6!
C
= 11 5 =
C5
6 5!
5!6!
5!1! 11 10 9 8 7 6!
1
77
77 462
= 1 (6 + 1)
=1
=
iii.
462
7
462
455
465
P(one particular man and one particular woman must not be in the committee
would be determined as follows
The group size
= 5m + 6w
Committee size
= 5 people
Actual groups size from which to
Select the committee
= 4m + 5w
Committee
= 1m + 4w
The committee may be selected in 9C5
The one man may be selected in 4C1 ways
The four women may be selected in 5C4 ways
P(committee of 4w1man).
5
C4 4C1
9
C5
5!
4!
4!1! 1!3!
9!
4!5!
168
Probability
169
5 4! 4 3!
4!5!
1!4! 1 3! 9 8 7 6 5!
10
63
P ( r ) = 9C5 p r (1 p )
nr
n!
nr
p r (1 p )
r !( n r )
Where
p = Probability of success
r = no. of successes
n = sample size
q = 1 P = Probability of failure
Example 1
A medical survey was conducted in order to establish the proportion of the population which
was infected with cancer. The results indicated that 40% of the population were suffering from
the disease.
A sample of 6 people was later taken and examined for the disease. Find the probability that the
following outcomes were observed
a) Only one person had the disease
b) Exactly two people had the disease
c) At most two people had the disease
d) At least two people had the disease
e) Three or four people had the disease
Solution
P(a persona having cancer)
= 40% = 0.4
P(a person not having cancer)
= 60% = 0.6
a) P(only one person having cancer)
= 6C1 (0.4)(0.6)5
=
=P
=1p=q
6!
(0.4)1(0.6)5
5 !1!
QUANTITATIVE TECHNIQUES
170
Lesson Five
= 0.1866
Note that from the formula
nC prqnr:
n = sample size = 6
r
p = 0.4
r = 1 = only one person having cancer
b) P(2 people had the disease)
= 6C2 (0.4)2 (0.6)4
=
=
6!
(0.4) 2 (0.6)5
4!2!
654 !
(0.4) 2 (0.6)5
4 ! 2 1
= 15 (0.4) 2 (0.6)5
= 0.311
c) P(at most 2) = P(0) + P(1) + P(2) = P(0) or P(1) or P(2)
So we calculate the probability of each and add them up.
P(0) = P(nobody having cancer)
= 6C0 (0.4) 0(0.6)6
=
6!
(0.4) 0(0.6)6
0 !6 !
= (0.6)6
= 0.0467
The probabilities of P(1) and P(2) have been worked out in part (a) and (b)
Therefore P(at most 2) = 0.0467 + 0.1866 + 0.311 = 0.5443
d) P(at least 2)
= P(2) + P(3) + P(4) + P(5) + P(6)
= 1 [P(0) + P(1)] This is a shorter way of working out the solution since
6!
6!
(0.4) 3(0.6)3 +
(0.4) 4(0.6)2
3!3!
2! 4!
170
Probability
171
Example 2
An insurance company takes a keen interest in the age at which a person is insured.
Consequently a survey conducted on prospective clients indicated that for clients having the
same age the probability that they will be alive in 30 years time is 2 3 . This probability was
established using the actuarial tables. If a sample of 5 people was insured now, find the
probability of having the following possible outcomes in 30 years
a) All are alive
b) At least 3 are alive
c) At most one is alive
d) None is alive
e) At least 1 is alive
Sample size = 5
P ( alive ) = p =
a)
where as
2
3
P ( not alive ) = q = 13
P ( all alive ) = P ( r = 5 )
= 5C5 ( 23 )
=
( 13 )
5! 2 5 1 0
( )( )
5!0! 3 3
= ( 23 )
32
243
P ( atleast 3 alive ) = P ( r 3)
=
b)
= P ( 3) orP ( 4 ) orP ( 5 ) = P ( 3) + P ( 4 ) + P ( 5 )
P ( 3) = C3 (
5
P ( 4 ) = 5C4 ( 23 )
)( )
2 3
3
1 2
3
5! 2 5 1 0
3
2
=
( 3 ) ( 3 ) = 10 ( 23 ) ( 13 )
3!2!
80
=
243
P (5) =
32
243
80
80
32
+
+
243 243 243
192
=
243
P ( 3) =
QUANTITATIVE TECHNIQUES
( 13 )
5! 2 4 1 1 5 4! 2 4 1
( 3) (3) =
( 3) (3)
4!1!
4! 1
80
=
243
=
172
c)
Lesson Five
P ( atmost 1 is alive ) = P ( r 1)
d)
= P ( 0 ) + P (1)
= 5C0 ( 23 )
( 13 )
P ( none is alive ) = P ( r = 0 )
= 5C0 ( 23 )
+ 5C1 ( 23 )
( 13 )
5! 1 5 5! 2 1 4
( ) + ( 3 )( 3 )
0!5! 3
1!4!
1
10
=
+
243 243
11
=
243
=
e)
( 13 )
1
243
P ( atleast 1 alive ) = P ( r 1)
= 1 P ( none alive )
1
243
242
=
243
= 1
P ( x) =
e x
x!
Where
x = No. of successes
i.
e x
x!
( = np = 1000 0.005) = 5
P(only one is defective) = P(1) = P(x = 1)
=
2.718 5 51
1!
1
2.718 5
172
Probability
173
5
2.718 5
5
148.33
ii.
0.0337
P(at most 2 defective) = P(x 2)
=
P(0) + P(1) + P(2)
e 5 50
0!
P(x = 0) =
= 2.7185
=
=
P(1) = 0.0337
P(2) =
2.718+ 5
1
148.336
= 0.00674
2.7185 52
2!
25
2 148.336
= 0.08427
iii.
npq
Example
A firm is manufacturing 45,000 units of nuts. The probability of having a defective nut is 0.15
Calculate the following
The expected no. of defective nuts
i.
The variance and standard deviation of the defective nuts in a daily consignment of
ii.
45,000
Solution
Sample size n = 45,000
P(defective) = 0.15 = p
P(non defective) = 0.85 = q
the expected no of defective nuts
= 45,000 0.15 = 6,750
The variance = npq
ii.
= 45000 0.85 0.15
i.
QUANTITATIVE TECHNIQUES
174
Lesson Five
= 5737.50
The standard deviation =
npq
= 5737.50
= 75.74
np =
Example
The probability of a rare disease striking a given population is 0.003. A sample of 10000 was
examined. Find the expected no. suffering from the disease and hence determine the variance
and the standard deviation for the above problem
Solution
Sample size
n = 10000
P(a person suffering from the disease) = 0.003 = p
expected number of people suffering from the disease
Mean = = 10000 0.003
= 30
= np =
variance = np = 30
Standard deviation =
np
= 30
= 5.477
5.5
PROBABILITY DISTRIBUTION FOR CONTINUOUS RANDOM
VARIABLES.
In a continuous distribution, the variable can take any value within a specified range, e.g. 2.21 or
1.64 compared to the specific values taken by a discrete variable e.g 1 or 3. The probability is
represented by the area under the probability density curve between the given values.
The uniform distribution, the normal probability distribution and the exponential distribution
are examples of a continuous distribution
 The normal distribution is a probability distribution which is used to determine
probabilities of continuous variables
Examples of continuous variables are
o Distances
o Times
o Weights
o Heights
o Capacity e.t.c
 Usually continuous variables are those, which can be measured by using the appropriate
units of measurement.
 Following are the properties of the normal distribution
174
Probability
175
1. The total area under the curve is = 1 which is equivalent to the maximum value
of probability
Normal probability
Distribution curve
Line of symmetry
Tail end
Tail end
Age (Yrs)
2. The line of symmetry divides the curve into two equal halves
3. The two ends of the normal distribution curve continuously approach the
horizontal axis but they never cross it
4. The values of the mean, mode and median are all equal
NB: The above distribution curve is referred to as normal probability distribution curve because
if a frequency distribution curve is plotted from measurements of a given sample drawn from a
normal population then a graph similar to the normal curve must be obtained.
 It should be noted that 68% of any population lies within one standard deviation, 1
 95% lies within two standard deviations 2
 99% lies within three standard deviations 3
Where = standard deviation
QUANTITATIVE TECHNIQUES
176
Lesson Five
STANDARDIZATION OF VARIABLES
 Before we use the normal distribution curve to determine probabilities of the
continuous variables, we need to standardize the original units of measurement, by
using the following formular.
Z=
35  35
= 0
5
the area between Z = 0 and Z = 1 is 0.3413 (These values are checked from the normal
tables see appendix)
The value from standard normal curve tables.
When z = 0,
p=0
And when z = 1, p = 0.3413
Now the area under this curve is the area between z = 1 and z = 0
= 0.3413 0 = 0.3413
the probability age lying between 35 and 40 yrs is 0.3413
(ii). 30 and 40 years
30 35
5
=
=
Z=
5
5
40 35
=
=
Z=
5
= 1
1
176
Probability
177
P = 0.6826
Z=
30 35
5
= 1
5
5
Probability corresponding to Z = 2 = 0.4772 = probability of between 35 and 45
(i)..
(iii)
( )
Where E x 2 = x 2 f ( x )dx
a
QUANTITATIVE TECHNIQUES
178
Lesson Five
ii)
f ( x )dx = 1
Mean = E ( x ) = xf ( x )dx
0
kx.dx =
0
k
2
k
2
x 2 = 1
0
2 x dx =
2
(1 0 ) = 1
2
3
x 3
( 23 0 ) = 23
k = 2
iii)
Variance = E ( x 2 ) E ( x )
b
= x 2 f ( x ) dx [ Mean ]
= ( x 2 2 x )dx ( 23 )
= 12 x 4 94
0
=
1
2
4
9
Variance =
1
18
Exponential distribution
Example
The mean life of an electrical component is 100 hours and its life has an exponential
distribution.
Find
a. The probability that it will last less than 60 hours
b. The probability that it will last more than 90 hours
Solution
A continuous random variable X has an exponential distribution, if for some constant k >0 it
has the probability density function
= k .e kx for
f ( x)
= 0
x0
elsewhere
178
Probability
179
The function f(x) is positive for all values of x and the area under the curve
f ( x ) dx = ke kx dx = 1
0
1
k
1
k2
Example
The mean of an exponential distribution is 100, find;
a) P(x<60)
b) P(x>90)
solution.
a) P ( x < 60 ) =
60
1
1 100 x
100
dx
1
100
60
= e 100 = 1e0.6
0
= 0.45
b) P x > 90 = 1 P ( x 90 )
90
1
= 1 100
e
x
100
dx
90
= 1 e0.9 = e0.9
0
= 0.41
The students t distribution
The students t distribution was presented by W. S. Gosset in 1908 under the pen name of
student. The t distribution is of great importance in the so called small sample tests and is
profoundly used in statistical inference
The t distribution has a single parameter, known as the number of degrees of freedom. It is
denoted by the Greek symbol (read as nu). It can be interpreted as the number of useful items
of information generated by a sample of given size. The degrees of freedom are sample size less
one (v = n1)
Properties of t distribution
1.
The t distribution ranges from to first as does the normal distribution
The t distribution like the standard normal distribution is bell shaped and
2.
symmetrical around mean zero
The shapes of the t distribution changes as the number of degrees of freedom
3.
changes
4.
The t distribution is more platykurtic that the normal distribution
The t distribution has a greater dispersion than the standard normal
5.
distribution. As n gets larger the t distribution approaches the normal
distribution when n = 30 the difference is very small
QUANTITATIVE TECHNIQUES
180
Lesson Five
Relation between the t distribution and standard normal distribution is shown in the following
diagram
4
3
2
1
Note that the t distribution has different shapes depending on the size of the sample. When the
sample is quite small the height of the t distribution is shorter than the normal distribution and
the tails are wider.
Assumptions of t distribution
1. The sample observations are random
2. Samples are drawn from normal distribution
3. The size of sample is thirty or less n 30
Application of t distribution
 Estimation of population mean from small samples
 Test of hypothesis about the population mean
 Test of hypothesis about the difference between two means
Chi Square distribution
Chi square was first used by Karl Pearson in 1900. It is denoted by the Greek letter 2. it
contains only one parameter, called the number of degrees of freedom (df), where the term
degree of freedom represents the number of independent random variables that express the chi
square
Properties
1.
Its critical values vary with the degree of freedom. For every increase in the number
of degrees of freedom there is a new 2 distribution.
This possesses additional property so that when 21 and 22 are independent and
2.
have a chi square distribution with n1 and n2 degrees of from 21 + 22 will also be
distributed as a chi square distribution with n1 + n2 degrees of freedom
Where the degrees of freedom is 3.0 and less the distribution of 2 is skewed. But,
3.
for degrees of freedom greater than 30 in a distribution, the values of 2 are
normally distributed
180
Probability
181
4.
The 2 function has only one parameter, the number of degrees of freedom.
P(x)
=1
=2
=3
=4
=5
10
s12
expressed as
s 22
d12
d 22
QUANTITATIVE TECHNIQUES
182
Lesson Five
s12
(x x )
=
s22
(x
=
n1 1
2
x2
n1 1
S12
S 22
F Distribution with n11 and n21 degrees of freedom. F distribution depends on the degrees
of freedom 1 for the numerator and 2 for the denominator. It has parameters 1 and 2
such that for different values of 1 and 2 will have different distributions.
Properties
1.
2.
Variance =
1
v2  2
2v12 ( v1 + v2 2 )
v1 ( v2 2 ) ( v2 4 )
2
for 2 >2
for 2 > 4
3.
The f distribution is positively skewed and its skewness decreases with increases
4.
in 1 and 2
The value of f must be positive or zero since variances are squares and can
never assume negative values
Assumptions
a) All sample observations are randomly selected and independent
b) The total variance of the various sources of variance should be additive.
c) The ratio of S12 to S22 should be equal to or greater than 1
d) The population for each sample must be normally distributed with identical mean of
variance
e) F value can never be negative
182
Probability
183
Required:
a)
Explain why the Poisson distribution is appropriate to invstigate this situation.
Using the Poisson distribution, determine the probability of accepting a batch Pa,
b)
containing p=2% defectives if the method is used.
Determine Pa, for p = 0%, 2%, 5%, 10%, 15%
QUESTION TWO
A woven cloth is liable to contain faults and is subjected to an inspection procedure. Any fault
has a probability of 0.7 that it will be detected by the procedure, independent of whether any
other fault is detected or not.
Required:
a) If a piece of cloth contains three faults, A, B and C,
Calculate the probability that A and C are detected, but that B is undetected;
i)
ii)
Calculate the probability that any two of A, B and C be detected, the other fault
being undetected;
State the relationship between your answers to parts (i) and (ii) and give reasons for
iii)
this.
b) Suppose now that, in addition to the inspection procedure given above, there is a secondary
check which has a probability of 0.6 of detecting each fault missed by the first inspection
procedure. This probability of 0.6 applies independently to each and every fault undetected
by the first procedure.
i)
Calculate the probability that a piece of cloth with one fault has this fault
undetected by both the inspection procedure and the secondary check;
ii)
Calculate the probability that a piece of cloth with two faults has one of these faults
detected by either the inspection procedure or the secondary check, and one fault
undetected by both;
Of the faults detected, what proportion are detected by the inspection procedure
iii)
and what proportion by the secondary check?
QUANTITATIVE TECHNIQUES
184
Lesson Five
QUESTION THREE
A company has three production sections S1,S2 and S3 which contribute 40%,35% and 25%,
respectively, to total output. The following percentages of faulty units have been observed:
S1
2%
(0.02)
S2
3%
(0.03)
S3
4%
(0.04)
There is a final check before output is dispatched. Calculate the probability that a unit found
faulty at this check has come from section 1, S1
QUESTION FOUR
Assuming a Binomial Distribution what is the probability of a salesman making 0,1,2,3,4,5 or 6
sales in 6 visits if the probability of making a sale on a visit is 0.3?
Do not use tables for this question.
QUESTION FIVE
Records show that 60% of students pass their examinations at first attempt. Using the normal
approximation to the binomial, calculate the probability that at least 65% of a group of 200
students will pass at the first attempt.
QUESTION SIX
A batch of 5000 electric lamps has a mean life of 1000 hours and a standard deviation of 75
hours. Assume a normal distribution.
a) How many lamps will fail before 900 hours?
How many lamps will fail between 950 and 1000 hours?
b)
c) What proportion of lamps will fail before 925 hours?
d)Given the same mean life, what would the standard deviation have to be to ensure that
no more than 20% of lamps fail before 916 hours?
184
185
LESSON SIX
Sampling and Estimation
Sampling techniques
Central limit theorem
Sampling distribution of statistical parameters
Test of hypothesis
6.1
Methods of Sampling
a . Random or probability sampling methods
they include
Simple random sampling
i.
ii.
Stratified sampling
Systematic sampling
iii.
Multi stage sampling
iv.
b. Non random probability sampling methods
these consist of
i.
ii.
iii.
Judgment sampling
Quota sampling
Cluster sampling
QUANTITATIVE TECHNIQUES
186
Lesson Six
Systematic Sampling
This sampling is a part of simple random sampling in ascending or descending orders. In
systematic sampling a sample is drawn according to some predetermined object. Suppose a
population consists of 1000 units, then every tenth, 20th or 50th item is selected. This method is
very easy and economical. It also saves a lot of time
Multistage sampling
This is similar to stratified sampling except division is done on geographical/location basis, e.g. a
country can be divided into provinces and then survey is done in 4 towns in each province. This
helps to cut traveling costs for a surveyor.
Cluster Sampling
This is where a few geographical regions e.g. a location, town or village are selected at random
and say every single household or shop in that area is interviewed. This again cuts on costs.
Judgment Sampling
Here the interviewer selects whom to interview believing that their view is more fundamental
since they might be directly affected e.g. to find out effects of public transport one may chose to
interview only people who dont own cars and travel frequently to work.
6.2
THE CENTRAL LIMIT THEOREM
The theory was introduced by De Moivre and according to it; if we select a large number of
simple random samples, say from any population and determine the mean of each
sample, the distribution of these sample means will tend to be described by the normal
probability distribution with a mean and variance 2/n. This is true even if the population
itself is not normal distribution. Or the sampling distribution of sample means approaches to a
normal distribution irrespective of the distribution of population from where the sample is taken
and approximation to the normal distribution becomes increasingly close with increase in sample
sizes
Types of distribution
Population distribution
It refers to the distribution of the individual values of population. Its mean is denoted by
Sample distribution
It is the distribution of the individual values of a single sample. Its mean is generally written as
x . it is not usually the same as
Distribution of Sample Means or sampling distribution
A sample of size n is taken from the parent population and mean of the sample is calculated.
This is repeated for a number of samples so that we have a distribution of sample means, which
approaches a normal distribution.
Standard errors of the mean
The series of sample means X 1 , X 2 , X 3 .. is normally distributed or nearly so (according
to the central limit theorem). It can be described by its mean and its standard deviation. This
standard deviation is known as the standard error.
186
187
s
n
Note: this formula is satisfactory for larger samples and a large population i.e. n > 30 and n >
5% of N.
 The word error is in place of deviation to emphasize that variation among sample means
is due to sampling errors.
 The smaller the standard error the greator the precision of the sample value.
6.3
Statistical inference
It is the process of drawing conclusions about attributes of a population based upon information
contained in a sample (taken from the population).
It is divided into estimation of parameters and testing of hypothesis. Symbols for statistic of
population parameters are as follows.
Arithmetic mean
Standard deviation
Number of items
Sample Statistic
x
s
n
Population Parameter
Statistical estimation
It is the procedure of using statistic to estimate a population parameter
It is divided into point estimation (where an estimate of a population parameter is given by a
single number) and interval estimation (where an estimate of a population is given by a range in
which the parameter may be considered to lie) e.g. a bus meant to take a class of 100 students
(population N) for trip has a limit to the maximum weight of 600kg of which it can carry, the
teacher realizes he has to find out the weight of the class but without enough time to weigh
everyone he picks 25 students selected at random (sample n = 25). These students are weighed
and their average weight recorded as 64kg ( X  mean of a sample) with a standard deviation (s),
now using this the teacher intends to estimate the average weight of the whole class (
population mean) by using the statistical parameters standard deviation (s), and mean of the
sample ( x ).
QUANTITATIVE TECHNIQUES
188
Lesson Six
ii.
1.
LARGE SAMPLES
These are samples that contain a sample size greater than 30(i.e. n>30)
(a)
Estimation of population mean
Here we assume that if we take a large sample from a population then the mean of the
population is very close to the mean of the sample
Steps to follow to estimate the population mean includes
i.
Take a random sample of n items where (n>30)
ii.
Compute sample mean ( X ) and standard deviation (S)
Compute the standard error of the mean by using the following formular
iii.
s
Sx =
n
where S x = Standard error of mean
S = standard deviation of the sample
n = sample size
iv.
Choose a confidence level e.g. 95% or 99%
Estimate the population mean as under
v.
Population mean = (appropriate number) S x
Appropriate number means confidence level e.g. at 95% confidence level is 1.96
this number is usually denoted by Z and is obtained from the normal tables.
Example
The quality department of a wire manufacturing company periodically selects a sample of wire
specimens in order to test for breaking strength. Past experience has shown that the breaking
strengths of a certain type of wire are normally distributed with standard deviation of 200 kg. A
random sample of 64 specimens gave a mean of 6200 kgs. Find out the population mean at 95%
level of confidence
Solution
Population mean = 1.96 S x
Note that sample size is alredy n > 30 whereas s and x are given thus step i), ii) and iv) are
provided.
Here: X = 6200 kgs
s
200
Sx =
=
=
25
n
64
Population mean
= 6200 1.96(25)
= 6200 49
= 6151 to 6249
At 95% level of confidence, population mean will be in between 6151 and 6249
188
189
FPCF is given by
N n
n 1
Example
A manager wants an estimate of sales of salesmen in his company. A random sample 100 out of
500 salesmen is selected and average sales are found to be Shs. 75,000. if a sample standard
deviation is Shs. 15000 then find out the population mean at 99% level of confidence
Solution
Here N = 500, n = 100, X = 75000 and S = 15000
Now
Standard error of mean
s
N n
= Sx =
x
n 1
n
(500 100 )
(500 1)
15000
x
100
15000
400
x
499
10
15000
=
(0.895)
10
Sx
Population mean
b)
Estimation of difference between two means
We know that the standard error of a sample is given by the value of the standard deviation
()divided by the square root of the number of items in the sample (
But, when given two samples, the standard errors is given by
S (X
AX B
)=
n ).
S A2 S B2
+
n A nB
Also note that we do estimate the interval not from the mean but from the difference between
the two sample means i.e. X A X B .
The appropriate number of confidence level does not change
Thus the confidence interval is given by;
X A X B Confidence level S (X X )
A B
= X A X B Z S (X X )
A B
QUANTITATIVE TECHNIQUES
190
Lesson Six
Example
Given two samples A and B of 100 and 400 items respectively, they have the means X 1 = 7 ad
Solution
Sample A
X1 = 7
X 2 = 10
n2 = 400
n1 = 100
S2 = 3
S1 = 2
The standard error of the samples A and B is given by
S (X
AX B )
25
=
400
4
9
+
100 400
5
20
0.25
At 70% confidence level, then appropriate number is equal to 1.04 (as read from the normal
tables)
X 1 X 2 = 7 10 =  3 = 3
We take the absolute value of the difference between the means e.g. the value of X = absolute
value of X i.e. a positive value of X.
Confidence interval is therefore given by
= 3 1.04 (0.25 )
From the normal tables a z value of 1.04 gives a value of 0.7.
= 3 0.26
= 3.26 and 2.974
Thus 2.974 X 3.26
Example 2
A comparison of the wearing out quality of two types of tyres was obtained by road testing.
Samples of 100 tyres were collected. The miles traveled until wear out were recorded and the
results given were as follows
Tyres
T1
T2
X 1 = 26400 miles
X 2 = 25000 miles
Mean
Variance
S21= 1440000 miles
S22= 1960000 miles
Find a confidence interval at the confidence level of 70%
Solution
X 1 = 26400
X 2 = 25000
Difference between the two means
(X
X 2 = (26400 25000)
190
191
= 1,400
Again we take the absolute value of the difference between the two means
We calculate the standard error as follows
S (X
AX B )
S12 S 22
+
n1 n2
=
184.4
Confidence level at 70% is read from the normal tables as 1.04 (Z = 1.04).
Thus the confidence interval is calculated as follows
= 1400 (1.04) (184.4)
= 1400 191.77
or (1400 191.77) to (1400 + 191.77)
1,208.23 X 1591.77
Pq
= Standard error for sampling of population proportions
n
Example 1
In a sample of 800 candidates, 560 were male. Estimate the population proportion at 95%
confidence level.
Solution
Here
Sample proportion (P) =
560
= 0.70
800
q = 1 p = 1 0.70 = 0.30
n = 800
pq
=
n
( 0.70 )( 0.30 )
800
Sp = 0.016
population proportion
QUANTITATIVE TECHNIQUES
192
Lesson Six
= P 1.96 Sp where 1.96 = Z.
= 0.70 1.96 (0.016)
= 0.70 0.03
= 0.67 to 0.73
= between 67% to 73%
Example 2
A sample of 600 accounts was taken to test the accuracy of posting and balancing of accounts
where in 45 mistakes were found. Find out the population proportion. Use 99% level of
confidence
Solution
Here
n = 600; p =
45
= 0.075
600
q = 1 0.075 = 0.925
Sp =
pq
=
n
( 0.075 )( 0.925 )
600
= 0.011
Population proportion
= P 2.58 (Sp)
= 0.075 2.58 (0.011)
= 0.075 0.028
= 0.047 to 0.10
= between 4.7% to 10%
S (P
1 P2 )
pq pq
p n + p2 n2
+
where p = 1 1
and q = 1  p
n1 n2
n1 + n2
Then given the confidence level, the confidence interval between the two population
proportions is given by
(P1 P2) Confidence level S (P P )
1 2
= (P1 P2) Z
pq pq
+
n1 n2
192
Where P =
193
p1n1 + p2 n2
always remember to convert P1 & P2 to P.
n1 + n2
2.
SMALL SAMPLES
(a)
Estimation of population mean
If the sample size is small (n<30) the arithmetic mean of small samples are not normally
distributed. In such circumstances, students t distribution must be used to estimate the
population mean.
In this case
Population mean = X tsx
X = Sample mean
s
Sx =
n
S = standard deviation of samples =
( x x)
n 1
n = sample size
v = n 1 degrees of freedom.
The value of t is obtained from students t distribution tables for the required confidence level
Example
A random sample of 12 items is taken and is found to have a mean weight of 50 grams and a
standard deviation of 9 grams
What is the mean weight of population
a) with 95% confidence
b) with 99% confidence
Solution
X = 50; S = 9; v = n 1 = 12 1 = 11;
Sx =
s
9
=
n
12
= x tsx
At 95% confidence level
12
= 50 2.262
= 50 5.72 grams
Therefore we can state with 95% confidence that the population mean is between 44.28 and
55.72 grams
At 99% confidence level
12
= 50 3.25
= 50 8.07 grams
QUANTITATIVE TECHNIQUES
194
Lesson Six
Therefore we can state with 99% confidence that the population mean is between 41.93 and
58.07 grams
Note: To use the t distribution tables it is important to find the degrees of freedom (v = n 1).
In the example above v = 12 1 = 11
From the tables we find that at 95% confidence level against 11 and under 0.05, the value of t =
2.201
6.4
Hypothesis Testing
Definition
 A hypothesis is a claim or an opinion about an item or issue. Therefore it has to be tested
statistically in order to establish whether it is correct or not correct
 Whenever testing an hypothesis, one must fully understand the 2 basic hypothesis to be tested
namely
i.
The null hypothesis (H0)
The alternative hypothesis(H1)
ii.
The null hypothesis
This is the hypothesis being tested, the belief of a certain characteristic e.g. Kenya Bureau of
Standards (KBS) may walk to a sugar making company with an intention of confirming that the
2kgs bags of sugar produced are actually 2kgs and not less, they conduct hypothesis testing with
the null hypothesis being: H0 = each bag weighs 2kgs. The testing will set out to confirm this or
to refute it.
The alternative hypothesis
While formulating a null hypothesis we also consider the fact that the belief might be found to
be untrue hence we will reject it. We therefore formulate an alternative hypothesis which is a
contradiction to the null hypothesis, thus when we reject the null hypothesis we accept the
alternative hypothesis.
In our example the alternative hypothesis would be
H1 = each bag does not weigh 2kg
Acceptance and rejection regions
All possible values which a test statistic may either assume consistency with the null hypothesis
(acceptance region) or lead to the rejection of the null hypothesis (rejection region or critical
region)
The values which separate the rejection region from the acceptance region are called critical
values
Type I and type II errors
While testing hypothesis (H0) and deciding to either accept or reject a null hypothesis, there are
four possible occurrences.
a) Acceptance of a true hypothesis (correct decision) accepting the null hypothesis and it
happens to be the correct decision. Note that statistics does not give absolute information,
thus its conclusion could be wrong only that the probability of it being right are high.
b) Rejection of a false hypothesis (correct decision).
c) Rejection of a true hypothesis (incorrect decision) this is called type I error, with
probability = .
d) Acceptance of a false hypothesis (incorrect decision) this is called type II error, with
probability = .
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Levels of significance
A level of significance is a probability value which is used when conducting tests of hypothesis.
A level of significance is basically the probability of one making an incorrect decision after the
statistical testing has been done. Usually such probability used are very small e.g. 1% or 5%
0.5000
0.4900
0
Critical value
0.45
5% = 0.05
Critical region
0
Crititical value = 1.65
NB: If the standardized value of the mean is less than 1.65 we reject the null hypothesis (H0)
and accept the alternative Hypothesis (H1) but if the standardized value of the mean is more
than 1.65 we accept the null hypothesis and reject the alternative hypothesis
The above sketch graph and level of significance are applicable when the sample mean is < (i.e.
less than the population mean)
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Lesson Six
Acceptance region
5% = 0.05
NB: If the sample mean standardized value < 1.65, we accept the null hypothesis but reject the
alternative. If the sample mean value > 1.65 we reject the null hypothesis and accept the
alternative hypothesis
The above sketch is normally used when the sample mean given is greater than the population
mean
0.05% = 0.05
0.495
0.495
2.58
0.5% = 0.05
+2.58
NB: if the standardized value of the sample mean is between 2.58 and +2.58 accept the null
hypothesis but otherwise reject it and therefore accept the alternative hypothesis
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H0
Critical region
Critical region
15cm
17 cm
NB: Alternative hypothesis is usually rejected if the standardized value of the sample mean lies
beyond the tolerance limits (15cm and 17 cm).
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Lesson Six
left
On the other hand the test may compuliate on the right hand tail of the normal distribution
when this happens the major complaint is likely to do with oversize items bought. Therefore the
test is known as one tailed as the focus is on one end of the normal distribution.
5% level of significance
1% level of significance
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1. Normal test
Test a sample mean ( X ) against a population mean () (where samples size n > 30 and
population variance 2 is known) and sample proportion, P(where sample size np >5 and nq
>5 since in this case the normal distribution can be used to approximate the binomial
distribution
2. t test
Tests a sample mean ( X ) against a population mean and especially where the population
variance is unknown and n < 30.
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Lesson Six
Acceptance region
Rejection region
 1.65
X = Sample mean
= Population mean
S = sample standard deviation
n = sample size
z = standard value (as per computation)
The standard value Z must fall within the acceptance region for us to accept the null
hypothesis. Thus it must be >  1.65 otherwise we accept the alternative hypothesis.
16 19
2.1
50
=  10.1
6. Since 10.1 < 1.65, we reject the null hypothesis but accept the alternative hypothesis
at 5% level of significance i.e. the marriage age in this community is significantly lower
than 19 years
Example 2
A foreign company which manufactures electric bulbs has assured its customers that the lifespan
of the bulbs is 28 month with a standard deviation of 4months
Recently the company embarked on a quality improvement research for their product. After the
research using new technology, a sample of 70 bulbs was tested and they gave a mean lifespan of
30.2 months
Does this justify the research undertaken? Use 1% level of significance to conduct a statistical
test in order to establish the truth about the above question.
Testing procedure
1. Null hypothesis H0: = 28
Alternative hypothesis H1: > 28
2. The level of significance is 1% (one tailed test)
STRATHMORE UNIVERSITY STUDY PACK
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201
0.4900
1% = 0.01
2.33
5. The standardized value of the sample mean is
Z
X
Sx
30.2 28
4
70
= 4.6
6. Since 4.6 > 2.33, we reject the null hypothesis but accept the alternative hypothesis at
1% level of significance i.e. the new sample mean life span is statistically significant
higher than the population mean
Therefore the research undertaken was worth while or justified
Example 3
A construction firm has placed an order that they require a consignment of wires which have a
mean length of 10.5 meters with a standard deviation of 1.7 m
The company which produces the wires delivered 90 wires, which had a mean length of 9.2 m.,
The construction company rejected the consignment on the grounds that they were different
from the order placed.
Required
Conduct a statistical test to indicate whether you support or not support the action taken by the
construction company at 5% level of significance.
Solution
Null hypothesis = 10.5 m
Alternative hypothesis 10.5 m
Level of significance be 5%
The test statistics is the sample mean X = 9.2m
The critical value of the two tailed test at 5% level of significance is 1.96 (two tailed test).
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Lesson Six
 1.96
+1.96
X 
SX
9.2 10.5
1.7
90
=  7.25
Since 7.25 < 1.96, reject the null hypothesis but accept the alternative hypothesis at 5% level
of significance i.e. the sample mean is statistically different from the consignment ordered by
the construction company. Therefore support the action taken by the construction company
X1 X 2
S X1 X 2
where S X 1 X 2 =
S12 S 22
+
n1 n2
Example 1
An agronomist was interested in the particular fertilizer yield output. He planted maize on 50
equal pieces of land and the mean harvest obtained later was 60 bags per plot with a standard
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deviation of 1.5 bags. The crops grew under natural circumstances and conditions without the
soil being treated with any fertilizer. The same agronomist carried out an alternative experiment
where he picked 60 plots in the same area and planted the same plant of maize but a fertilizer
was applied on these plots. After the harvest it was established that the mean harvest was 63
bags per plot with a standard deviation of 1.3 bags
Required
Conduct a statistical test in order to establish whether there was a significant difference between
the mean harvest under the two types of field conditions. Use 5% level of significance.
Solution
H 0 : 1 = 2
H 1 : 1 2
Critical values of the two tailed test at 5% level of significance are 1.96
The standardized value of the difference between sample means is given by Z where
=
=
 1.96
X1 X 2
S X1 X 2
where S X 1 X 2 =
1.52 1.32
+
50
60
( 60 63)
0.045 + 0.028
11.11
+1.96
Since 11.11 < 1.96, we reject the null hypothesis but accept the alternative hypothesis at 5%
level of significance i.e. the difference between the sample mean harvest is statistically significant.
This implies that the fertilizer had a positive effect on the harvest of maize
Note: You dont have to illustrate your solution with a diagram.
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Lesson Six
Example 2
An observation was made about reading abilities of males and females. The observation lead to a
conclusion that females are faster readers than males. The observation was based on the times
taken by both females and males when reading out a list of names during graduation ceremonies.
In order to investigate into the observation and the consequent conclusion a sample of 200 men
were given lists to read. On average each man took 63 seconds with a standard deviation of 4
seconds
A sample of 250 women were also taken and asked to read the same list of names. It was found
that they on average took 62 seconds with a standard deviation of 1 second.
Required
By conducting a statistical hypothesis testing at 1% level of significance establish whether the
sample data obtained does support earlier observation or not
Solution
H0: 1 = 2
H1: 1 2
Critical values of the two tailed test is at 1% level of significance is 2.58.
Z
X1 X 2
S X1 X 2
63 62
42
200
1
+ 250
)
=
3.45
Acceptance region
Rejection region
 2.58
+2.58
+3.45
Since 3.45 > 2.33 reject the null hypothesis but accept the alternative hypothesis at 1% level
of significance i.e. there is a significant difference between the reading speed of Males and
females, thus females are actually faster readers.
204
Sp =
205
Pq
n
P
Sp
Example
A member of parliament (MP) claims that in his constituency only 50% of the total youth
population lacks university education. A local media company wanted to acertain that claim thus
they conducted a survey taking a sample of 400 youths, of these 54% lacked university
education.
Required:
At 5% level of significance confirm if the MPs claim is wrong.
Solution.
Note: This is a two tailed tests since we wish to test the hypothesis that the hypothesis is
different () and not against a specific alternative hypothesis e.g. < less than or > more
than.
H0 : = 50% of all youth in the constituency lack university education.
H1 : 50% of all youth in the constituency lack university education.
pq
0.5 x0.5
=
= 0.025
n
400
0.54 0.50
= 1.6
Z=
0.025
Sp =
at 5% level of significance for a twotailored test the critical value is 1.96 since calculated Z value
< tabulated value (1.96).
i.e. 1.6 < 1.96 we accept the null hypothesis.
Thus the MPs claim is accurate.
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Lesson Six
The critical value for this two tailed test at 5% level of significance = 1.96.
Now Z =
( P1 P2 ) ( 1 2 )
S ( P1 P2 )
But since the null hypothesis is 1 = 2, the second part of the numerator disappear i.e.
1  2 = 0 which will always be the case at this level.
Then Z =
( P1 P2 )
S ( P1 P2 )
Where;
Sample size
Sample proportion of success
Population proportion of success.
Now
Sample 2
n2 = 12,000
P2 = 0.83
2
pq pq
+
n1 n2
S ( p1 p2 ) =
Where P =
Sample 1
n1 = 10,000
P1 =0.72
1
p1n1 + p2 n2
n1 + n2
And q = 1 p
in our case
P=
q = 0.22
S ( P1 P2 ) =
0.78 ( 0.22 )
10, 000
0.78 ( 0.22 )
12, 000
= 0.00894
Z=
0.72 0.83
0.00894
12.3
Since 12.3 > 1.96, we reject the null hypothesis but accept the alternative. the differences
between the proportions are statistically significant. This implies that the perfume is much
more popular in Rook town than in Back rank city.
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The null hypothesis is that there is no difference between the population proportions. It means
two samples are from the same population.
Hence
H0 : 1 = 2
The best estimate of the standard error of the difference of P1 and P2 is given by pooling the
samples and finding the pooled sample proportions (P) thus
P=
p1n1 + p2 n2
n1 + n2
S ( p1 p2 ) =
pq pq
+
n1 n2
P1 P2
S ( p1 p2 )
And Z =
Example
In a random sample of 100 persons taken from village A, 60 are found to be consuming tea. In
another sample of 200 persons taken from a village B, 100 persons are found to be consuming
tea. Do the data reveal significant difference between the two villages so far as the habit of
taking tea is concerned?
Solution
Let us take the hypothesis that there is no significant difference between the two villages as far
as the habit of taking tea is concerned i.e. 1 = 2
We are given
n1 = 100
P1 = 0.6;
n2 = 200
P2 = 0.5;
Appropriate statistic to be used here is given by
P
=
=
p1n1 + p2 n2
n1 + n2
300
= 0.53
= 1 0.53
= 0.47
S ( P1 P2 ) =
=
pq pq
+
n1 n2
200
= 0.0608
0.6 0.5
Z=
0.0608
= 1.64
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Lesson Six
Since the computed value of Z is less than the critical value of Z = 1.96 at 5% level of
significance therefore we accept the hypothesis and conclude that there is no significant
difference in the habit of taking tea in the two villages A and B
t distribution (students t distribution) tests of hypothesis (test for small samples n < 30)
For small samples n < 30, the method used in hypothesis testing is exactly similar to the one for
large samples exept that t values are used from t distribution at a given degree of freedom v,
instead of z score, the standard error Se statistic used is also different.
Note that v = n 1 for a single sample and n1 + n2 2 where two sample are involved.
a) Test of hypothesis about the population mean
When the population standard deviation (S) is known then the t statistic is defined as
t
X
SX
where S X =
S
n
X = Sample mean
= Hypothesis population mean
n = sample size
and S is the standard deviation of the sample calculated by the formula
S=
( X X )
n 1
for n < 30
If the calculated value of t exceeds the table value of t at a specified level of significance, the null
hypothesis is rejected.
Example
Ten oil tins are taken at random from an automatic filling machine. The mean weight of the tins
is 15.8 kg and the standard deviation is 0.5kg. Does the sample mean differ significantly from the
intended weight of 16kgs. Use 5% level of significance.
Solution
Given that n = 10; x = 15.8; S = 0.50; = 16; v = 9
H0 : = 16
H1 : 16
0.5
10
= SX =
t
=
=
15.8 16
0.5
10
0.2
0.16
= 1.25
The table value for t for 9 d.f. at 5% level of significance is 2.26. the computed value of t is
smaller than the table value of t. therefore, difference is insignificant and the null hypothesis is
accepted.
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X1 X 2
S X X 2
( 1 )
at (n1 + n2 2) d.f.
The standard deviation is obtained by pooling the two sample standard deviation as shown
below.
( n1 1) S12 + ( n2 1) S22
Sp =
n1 + n2 2
Sp
Sp
and S X 2 =
n1
n2
S X1X 2 =
(
)
S X2 + S X2 2
Alternatively S
( X1X 2 )
= Sp
n1 + n2
n1n2
Example
Two different types of drugs A and B were tried on certain patients for increasing weights, 5
persons were given drug A and 7 persons were given drug B. the increase in weight (in pounds)
is given below
Drug A
Drug B
8
10
12
8
16
12
9
15
3
6
11
Do the two drugs differ significantly with regard to their effect in increasing weight? (Given that
t=
X1 X 2
S X1 X 2
(
)
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Lesson Six
X1
X2
8
12
13
9
3
X1 X 1
1
+3
+4
0
6
(X1 X 1 )2
1
9
16
0
36
X1 = 45
(X1 X 1 ) = 0
(X1 X 1 )2= 62
X1 =
S1 =
Sp =
X
n1
45
=9
5
X2 =
62
= 3.94
4
S2 =
X
n2
10
8
12
15
6
8
11
X2= 70
(X2 X 2 )
0
2
+2
+5
4
2
+1
(X2 X )2
0
4
4
25
16
4
1
(X2 X 2 ) = 0
(X2 X 2 )2= 54
70
= 10
7
54
=3
6
( 4 )15.4 + ( 6 ) 9
10
= 3.406
S( X 1 X 2 ) =
11.6 11.6
7+5
+
or 3.406
5
7
5(7)
= 1.99
t
X1 X 2
S X1 X 2
(
)
9 10
1.99
= 0.50
Now t0.05 (at v = 10) = 2.23 > 0.5
Thus we accept the null hypothesis.
Hence there is no significant difference in the efficacy of the two drugs in the matter of
increasing weight
Example
Two salesmen A and B are working in a certain district. From a survey conducted by the head
office, the following results were obtained. State whether there is any significant difference in the
average sales between the two salesmen at 5% level of significance.
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211
A
20
170
20
No. of sales
Average sales in shs
Standard deviation in shs
Solution
H 0 : 1 = 2
H 1 : 1 2
Where
Sp =
B
18
205
25
( n1 1) S12 + ( n2 1) S 22
n1 + n2 2
n1 + n2
n1n2
S X 1 X 2 = Sp
(
)
Sp =
S( X 1 X 2 ) = 22.5
38
360
= 7.31
t=
170 205
7.31
= 4.79
t0.05(36) = 1.9 (Since d.f > 30 we use the normal tables)
The table value of t at 5% level of significance for 36 d.f. when d.f. >30, that t distribution is the
same as normal distribution is 1.9. since the value computed value of t is more than the table
value, we reject the null hypothesis. Thus, we conclude that there is significant difference in the
average sales between the two salesmen
F=
s12
12
s 22
22
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Lesson Six
F=
S12
which is the test statistic.
S 22
Which follows F distribution with V1 and V2 degrees of freedom. The larger sample variance is
placed in the numerator and the smaller one in the denominator
If the computed value of F exceeds the table value of F, we reject the null hypothesis i.e. the
alternate hypothesis is accepted
Example
In one sample of observations the sum of the squares of the deviations of the sample values
from sample mean was 120 and in the other sample of 12 observations it was 314. test whether
the difference is significant at 5% level of significance
Solution
Given that n1 = 10, n2 = 12, (x1 X 1 )2 = 120
(x2 X 2 )2 = 314
Let us take the null hypothesis that the two samples are drawn from the same normal population
of equal variance
H0 : 12 = 22
H1: 12 22
Applying F test i.e.
F=
S12
S 22
( X1 X 1 )
n1 1
X2 X 2
( n2 1)
120
9
314
11
13.33
28.55
28.55
= 2.1
13.33
The table value of F at 5% level of significance for V1 = 9 and V2 = 11. Since the calculated
value of F is less than the table value, we accept the hypothesis. The samples may have been
drawn from the two population having the same variances.
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The Chi square test (2) is used when comparing an actual (observed) distribution with a
hypothesized, or explained distribution.
It is given by; 2 =
(O E )
E = Expected frequency
The computed value of 2 is compared with that of tabulated 2 for a given significance level and
degrees of freedom.
i.
Test for goodness of fit
This tests are used when we want to determine whether an actual sample distribution matches a
known theoretical distribution
The null hypothesis usually states that the sample is drawn from the theoretical population
distribution and the alternate hypothesis usually states that it is not.
Example
Mr. Nguku carried out a survey of 320 families in Ateka district, each family had 5 children and
they revealed the following distribution
No. of boys
5
4
3
2
1
0
No. of girls
0
1
2
3
4
5
No. of families
14
56
110
88
40
12
Is the result consistent with the hypothesis that male and female births are equally probable at
5% level of significance?
Solution
If the distribution of gender is equally probable then the distribution conforms to a binomial
distribution with probability P(X) = .
Therefore
H0 = the observed number of boys conforms to a binomial distribution with P =
H1 = The observations do not conform to a binomial distribution.
On the assumption that male and female births are equally probable the probability of a male
birth is P = . The expected number of families can be calculated by the use of binomial
distribution. The probability of male births in a family of 5 is given by
(for x = 0, 1, 2, 3, 4, 5,)
P(x)
= 5cX Px q5x
= 5cX ( )5
(Since P = q = )
To get the expected frequencies, multiply P(x) by the total number N = 320. The calculations are
shown below in the tables
x
0
1
2
3
4
P(x)
5c
0
( )5
= 1
5c
1
( )5
= 5
5c
2
( )5
5c
3
( )5
5c
4
( )5
32
32
= 10
32
= 10
32
=5
32
QUANTITATIVE TECHNIQUES
320 1
320 5
32
= 10
= 50
32
320 10
= 100
32
320 10
= 100
32
320 5
= 50
32
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Lesson Six
5c
5
( )5
=1
32
320 1
32
= 10
Arranging observed and expected frequencies in the following table and calculating x2
(O E) 2 /E
O
E
(O E) 2
14
10
16
1.60
56
50
16
0.72
110
100
100
1.00
88
100
144
1.44
40
50
100
2.00
12
10
4
0.40
(0 E) 2 /E = 7.16
(O E )
= 7.16
The table of 2 for V = 6 1 = 5 at 5% level of significance is 11.07. The computed value of 2
= 7.16 is less than the table value. Therefore the hypothesis is accepted. Thus it can be
concluded that male and female births are equally probable.
ii)
Test of independence of attributes
This test disclosed whether there is any association or relationship between two or more
attributes or not. The following steps are required to perform the test of hypothesis.
1. The null and alternative hypothesis are set as follows
H0: No association exists between the attributes
H1: an association exists between the attributes
2. Under H0 an expected frequency E corresponding to each cell in the
contingency table is found by using the formula
E=
RC
n
(O E )
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215
Example
In a sample of 200 people where a particular devise was selected, 100 were given a drug and the
others were not given any drug. The results are as follows
Drug
No drug
Total
Cured
65
55
120
Not cured
35
45
80
Total
100
100
200
Test whether the drug will be effective or not, at 5% level of significance.
Solution
Let us take the null hypothesis that the drug is not effective in curing the disease.
Applying the 2 test
The expected cell frequencies are computed as follows
E11 =
R1C1
=
n
120 100
200
60
E12 =
R1C2
=
n
120 100
200
60
E21 =
R2C1
=
n
80 100
200
40
E22 =
R2C2
=
n
80 100
200
40
E
60
60
40
40
120
80
200
(O E) 2
25
25
25
25
(O E) 2 /E
0.417
0.625
0.417
0.625
(O E) 2 /E = 2.084
Arranging the observed frequencies with their corresponding frequencies in the following table
we get
(O E )
= 2.084
2
V= (r 1) (c1) = (2 1) (2 1) = 1; tabulated
( 0.05 ) = 3.841
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Lesson Six
The calculated value of 2 is less than the table value. The hypothesis is accepted. Hence the
drug is not effective in curing the disease.
Test of homogeneity
It is concerned with the proposition that several populations are homogenous with respect to
some characteristic of interest e.g. one may be interested in knowing if raw material available
from several retailers are homogenous. A random sample is drawn from each of the population
and the number in each of sample falling into each category is determined. The sample data is
displayed in a contingency table
The analytical procedure is the same as that discussed for the test of independence
Example
A random sample of 400 persons was selected from each of three age groups and each person
was asked to specify which types of TV programs be preferred. The results are shown in the
following table
Type of program
Age group
A
B
C
Total
Under 30
120
30
50
200
30 44
10
75
15
100
45 and above
10
30
60
100
Total
140
135
125
400
Test the hypothesis that the populations are homogenous with respect to the types of television
program they prefer, at 5% level of significance.
Solution
Let us take hypothesis that the populations are homogenous with respect to different types of
television programs they prefer
Applying 2 test
O
E
(O E) 2
(O E) 2 /E
120
70.00
2500.00
35.7143
10
35.00
625.00
17.8571
10
35.00
625.00
17.8571
30
67.50
1406.25
20.8333
75
33.75
1701.56
50.4166
30
33.75
14.06
0.4166
50
62.50
156.25
2.500
15
31.25
264.06
8.4499
60
31.25
826.56
26.449
(O E) 2 /E = 180.4948
2 =
(O E )
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217
S
X
Where S X =
at level of significance.
SX
n
For n < 30
t=
S
X
where S X =
SX
n
at n 1 d.f
level of significance
(b)
X1 X 2
S X1 X 2
(
)
Where S
( X1X 2 )
S12 S 22
+
n1 n2
At = level of significance
For n < 30
t=
X1 X 2
at n1 + n2 2 d.f
S X1 X 2
(
)
where S
( X1X 2 )
= Sp
and S p =
(c)
n1 + n2
n1n2
( n1 1) S12 + ( n2 1) S22
n1 + n2 2
p
Sp
Where: Sp =
pq
n
(d)
P1 P2
S( P1 P2 )
QUANTITATIVE TECHNIQUES
218
Lesson Six
Where:
pq pq
+
n1 n2
p n + p2 n2
p= 1 1
n1 + n2
S( P1 P2 ) =
(e)
q=1P
Chisquare test
X2 =
(f)
(O E )
S12
S 22
here the bigger value between the standard deviations make the numerator.
218
219
QUESTION TWO
A sample of 80 is drawn at random from a population of 800. The sample standard deviation
was found to be 6 grams.
 What is the finite population correction factor?
 What is the approximation of the correction factor?
 What is the standard error of the mean?
QUESTION THREE
State the Central Limit Theorem
QUESTION FOUR
a)
b)
c)
d)
e)
f)
g)
h)
QUESTION FIVE
A market research agency takes a sample of 1000 people and finds that 200 of them know of
Brand X. After an advertising campaign a further sample of 1091 people is taken and its found
that 240 know of Brand X.
It is required to know if there has been an increase in the number of people having an awareness
of Brand X at the 5% level.
QUESTION SIX
The monthly bonuses of two groups of salesmen are being investigated to see if there is a
difference in the average bonus received. Random samples of 12 and 9 are taken from the two
groups and it can be assumed that the bonuses in both groups are approximately normally
distributed and that the standard deviations are about the same. The same level of significance is
to be used.
The sample results were
n1=12
x1=1060
s1=63
QUANTITATIVE TECHNIQUES
n2=9
x2=970
s2=76
220
Lesson Six
QUESTION SEVEN
Torch bulbs are packed in boxes of 5 and 100 boxes are selected randomly to test for the
number of defectives
Number of
Number
Total
of boxes
defectives
Defectives
0
40
0
1
37
37
2
17
34
3
5
15
4
1
4
5
0
0
100
90
The number of any individual bulb being a reject is
90
5 = 0.18
100
and it is required to test at the 5% level whether the frequency of rejects conforms to a binomial
distribution.
QUESTION EIGHT
a) Define type I and type II errors.
b) What is a twotail test?
c) What is the best estimate of the population standard deviation when the two samples are
taken
QUESTION NINE
Express Packets guarantee 95%of their deliveries are on time. In a recent week 80 deliveries
were made and 6 were late and the management says that, at the 95%level there has been a
significant improvement in deliveries.
Can the MDs statement be supported?
If not, at what level of confidence can it be supported?
A batch of weighing machines has been purchased and one machine is selected at random for
testing. Ten weighing tests have been conducted and the errors found are noted as follows:
Test
1
2
3
4
5
6
7
8
9
10
Errors (gms)
4.6
8.2
2.1
6.3
5.0
3.6
1.4
4.1
7.0
4.5
The purchasing manager has previously accepted machines with a mean error of 3.8 gms and
asserts that these tests are below standard.
Test the assertions at 5% level.
Compare your answers with those given in lesson 9 of the study pack
220
221
Instructions:
Answer any THREE questions from SECTION I and TWO questions from SECTION II.
Marks allocated to each question are shown at the end of the question. Show all your workings
Statistical hypothesis;
(2 marks)
Test of a hypothesis;
(2 marks)
Type I error;
(2 marks)
Type II error;
(2 marks)
Level of significance
(2 marks)
Cross Lines Group (CLG) has two factories in different parts of the country. Their
Resources, including the labour force skills are regarded as identical and both factories
were built at the same time.
A random sample of output data during a given period has been taken from each factory
and converted to standard hours of output per employee. The data are given below:
Factory 1
Factory 2
42
39
50
45
43
36
39
42
41
52
49
37
52
43
41
41
46
40
48
39
You are given that for factory 1 mean = 45.1 and variance = 20.10 and that for factory 2
mean = 41.4 and variance = 21.16.
Required:
i) Test the hypothesis that the mean of standard hours for employees in the two factories
is the same.
(7 marks)
(3 marks)
ii) Comment briefly on the conditions of the test and interpret the outcome.
(Total: 20 marks)
QUESTION TWO
a) State clearly what is meant by two events being statistically independent.
(2 marks)
b) In a certain factory which employs 500 men, 2% of all employees have a minor accident in a
given year. Of these, 30% had safety instructions whereas 80% of all employees had no
safety instructions.
Required
Find the probability of an employee being accidentfree given that he had:
i) No safety instructions
ii) Safety instructions
(5 marks)
(5 marks)
c) An electric utility company has found that the weekly number of occurrences of lightning
striking the transformers is a Poisson distribution with mean 0.4.
QUANTITATIVE TECHNIQUES
222
Lesson Six
Required:
i) The probability that no transformer will be struck in a week.
ii) The probability that at most two transformers will be struck in a week
(3 marks)
(5 marks)
(Total: 20 marks)
QUESTION THREE
Explain the difference between the paired ttest and the twosample ttest
(4 marks)
Trendy Tyres Ltd. Has introduced a new brand of tyres which in their advertisements claim to
be superior to their only competitor brand. The Roadmaster Tyres. The brand manager of
Roadmaster Tyres disputes this claim which he says is an advertisement gimmick. The brand
managers of the two companies agree to run a road test for the brands. Ten (10) saloon cars of
uniform weight and identical specifications are to be used for the test. Each car is fitted with
both brands of tyres: One brand at the front the other brand at the rear. The cars cover a
distance of 5,000 kilometers and the trend wear is recorded as follows:
1
2
3
4
5
6
7
8
9
10
Trend tyres
centimeters
1.08
1.06
1.24
1.20
1.17
1.21
1.18
1.10
1.22
1.60
Roadmaster tyres
Centimeters
1.12
1.09
1.16
1.24
1.23
1.25
1.20
1.15
1.19
1.13
Required:
i) Determine whether Trendy Tyres Ltd.s claim is true using = 0.01
ii) What are the assumptions you have made in (i) above?
(15 marks)
(1 mark)
(Total: 20 marks)
QUESTION FOUR
Kenear Commercial bank Ltd. commissioned a research whose results indicated that automatic
teller machines (ATM) reduces the cost of routine banking transactions.
Following this information, the bank installed an ATM facility at the premises of Joy Processing
Company Ltd., which for the last several months has exclusively been, used by JoyS 605
employees. Survey on the usage of the ATM facility by 100 of the employees in a month
indicated the following:
222
223
The analyst would like to determine if on average there was a significant change in the Treasury
bill rates over the two years.
Required:
i) The mean and variance of the Treasury bill rates for each year.
(10 marks)
ii) Determine if there is a significant difference in the average Treasury bill rates (use a
significance level of 1%)
(5 marks)
QUANTITATIVE TECHNIQUES
224
Lesson Six
Note:
n1 1) S12 + ( n2 1) S 22
(
=
n1 + n2 2
(Total: 20 marks)
SECTION II
QUESTION SIX
a) Describe the characteristics of the following distributions:
i) Binomial distribution
ii) Poisson distribution.
(3 marks)
(3 marks)
b) High Grade Meat Ltd. Produces beef sausages and sells them to various supermarket. In
order to satisfy the industrys requirement, the firm may only produces 0.2 per cent of
sausages below a weight of 80 grammes. The sausage producing machine operates with a
standard deviation of 0.5 grammes. The weights of the sausages are normally distributed.
The firms weekly output is 300,000 sausages and the sausage ingredients cost Sh.5.00 per
100 grammes. Sausages with weights in excess of 82 grammes require additional ingredients
costing Sh.2.50 per sausage.
Required:
i) The mean weight at which the machine should be set.
ii) The firms weekly cost of production
(4 marks)
(10 marks)
(Total: 20 marks)
QUESTION SEVEN
a) The past records of Salama Industries indicate that about 4 out of 10 of the companys
orders are for export. Further, their records indicate that 48 per cent of all orders are for
export in one particular financial quarter. They expect to satisfy about 80 orders in the next
financial quarter.
Required:
Determine the probability that they will break their previous export record.
Explain why you have used the approach you have chosen to solve part (i) above.
(7 marks)
(2 marks)
b) Gear Tyre Company has just developed a new steelbelted radial tyre that will be sold
through a national chain of discount stores. Because the tyre is a new product, the
companys management believes that the mileage guarantee offered with the tyre will be an
important factor in the consumer acceptance of the product. Before finalizing the tyre
mileage guarantee policy, the actual road test with the tyres shows that the mean tyre mileage
is = 36,500 kilometers and the standard deviation is = 5,000 kilometers. In addition, the
data collected indicate that a normal distribution is a reasonable assumption.
Required:
Gear Tyre Company will distribute the tyres if 20 per cent of the tyres manufactured can be
expected to last more than 40,000 kilometres. Should the company distributed the tyres?
(4 marks)
ii)
The company will provide a discount on a new set of tyres if the mileage on the original
tyres does not exceed the mileage stated on the guarantee.
i)
224
225
(4 marks)
QUESTION EIGHT
a) Explain the following terms used in statistical inference:
i)
Null hypothesis
Parametric test
ii)
Coefficient of correlation
iii)
Rank correlation coefficient
iv)
(2 marks)
(2 marks)
(2 marks
(2 marks)
(4 marks)
Required:
i)
State the null and alternative hypotheses that should be tested.
(4 marks)
What conclusion can be drawn from the results of the data? (use = 0.05) (4 marks)
ii)
(Total: 20 marks)
QUANTITATIVE TECHNIQUES
226
Decesion Theory
LESSON SEVEN
Decision Theory
7.1
Decision theory
Decision trees and sequential decisions
Game theory
Decision Theory
Types of decisions
There are many types of decision making
1. Decision making under uncertainty
These refer to situations where more than one outcome can result from any single decision
2. Decision making under certainty
Whenever there exists only one outcome for a decision we are dealing with this category e.g.
linear programming, transportation assignment and sequencing e.t.c.
3. Decision making using prior data
It occurs whenever it is possible to use past experience (prior data) to develop probabilities for
the occurrence of each data
4. Decision making without prior data
No past experience exists that can be used to derive outcome probabilities in this case the
decision maker uses his/her subjective estimates of probabilities for various outcomes
Decision making under uncertainty
Several methods are used to make decision in circumstances where only the pay offs are known
and the likelihood of each state of nature are known
a) Maximin Method
This criteria is based on the conservative approach to assume that the worst possible is going
to happen. The decision maker considers each strategy and locates the minimum pay off for
each and then selects that alternative which maximizes the minimum payoff
Illustration
Rank the products A B and C applying the Maximin rule using the following payoff table
showing potential profits and losses which are expected to arise from launching these three
products in three market conditions
(see table 1 below)
226
Lesson Eight
227
Boom condition
Product A
Product B
Product C
+8
2
+16
10
+12
26
Table 1
Ranking the MAXIMIN rule = BAC
b) MAXIMAX method
This method is based on extreme optimism the decision maker selects that particular strategy
which corresponds to the maximum of the maximum pay off for each strategy
Illustration
Using the above example
Max. profits row maxima
Product A
+8
Product B
+12
Product C
+16
Ranking using the MAXIMAX method = CBA
8
18
0
22
0
38
A regret table (table 2) is constructed based on the pay off table. The regret is the opportunity
loss from taking one decision given that a certain contingency occurs in our example whether
there is boom steady state or recession
The ranking using MINIMAX regret method = BAC
QUANTITATIVE TECHNIQUES
228
Decesion Theory
i.
A risky contract promising shs 7 million with probability 0.6 and shs 4 million with
probability 0.4 and
ii.
A diversified portfolio consisting of two contracts with independent outcomes each
promising Shs 3.5 million with probability 0.6 and shs 2 million with probability 0.4
Can you arrive at the decision using EMV method?
Solution
The conditional payoff table for the problem may be constructed as below.
(Shillings in millions)
Event Ei Probability (Ei)
Conditional pay offs decision Expected pay off decision
(i)
Contract (ii) Portfolio(iii)
Contract (i) x (ii)
Portfolio (i) x (iii)
Ei
0.6
7
3.5
4.2
2.1
E2
0.4
4
2
1.6
0.8
EMV
5.8
2.9
Using the EMV method the manager must go in for the risky contract which will yield him a
higher expected monetary value of shs 5.8 million
5000
2000
4000
7000
10000
4000
3000
6000
4000
228
Lesson Eight
229
Solution
Economic condition
Investment
1
2
3
Minimum
opportunities
A
5000
7000
3000
3000
B
2000
10000
6000
2000
C
4000
4000
4000
4000
i.
Using the Maximin rule Highest minimum = 4000
ii.
iii.
A
B
C
Maximum
7000
10000
4000
Choose investment C
Using the Maximax rule Highest maximum = 10000
Choose investment B
Minimax Regret rule
1
0
7000
1000
3000
0
6000
3000
0
2000
Maximum
regret
3000
7000
6000
QUANTITATIVE TECHNIQUES
230

Decesion Theory
The symbol
and
or event respectively. The node depicted by a square is a decision node while outcome
Decision nodes: points where choices exist between alternatives and managerial decisions is
made based on estimates and calculations of the returns expected.
Outome nodes are points where the events depend on probabilities
event
ACT
E1
A1
E2
D1
B1
D2
B2
C1
122
D3
A2
112
C2
121
131
For example 111 represents the payoff of the act event combination A1 E1 B1
When probabilities of various events are known they are written along the corresponding
branches. Joint probabilities are obtained by multiplying the probabilities along the branches
Example
Kauzi Agro mills ltd (KAM) is considering whether to enter a very competitive market. In case
KAM decided to enter this market it must either install a new forging process or pay overtime
wages to the entire workers. In either case, the market entry could result in
i.
high sales
medium sales
ii.
low sales
iii.
no sales
iv.
a) Construct an appropriate tree diagram
b) Suppose the management of KAM has estimated that if they enter the market
there is a 60% chance of their stakeholders approving the installation of the
new forge. (this means that there is a 40% chance of using overtime) a random
sample of the current market structure reveals that KAM has a 40% chance of
achieving high sales, a 30% chance of achieving medium sales, a 20% chance of
achieving low sales and a 10% chance of achieving no sales. Construct the
appropriate probability tree diagram and determine the joint probabilities for
various branches
c) Market analysts of KAM have indicated that a high level of sales will yield shs
1,000,000 profit; a medium level of sales will result in a shs 600000 profit a low
level of sales will result in a shs 200000 profit and a no sales level will cause
KAM a loss of shs 500000 apart from the cost of any equipment. Entering the
230
Lesson Eight
231
market will require a cash outlay of either shs 300000 to purchase and install a
forge or shs 10000 for overtime expenses should the second option be selected.
Draw the appropriate decision tree diagram
Solution
a) The tree diagram for this problem is illustrated as follows
The 1st stage of drawing a tree diagram is to show all decision points and outcome points done
from left to right, concentrate first on the logic of the problem and on probabilities or values
involved. This is called forward pass.
The resultant is the figure below:
Act
Act/event
Install forge
1
0
Use overtime
stop
Outcome/event
High sales
Medium sales
Low sales
No sales
High sales
10
Medium sales
11
Low sales
12
No sales
Tree diagram
The entire sample space of act event choices is available to KAM are summarized in the table
shown below
Path
0135
0136
0137
0138
0149
0 1 4 10
0 1 4 11
0 1 4 12
02
QUANTITATIVE TECHNIQUES
232
Decesion Theory
b) The appropriate probability tree is shown in the figure below. The alternatives available
to the management of KAM are identified. The joint probabilities are the result of the
path sequence that is followed. For example, the sequence enter market install forge,
low sales yields (0.6) (0.2) = 0.12 = probability to install forge and get low sales.
Pay offs
Install forge
(300,000)
0.4
0.3
HS = 0.24 = 1,000,000
MS = 0.18 = 600,000
3
Enter Market
0.2
0.6
0.1
LS = 0.12 = 200,000
1
NS = 0.06 =  500,000
0.4
Use overtime
(10,000)
4
Dont enter market
0.4
0.3
0.2
0.1
HS = 0.16 = 1,000,000
MS = 0.12 = 600,000
LS = 0.08 = 200,000
NS = 0.04 =  500,000
(c)
The overall decision is determined after analysis of the expected values at various points
so the correct decision (with the highest expected value is made. The stage is worked
from right to left and is known as the backward pass.
The expected value for a decision is the highest pay off value where as the E.V
for an outcome is the summation of probability x pay off value of each branch.
In both cases any expenditure incurred due to the selection of the said option is
deducted.
In our case
Node 3 = [(0.4 1,000,000 ) + (0.3 600,000) + (0.2 200,000 ) + (0.1 50,000)]
 300,000
E.V. = 615,000 300,000 = 315,000
Node 4 = [(0.4 1,000,000 ) + (0.3 600,000) + (0.2 200,000 ) + (0.1 50,000)]
 10,000
E.V. = 615,000 10,000 = 605,000
Node 1 = (0.6 315,000) + (0.4 605,000)
E.V. = 431,000
Node 0 = The highest of (0;431,000)
Since not entering the market has a 0 expected value
= 431,000 = thus the decision should be to enter the market.
232
Lesson Eight
233
0.4
Install forge
0.3
1,000,000
600,000
3
Enter Market
0.6
0.2
EV = 315,000
0.1
1
0
200,000
 500,000
EV = 431,000
0.4
Use overtime
4
EV = 605,000
0.4
0.3
0.2
0.1
1,000,000
600,000
200,000
 500,000
0
QUANTITATIVE TECHNIQUES
234
Decesion Theory
Actual sales
Predicted sales
level
High
0.8*
0.2
Good
Bad
Low
0.1
0.9
*When actual sales were high the market research company had predicted good sales level
80% of the time.
Required:
Use a time horizon of 6 years to indicate to the management of the company which option
theory should adopt (Ignore the time value of money).
Solution
(a)
First draw the decision tree diagram
Ruy Lopez
(option 1)
60,000 (declining)
High 0.7
90,000
GUIOCO
(option 2)
Low 0.3
30,000
P(HG)
0.95
Market
Research
(option 3)
Extra 35,000
Good
0.05
No extra
P(LG)
P(HG)
0.95
P(LG)
0.05
P(HB)
Bad
0.34
P(LB)
0.66
100,000
25,000
90,000
30,000
70,000
50,000
234
Lesson Eight
235
P(HG)
P(LG)
P(HB)
P(LB)
P(GH) = 0.8
P(BH) = 0.2
P(GL) = 0.1
P(BL) = 0.9
P(H) = 0.7
P(L) = 0.3
Given
Good
Bad
P ( H G ) =
P ( GH ) P ( H ) 0.56
=
= 0.95
P (G )
0.59
P ( LG ) =
P ( GL ) P ( L ) 0.03
=
= 0.05
0.59
P (G )
P ( H B ) =
P ( BH ) P ( H ) 0.14
=
= 0.34
0.41
P ( B)
P ( LB ) =
P ( BL ) P ( L ) 0.27
=
= 0.66
0.41
P (B)
Year
1=
2=
3=
4=
5=
6=
60,000 0.9 =
60,000 0.92 =
60,000 0.93 =
60,000 0.94 =
60,000 0.95 =
60,000 0.96 =
Shs.
54,000.0
48,000.0
43,740.0
39,366.0
35,429.5
31,886.5
253,022.0
QUANTITATIVE TECHNIQUES
236
Decesion Theory
Option 2
Expected value of Giuoco
Node (A): 0.7(90,000 6) + 0.3(30,000 6)
= 378,000 + 54,000 = Shs. 432,000
Note that the figures a multiplied by 6 to account for the 6 years.
Option 3
Expected value of market research
Node (B): 0.95(100,000 6) + 0.05(25,000 6)
= 570,000 + 7,500 = Shs. 577,500
Deduct Shs. 35,000 for extensions
= 542,500.
Node (C): 0.95(90,000 6) + 0.05(30,000 6)
= 513,000 + 9,000 = Shs. 522,000
Node 1:
Compare B and C
B is higher, thus = 542,000.
Node (D):
0.34(70,000 6) + 0.66(50,000 6)
142,800 + 198,000 = Shs. 340,800
Node 2:
Node (E):
Node 2:
236
Lesson Eight
237
the action of others. Both competing sides face a similar problem. Hence game theory is a
science of conflict
Game theory does not concern itself with finding an optimum strategy but it helps to improve
the decision process.
Game theory has been used in business and industry to develop bidding tactics, pricing policies,
advertising strategies, timing of the introduction of new models in the market e.t.c.
NOTE: only in a few real life competitive situation can game theory be applied because all the
rules are difficult to apply at the same time to a given situation.
Example
Two players X and Y have two alternatives. They show their choices by pressing two types of
buttons in front of them but they cannot see the opponents move. It is assumed that both
players have equal intelligence and both intend to win the game.
This sort of simple game can be illustrated in tabular form as follows:
Player X
Button m
Button n
Player Y
Button R
X wins 2 points
Y wins 2 points
Button t
X wins 3 points
X wins 1 point
The game is biased against Y because if player X presses button m he will always win. Hence Y
will be forced to press button r to cut down his losses
Alternative example
Player X
Button m
Button n
Player Y
Button R
X wins 3 points
Y wins 2 points
Button t
Y wins 4 points
X wins 1 point
In this case X will not be able to press button m all the time in order to win(or button n).
similarly Y will not be able to press button r or button t all the time in order to win. In such a
situation each player will exercise his choice for part of the time based on the probability
QUANTITATIVE TECHNIQUES
238
Decesion Theory
4
1
STRATEGY
It refers to a total pattern of choices employed by any player. Strategy could be pure or a mixed
one
In a pure strategy, player X will play one row all of the time or player Y will also play one of this
columns all the time.
In a mixed strategy, player X will play each of his rows a certain portion of the time and player Y
will play each of his columns a certain portion of the time.
VALUE OF THE GAME
The value of the game refers to the average pay off per play of the game over an extended
period of time
Example
Player Y
3 4
Player X
6 2
in this game player X will play his first row on each play of the game. Player y will have to play
first column on each play of the game in order to minimize his looses
so this game is in favour of X and he wins 3 points on each play of the game.
This game is a game of pure strategy and the value of the game is 3 points in favour of X
Example
Determine the optimum strategies for the two players X and Y and find the value of the game
from the following pay off matrix
Player Y
3 1 4 2
Player X 1 3 7 0
4 7 3 9
Strategy assume the worst and act accordingly
if X plays first
238
Lesson Eight
239
if X plays first with his row one then Y will play with his 2nd column to win 1 point similarly if X
plays with his 2nd row then Y will play his 3rd column to win 7 points and if x plays with his 3rd
row then Y will play his fourth column to win 9 points
In this game X cannot win so he should adopt first row strategy in order to minimize losses
This decision rule is known as maximum strategy i.e. X chooses the highest of these minimum
pay offs
Using the same reasoning from the point of view of y
If Y plays with his 1st column, then X will play his 3rd row to win 4 points
If Y plays with his 2nd column, then X will play his 1st row to lose 1 point
If Y plays with his 3rd column, then X will play his 1st row to win 4 points
If Y plays with his 4th column, then X will play his 1st row to win 2 points
Thus player Y will make the best of the situation by playing his 2nd column which is a Minimax
strategy
This game is also a game of pure strategy and the value of the game is 1(win of 1 point per
game to y) using matrix notation, the solution is shown below
Player Y
3 1 4 2
Player X 1 3 7 0
4 7 3 9
4
1 4
Row Minimum
7
9
column maximum
Saddle Point
The saddle point in a pay off matrix is one which is the smallest value in its row and the largest
value in its column. It is also known as equilibrium point in the theory of games.
Saddle point also gives the value of such a game. In a game having a saddle point, the optimum
strategy for both players is to pay the row or column containing the saddle point.
Note: if in a game there is no saddle point the players will resort to what is known as mixed
strategies.
Mixed Strategies
Example
Find the optimum strategies and the value of the game from the following pay off matrix
concerning two person game
Player Y
1 4
Player X
5 3
In this game there is no saddle point
Let Q be the proportion of time player X spends playing his 1st row and 1Q be the proportion
of time player X spends playing his 2nd row
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Decesion Theory
Similarly
Let R be the proportion of time player Y spends playing his 1st column and 1R be the
proportion of time player Y spends playing his second row
The following matrix shows this strategy
Player Y
R 1 R
Q 1 4
1 Q 5 3
Player X
Xs strategy
X will like to divide his play between his rows in such a way that his expected winning or loses
when Y plays the 1st column will be equal to his expected winning or losses when y plays the
second column
Points
1
5
Column 1
Proportion played
Q
1Q
Expected winnings
Q
5(1Q)
Column 2
Proportion played
Q
1Q
Expected winnings
4Q
3(1Q)
Total = Q + 5(1 Q)
Points
4
3
Total = 4Q + 3(1 Q)
Therefore Q + 5(1Q) = 4Q +3(1Q)
Giving Q = 2
and
(1Q) = 3
5
5
This means that player X should play his first row 2
th
th
of
the time
Using the same reasoning
1R + 4(1R) =
5R +3(1R)
and
(1R) = 4
Giving R = 1
5
5
This means that player Y should divide his time between his first column and second column in
the ratio 1:4
Player Y
1
5
Player X
2
5
3
5
4
5
1 4
5 3
Player Y
1 4
Player X
5 3
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Lesson Eight
241
Step I
Subtract the smaller pay off in each row from the larger one and smaller pay off in each column
from the larger one
1 4 4 1 = 3
5 3 5  3 = 2
5 1 = 4 4 3 = 1
Step II
Interchange each of these pairs of subtracted numbers found in step I
1 4 2
5 3 3
1 4
Thus player X plays his two rows in the ratio 2: 3
And player Y plays his columns in the ratio 1:4
This is the same result as calculated before
Row I column II
Row II column I
Row II column II
Joint probability
2 1 =2
5
5
25
2 4 =8
5
5
25
3 1 =3
5
5
25
3 4 = 12
5
5
25
Expected value x (p(x)
2
25
32
25
15
25
36
25
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Decesion Theory
i.
ii.
If all the elements in a column are greater than or equal to the corresponding
elements in another column, then the column is dominated
Similarly if all the elements in a row are less than or equal to the corresponding
elements in another row, then the row is dominated
Dominated rows and columns may be deleted which reduces the size of the game
NB always look for dominance and saddle points when solving a game
Example
Determine the optimum strategies and the value of the game from the following 2xm pay off
matrix game for X and Y
Y
6 3 1 0 3
X
3 2 4 2 1
In this columns I, II, and IV are dominated by columns III and V hence Y will not play these
columns
So the game is reduced to 22 matrix, hence this game can be solved using methods already
discussed
Y
1 3
X
4 1
GRAPHICAL METHOD
Graphical methods can be used in games with no saddle points and having pay off m2 or 2n
matrix
The aim is to substitute a much simpler 22 matrix for the original m2 or 2m matrix
Example I
Determine the optimum strategies and the value of the game from the following pay off matrix
game.
Y
6 3 1 0 3
X
3 2 4 2 1
Draw two vertical axes and plot two pay offs corresponding to each of the five columns. The
pay off numbers in the first row are plotted on axis I and those in second row on axis II
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Lesson Eight
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Axis I
Axis II
2 K
6 A
1
L 1
B 3
2
2
3
3
4
5
5
1
1
6
6
2
7
7
3
8
8
L 4
9
9
2
3 K
4
Example I
4
Example II
Thus the two pay off number 6 and 3 in the first column are shown respectively by point A on
axis I and point B on axis II
On the two intersecting lines at the very bottom thicken them from below to the point of
intersection i.e. highest point on the boundary.
The thick lines on the graph KT and LT meet at T
The two lines passing through T identify the two critical moves of Y which combined with X
yield the following 2 2 matrix
Y
1 3
X
4 1
The value of the game and the optimum strategies can be calculated using the methods
described earlier
Example II
Determine the optimum strategies and the value of the game from the following pay off matrix
concerning two person 4 2 game
Y
6
3
X 2
2
4
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Decesion Theory
The method is similar to the previous example, except we thicken the line segments which binds
the figure from the top and taken the lowest point on the boundary
The segments KP, PM and ML drawn in thick lines bind the figure from the top and their
lowest intersection M through which the two lines pass defines the following 2 2 matrix
relevant to our purpose
Y
3 4
X
7 1
The optimal strategies and the value of the game can now be calculated
Maintain prices
3,3 status quo
Corporation A
Decrease prices
4, 1, A gains market
share and profit
Decrease prices
1 , 4 B gets market share and
profit
(2,2) Both retain market share
but lose profit
The entries in the pay off matrix indicate the order of preference of the players i.e. first A then
B.
We may suppose that if both player study the situation, they will both decide to play row I
column I(3,3).
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However
Suppose As reasoning is as follows
If B plays column I then I should play row 2 because I will increase my gain to 4
In the same way Bs reasoning may be as follows
If A plays row I then I should play column 2 to get pay off 4 per play
If both play 2(row 2 column 2) each two receives a pay off of 2 only
In the long run pay off forms a new equilibrium point because if either party departs from it
without the other doing so he will be worse off before he departed from it
Game theory seems to indicate that they should play (2,2) because it is an equilibrium point but
this is not intuitively satisfying. On the other hand (3,3) is satisfying but does not appear to
provide stability. Hence the dilemma.
Theory of Metagames
This theory appears to describe how most people play non zero sum games involving a number
of persons
Prisoners dilemma is an example of this. The aim is to identify points at which players actually
tend to stabilize their play in non zero sum games.
This theory not only identifies equilibrium points missed by traditional game theory in games
that have one or more such points but also does so in games in which traditional theory finds no
such point
Its main aim is that each player is trying to maximize the minimum gain of his opponent
ADVANTAGES AND LIMITATIONS OF GAME THEORY
Advantage
Game theory helps us to learn how to approach and understand a conflict situation and to
improve the decision making process
LIMITATIONS
1. Businessmen do not have all the knowledge required by the theory of games. Most often
they do not know all the strategies available to them nor do they know all the strategies
available to their rivals
2. there is a great deal of uncertainty. Hence we usually restrict ourselves to those games with
known outcomes
3. The implications of the Minimax strategy is that the businessman minimizes the chance of
maximum loss. For an ambitious business man, this strategy is very conservative
4. the techniques of solving games involving mixed strategies where pay off matrices are rather
large is very complicated
5. in non zero sum games, mathematical solutions are not always possible. For example a
reduction in the price of a commodity may increase overall demand. It is also not necessary
that demand units will shift from one firm to another
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Decesion Theory
NPV (m)
100
120
50
40
65
15
45
Required.
a) Draw up a decision tree diagram
b) Advise the company on the best course of action
QUESTION TWO
1.
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Lesson Eight
247
The managers believe that if they employ specialistengineering consultants, their chances
of finishing the building on time will be trebled. But if the building is still late, it would
only be one or two months late, with equal probability.
Required
a)
To draw a tree diagram to represent this decision problem, using squares for
decision points, circles for random outcomes, and including probabilities
revenues and penalties;
b)
c)
To write a short report for the managers, with reasons and comments,
recommending which decision to make.
QUESTION THREE
Define minimax and maximax decision rules
QUESTION FOUR
A has two ammunition stores, one of which is twice as valuable as the other. B is an attacker
who can destroy an undefended store but he can only attack one of them. A can only
successfully defend one of them.
What would A do so as to maximize his return from the situation no matter what B may do?
QUESTION FIVE
Determine the optimum strategies and the value of the game for the following pay off matrix.
X
1
2
2
Y
2
1
0
1
1
1
Compare your answers with those given in lesson 9 of the study pack
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Decesion Theory
LESSON EIGHT
Operation Research
Linear programming
Transport and Assignments
Network Analysis
8.1
Linear programming
Linear programming is a technique of decision making used by managers to allocate limited
resources eg machinery, raw materials and labor in order to minimize costs or maximize
production. Decision variable are the amounts of each product to be made in a given time
period. Linear programming assumes that the variable has a linear relationship.
Application of linear programming
Production department to decide the quantity of pots to be produced subject to limited
resources (constraints) eg labour, power, machine hours, raw materials etc.
Marketing department: Allocation of salesmen to different sales regions subject to their expected
performance.
Human Resource: Scheduling personnels work hours and job description to either maximize
production or minimize cost.
Steps in solving linear programming problems(problem formulation)
1. Identify variables (eg product x and product y)
2. Identify the objective (To maximize contribution or to minimize cost), and write down its
mathematical presentation in terms of variables.
3. Identify the constraints (ie the limited resources shared among the variables), and write
down its mathematical representation in terms of variables.
4. write down the objectives and the constraints in terms of the variables.
These steps apply regardless of the number of the variables.
NOTE: If only two variables are involved, a graphical solution can be used otherwise for
multivariable problems, an algebraic method is applied to find the solution.
Example 1:
Long Castling Breweries manufactures two brands of beer, Benko lager and Benoni lager. Benko
has a contribution of Sh.4 per unit and Benoni has a contribution of Sh.3 per unit. Benko
requires 30 machine minutes and 30 labor minutes to manufacture a unit. Total available
machine hours per day are 12hrs whereas total available labour hours per day are 14hrs.
Required:
1. Formulate linear programming model.
2. How much of each brand should Long Castling produce if it wishes to maximize its daily
contribution assuming that all the lager produced is sold.
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Lesson Eight
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Solution:
1.
Formulating a linear programming model
Step 1: Identifying variables:
The variables here are the number of units of Benko and Benoni lager produced by Long
castling breweries per day; we can represent them as:
X1= a unit of Benko lager.
X2= a unit of Benoni lager.
Step 2: Identify the objective:
Definition: An objective is the desired result i.e. optimization of a function dependent on
decision variable and subject to some constraints.
The objective of Long Castling Breweries is to maximize daily contribution. Objective function
is the formula that will give us the total contribution in a day for both Benko lager and Benoni
lager.
The information above can thus be represented in a tabular form as:
(PER DAY)
Machine hours
Labor hours
Contribution
PRODUCT
X1
0.5
0.5
4
X2
0.33
0.5
3
Maximum available
hours/day
12
14
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Decesion Theory
X1
0
X2
Next we plot the scales on each axis to approximate the scales to use them, we consider each
constraint equation. We get the value of one of variables putting the other variable to be zero
and by substituting the inequality or with equality sign (=).
For:
0.5X1 + 0.33X2 12
When X1 = 0
0.5(0) + 0.33X2 = 12
0.33X2 = 12
X2 = 12/0.33 = 36
Therefore point to plot is (36, 0)
When X2 = 0
0.5X1 + 0.33(0) = 12
0.5X1 = 12
X1 = 12/0.5 = 24
Therefore the point is (0, 24)
For
0.5X1 + 0.5X2 14
When X1 = 0
0.5(0) + 0.5X2 = 14
0.5X2 = 14
X2 = 14/0.5 = 28
Therefore the point is (28, 0)
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Lesson Eight
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When X2 = 0
0.5X1 + 0.5(0) = 14
0.5X1 = 14
X1 = 14/0.5 = 28
Therefore the point is (0, 28)
Comparing these values we see that X2 ranges between 0 28, therefore we can have the graph
plotted as:
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Decesion Theory
Now including the NonNegativity constraints since no negative product can be produced;
X1 0; x2 0
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We must now consider how to choose the production which will maximize contribution. This
we do by plotting a line representing the objective function (4x1 + 3x2).
First choose a convenient point inside the feasible region
eg X2(10) +3X1(20) = 40 +60
= Sh 100
All of the other product mixes that give a contribution of Sh.100 lies on the line:
100 = 4X1 + 3X2 .....................................................................................(i)
<<This line is called a contribution line>>
Picking another point, say X2 =10 ad X1 = 20
Its contribution value is SH 110, thus give a contribution line of
110 = 4X1 + 3X2 ........................................................................................(ii)
Plotting these two contribution lines to our graph we get two parallel lines.
Until we reach the last feasible solution(s) before the line moves entirely out of the feasible
region.
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Decesion Theory
Point X is the last feasible solution. Coordinates of this point give a combination of the two
lagers production volumes that fetches the highest contribution.
Coordinates of point X can be read from the graph, but for precision they are calculated by
solving simultaneously the equations of the two lines that intersect at point X.
The two constraints are called binding or limiting constraints. They are the resources being fully
used thus preventing daily contribution from increasing further.
Therefore to get point x we solve:
0.5X1 + 0.33X2 = 12 .(i)
0.5X1 + 0.5X2 = 14 .(ii)
Since X is the intersection of these two constraints, solving by deducting (i) from (ii) we get
0.17X2=2
X2 =11.76
And substituting X2 = 11.76 to equation (i) we get
X1 = 16.24
Therefore 11.76 units of Benko lager and 16.24 units of Benoni lager need to be produced for
maximum contribution.
Contribution = 4(16.24) + 3(11.76) = 100.24
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Decesion Theory
X2
8
X1
The line X1 2 does not affect the feasible region (doesnt cause reduction of the feasible
region), this constraint doesnt limit attainment of the objective, thus its known as a redundant
constraint.
Now picking a convenient point inside the feasible region, say (6, 10)
We get a total cost of
600 = (6(40)+10(36))
Thus the objective function line of 40X1 + 36X2 = 600
Moving this line parallel toward the origin to locate the last apex before the line completely fall
off the feasible region, we get:
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Decesion Theory
Note:
The shadow prices apply in so far as the constraint is binding for example if more and more
labor hours are available it will reach a point where labor hours are no longer scarce thus labor
hours cease to be a binding constraint and its shadow price becomes a zero.(All nonbinding
constraints have zero shadow price). Logically its senseless to pay more to increase a resource,
which is already abundant.
Interpretation of shadow prices
A shadow price of a binding constraint indicates to management how much extra contribution
will be gained by increasing a unit of the scarce resource.
In the example above Sh.2.11 is the shadow price for labor hours. This implies that management
is ready to pay up to Sh.2.11 extra per hour for the extra hours i.e. say an employee is paid sh.5
per hour and one day he works for two hours extra (overtime), the management is prepared to
pay up to sh.7.11 per hour for the two hours overtime worked.
Sensitivity Analysis
Definition: Sensitivity analysis is the test of how certain changes in resources affect the optimal
solution.
In sensitivity analysis we consider the effect of additional limiting or nonlimiting constraints.
We already know that adding more nonlimiting constraints does not change the optimal
solution.
We also know that adding more binding constraints affects the objective function.
It is very important for the management to know how much of a limit resource can be made
available until it has no effect on the objective function (ie ceases to be a binding resource)
SIMPLEX METHOD
When analyzing linear programming problems with three or more variables the graphical
method becomes enadequate, in such cases we employ simplex method . Simplex method is an
algebraic procedure for solving systems of equations requiring optimization of the objective
function..
This method can be applied to any number of variables, the more they are the more complex it
becomes to workout a solution on paper. Computer programs e.g. Tora are used to solve the
most intricate problems.
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Lesson Eight
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Example
Consider the linear problem.
Maximize
45 x1 + 80 x2
5 x1 + 20 x2 400
10 x1 + 15 x2 450
Subject to
x1 0, x2 0
Solution.
1. to convert this problem to a system of linear equation, we introduce slack variables to
each constraint.
Z = 45 x1 + 80 x2
5 x1 + 20 x2 + x3 = 400
10 x1 + 15 x2 + x4 = 450
Subject to
x1 , x2 , x3 , x4 0
where the structural variables x3 and x4 are slack variables
2. we then place this information in a tabular form known as a tableu
Initial tableu
Products
Slack Variables
Solution
Solution
Quantity
Variable
x
x
x
x
1
x3
20
400
x4
10
15
450
45
80
x3 = 400
x4 = 450
Z =0
(Total contribution)
It also show that unused capacity is at maximum i.e. the value for the slack x3 and x4 is 0.
Afer several operations and when an optimal solution has been attained, these values will change
to give an optimal feasible solution.
3. Select the column with the highest value of Z (i.e. 80), then devide the positive numbers
in that column (i.e. the x2 column) into the quantity column.
i.e. 400 20 = 20
450 15 = 30
chose the rowgiving the lowest result (in our case the row with x3 gives 20) and mark the element
falling on the intersection of the selected row and selected column (i.e. 20: selected element)
4. Devide all the elements in the selected row by the value of the selected and change the
solution variable to the heading of the identified column (from x3 to x2)
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Decesion Theory
Solution
Quantity
x2
1
4
1
20
20
x4
10
15
450
45
80
5. next we conduct row operations that aim to reduce elements falling in the same column
as the previously marked element to zero. These row operations may sometime
necessitate multiplying or deviding the selected row with an arbitrary number.
Therefore:
Row 2 15Row 1
15
new
x4 10 15 0 1 = 450
x2
15
4
x4
6 14
15
15
20
0*
3
4
0 = 300
1 = 150
80
new
Z 45 80 0 0 =
0
x2 20 80 4 0 = 1600
Z
25 0*
4 0 = 1600
Solution
Quantity
x2
1
4
1
20
20
x4
6 14
3
4
150
25
4
1600
Since in the Z row under products column we still have values greator than zero, we
conduct another operation.
Taking the column with a Z value of 25, we repeat the process in the same manner.
20 14 = 80
150 6 14 = 24
thus we pick the x4 row and mark the element 6 14 , the row solution variable is changed to
x1 and we devide the row by 6 14 to convert the marked element to 1.
Therefore;
x1
3
25
4
25
= 24
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Lesson Eight
( 4 )
x2
1
4
1
20
x1
1
4
3
100
new x
2
261
Z
x1
25
new Z
0* 1
0 = 20
4
100
251
1
50
= 6
= 24
25 0 4 0 = 1600
25 0 3 4 = 600
0*
0 7 4 = 2200
x3
x4
Solution
Quantity
x2
1
50
251
24
x1
3
25
4
25
24
7
4
2200
Slack Variables
This is the final tableu since the Z row has no values greator than zero thus we have the
optimal solution.
Interpretation
to maximise Z we need to produce 24 units x2 and 24 units of x1, we obtain these
values from the solutions quantity column
thus, Z = 24(45) + 24(80) = 3000
we have zero slack (unused quantities of constraints).
Assume tableu 2 is the final tableu and let the constraint with variable x3 be labour
hours and x4 be raw materials, the slack wouldhve been interpreted as:
o 150 units of raw materials were unused
o to maximize Z we produce 20units of x2 and none of x1.
The values represnts in Z row under slack vaiable column represents shadow
prizes. Thus the shadow prize for the first constraint with x3 is 7 and the shadow
prize for the second constraint with the vaiable x4 is 4.
25 x1 + 20 x2 + 24 x2
where : x1 = Xtragrow, x2 = Youngrow, x3 = Zupergrow
Subject to
0.3 x1
+ 0.2 x3 500
0.5 x2 + 0.4 x3 1000
1500
x1 0, x2 0, x3 0
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Decesion Theory
Constraint
1(<)
2(<)
3(<)
4(<)
5(>)
Variable
X1: Xtragrow
X2: Youngrow
X3: Zupergrow
Constraint
1(<)
2(<)
3(<)
4(<)
5(>)
RHS
500
1000
800
600
1500
Slack/Surplus+
0
250316.670
166.7+
Sensitivity Analysis
Current obj coeff
Min obj coeff
25
13.50
20
9.78
24
Infinity
Current RHS
500
1000
800
600
1500
Min RHS
450
750
483.3
0
Infinity
Reduced cost
0
0
7.67
Max RHS
975
Infinity
Infinity
800
1666.7
Dual price
83.33
0
0
50
0
Required
Interpret the data generated by the the computer.
Solution.
Table 1:
Objective value, is the solution to objective function (e.g the solution to this example is 71,436)
The four columns of table 1 are to be interpreted as follows;
Variable: these are the variables of the model. In our example we have x1 = Xtragrow, x2 =
Youngrow and x3 = Zupergrow
Value: this is value that the variables assume at optimal solution (to optimize the
objective function one needs to produce this amounts of the variables). In our example we
are required to produce 1,666.67 of x1 and 1,750 of x2 and none of x3
Objective coefficient: these are the coefficients of the objective function
Objective value contribution: this is the value contributed by each variable to the
objective function (for x1=251,666.67), the total of this is equal to our objective value
(i.e 41,666.67+35,000=76,666.67).
The 3 columns of the second part of table1 can be interpreted as follows;
Constraints: this is constraints of the model representing the limited resources.
RHS: the Right hand side value is the limiting value of the constraint. E.g for the first
constraint the maximum amount of material A is 500 tons.
Slack/surplus: at optimal production not all the materials for some of the constrants will
be fully utilized, slack is the amount of material that is left over after production. For
constraint 1 and 4 no material remained, this also implies that these are the binding constraints i.e their
adjustment directly affects the objective solution
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263
Sensitivity Analysis
This is the analysis of the effect of adjusting variables or constraint, whether te objective
solution will be affected. How much of the objective coefficient (or the maximum available
amount of a constraint) can be reduced or increased without affecting the objective solution.
The columns of this table can be interpreted as follows;
Variable: as explained above
Current objective coefficient: this is the value of coefficients of the objective function
Minimum objective coefficient: this is how low the coefficient can be reduced without
affecting the optimal basis. The coefficient for x1 can be reduced from 25 to 13.50 (the prize for
Xtragrow fall to as low as $13.50 from $25) but the optimal solution will remain the same
Maximum objective coefficient: this is how high the coefficient can be increased without
affecting the optimal basis
Reduced cost: this is amount by which the coefficient of the variable has to be adjusted
with for it to become a basic variable (included to the objective optimal solution). X1
and x2 have 0 reduced costs implying that they already make part of the optimal solution, x3 will
require to be increased by 7.67 for it to make part of the basic variable.
The second part of the table is interpreted as follows;
Constraints: as described above
Current Rihgt Hand Side: the limiting value of the constraint. E.g for the first constraint the
maximum amount of material A is 500 tons.
Minimum RHS: the lowest the available amount of the constraint can be reduced
without affecting the optimal basis
Maximum RHS: the highest the available amount of the constraint can be increased
without affecting the optimal solution
Dual price: this is amount increase to the objective contribution due to a unit increase
of the available constraint. Since there are only 500 tons of material A if management decides to
increase it by a unit to 501tons then the objective optimal solution will be 76,666.67+83.33.
TRANSPORTATION
A transportation problem deals with a number of sources of supply (e.g a manufacturing
company, warehouse) and a number of destinations (e,g shops, houses). The usual objective is
minimizing transportation costs of supplying items from a set of source points to a set of
destinations.
A major characteristic of this problem is the linearity requirement, i.e. transport cost fom one
point to another must be clearly defined, if it will cost sh.50 to transport a bag from a warehouse
to shop A then it will cost sh.250 to transport 5 bags.
Assumptions
The model assumes a homogeneous commodity, one type of commodity
Total supply is equal to total demand
Example 1
64 chambers a computer support firm has three branches at different parts of the city, it receives
orders for a total of 15 desktop computers from four customers. In total in the three branches
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Decesion Theory
there are 15 machines available. The management wish to minimise delivery costs by dispatching
the computers from the appropriate branch for each customer.
Details of the availabilities, 'requirements, and transport costs per computer are given in the
following table.
Table 1
Available
Total
15
transportation
cost
per unit
Solution
Step 1 Make an initial feasible allocation of deliveries by selecting the cheapest route first, and
allocate as many as possible then the next cheapest and so on. The result of such an
allocation is as follows.
Table 2
A
3
Available
X
Y
Z
2 Units
6 Units
7 Units
1(4)
2(5)
Requirement
B
C
3
4
2(1)
1(3)
4(2)
D
5
5(2)
Note: the number in the table represent deliveries of computers and the number in the brackets (1), (2), etc
represent the sequence in which they are inserted, lowest cost first i.e.
Sh.
Total cost 22
1. 2 units X B sh.11/unit
2. 4 units Y C sh.12/unit
Total cost 48
5 units Z D sh.12/unit
Totals cost 60
3. The next lowest cost move which is feasible i.e. doesnt exceed row or column totals is 1
unit Y B sh.14/unit
14
4. similarly the next lowest feasible allocation 1 unit Y A
sh.17/unit
17
5. finally to fulfill the row /column totals 2 units Z A sh.18/unit
__36
197
Step 2. Check solution obtained to see if it represents the minimum cost possible. This is done
by calculating shadow costs (i.e. an imputed cost of not using a particular route) and
comparing these with the real transport costs to see whether a change of allocation is
desirable.
This is done as follows:
Calculate a nominal 'dispatch' and 'reception' cost for each occupied cell by making an
assumption that the transport cost per unit is capable of being split between dispatch and
reception costs thus:
264
Lesson Eight
265
D(X) + R(B) = 11
D(Y) + R(A) = 17
D(y) + R(B) = 14
D(Y) + R(C) = 12
D(Z) + R(A) = 18
D(Z) + R(D) = 12
Where D(X), D(Y) and D(Z) represent Dispatch cost from depots X, Y and Z, and R(A) R(B),
R(C) and R(D) represent Reception costs at customers A, B, C, D.
By convention the first depot is assigned the value of zero i.e. D(X) = 0 and this value is
substituted in the first equation and then all the other values can be obtained thus
R(A) = 14
R(B) = 11
R(C) = 9
R(D) =
8
D(X) = 0
D(Y) = 3
D(Z) = 4
Using these values the shadow costs of the unoccupied cells can be calculated. The unoccupied
cells are X : A, X : C, X : D, Y : D, Z : B, Z : C.
D(X) + R(A)
D(X) + R(C)
D(X) + R(D)
D(Y) + R(D)
D(Z) + R(B)
D(Z) + R(C)
=
=
=
=
=
=
0
0
0
3
4
4
+
+
+
+
+
+
14
9
8
8
11
9
Shadow
costs
14
9
8
11
15
13
=
=
=
=
=
=
These computed 'shadow costs' are compared with the actual transport costs (from Tab I),
Where the actual costs are less than shadow costs, overall costs can be reduced by allocating units
into that cell.
CellX:A
X:C
X:D
Y: D
Z:B
Z:C
Actual
cost
13
15
20
13
18
15
Shadow
cost
14
9
8
11
15
13
+ Cost increase
 Cost reduction
=
1
=
+6
=
+ 12
=
+2
=
+3
=
+2
The meaning of this is that total costs could be reduced by sh.1 for every unit that can be
transferred into cell X : A. As there is a cost reduction that can be made the solution , Table 2
is not optimum.
Step 3: Make the maximum possible allocation of deliveries into the cell where actual costs are
less than shadow costs using occupied cells i.e.
Cell X : A from Step 2, The number that can be allocated is governed by the need to keep within
the row and column totals. This is done as follows:
QUANTITATIVE TECHNIQUES
266
Decesion Theory
Table 3
X
Y
Z
Available
A
3
+
12
2 Units
6 Units
7 Units
Requirement
B
C
3
4
21+
4
D
5
Table 3 is a reproduction of Table 2 with a number of + and  inserted. These were inserted for
the following reasons.
Cell X : A + indicates a transfer in as indicated in Step 2
Cell X : B  indicates a transfer out to maintain Row X total.
Cell Y : B + indicates a transfer in to maintain Column B total
Cell Y : A  indicates a transfer out to maintain Row Y and Column A totals.
The maximum number than can be transferred into Cell X : A is the lowest number in the
Minus cells i.e. cells Y : A, and X : B which is 1 unit.
Therefore 1 unit is transferred in the + and  sequence described above resulting in the following
table
Table 4
Available
X
Y
Z
2 Units
6 Units
7 Units
A
3
1
Requirement
B
C
3
4
1
2
4
D
5
Cell X:A
Cell X:B
Cell Y:B
Cell Y:C
Cell Z:A
Cell Z:D
1 unit @ sh.13
1 Unit @ sh.11
2 Units @ sh.14
4 Units @ sh.12
2 Units @ sh.18
5 Units @ sh.12
Sh.
= 13
= 11
= 28
= 48
= 36
= 60
196
The new total cost is sh.1 less than the total cost established in Step 1. This is the result expected
because it was calculated in Step 2 that sh.1 would be saved for every unit we were able to
transfer to Cell X : A and we were able to" transfer 1 unit only.
Notes: Always commence the + and  sequence with a + in the cell indicated by the (actual cost shadow cost) calculation. Then put a  in the occupied cell in the same row which has an
occupied cell in its column. Proceed until a  appears in the same column as the original +.
Step 4. Repeat Step 2 i.e. check that solution represents minimum cost. Each of the processes in
266
Lesson Eight
267
Step 2 are repeated using the latest solution (Table 4) as a basis, thus: Nominal dispatch
and reception costs for each occupied cell.
D(X) + R(A) = 13
D(X) + R(B) = 11
D(y) + R(B) = 14
D(Y) + R(C) = 12
DZ) + R(A) = 18
D(Z) + R(D) = 12
Cell X :C
X:D
Y:A
Y:D
Z:B
Z:C
cost
15
20
17
13
18
15
+ Cost
increase
cost  Cost reduction
9=
+6
7=
+13
16 =
+1
10 =
+3
16 =
+2
14 =
+1
Shadow
Actual

It will be seen that all the answers are positive, therefore no further cost reduction is possible
and optimum solution has been reached.
Thus the optimal solution is represented by table 4
QUANTITATIVE TECHNIQUES
268
Decesion Theory
minimize cost and its seeking your advice, advise the firm.
Below is a table of availability and requirement;
Available
Store I
Store II
Store III
Total
Books
40
20
50
110
Sch. A
25
Sh.3
Sh.1
Sh.4
Required
Sch. B Sch. C
25
42
16
9
9
3
5
2
Sch. D
8
8
5
Total
100
transport
costs per
Book
Solution
Step 1: add a dummy destination to table 5 with zero transport costs and requirements equal to
the surplus availability.
Available
Store I
Store II
Store III
Total
Books
40
20
50
110
Sch. A
25
Sh.3
Sh.1
Sh.4
Sch. B
25
16
9
5
Required
Sch. C Sch. D Dummy
Total
10
42
8
100
0
9
transport
costs per
3
8
0
Book
2
5
0
Step 2. Now that the quantity available equals the quantity required (because of insertion of the
dummy) the solution can proceed in exactly the same manner described in the first
example. First set up an initial feasible solution
Available
I
II
III
40
20
50
A
25
5(4)
20(1)
B
25
17(6)
8(5)
Requirement
C
D
42
8
8(3)
Dummy
10
10(7)
42(2)
The numbers in the table represent the allocations made and the numbers in brackets represent
the sequence they were inserted based on lowest cost and the necessity to maintain row/column
totals. The residue of 10 was allocated to the dummy. The cost of this allocation is
Sh.
Sh.
IA
5 units @ 3
15
IB
17 units @ 16
272
ID
8units @ 2
16
IDummy
10 units @ zero cost
IIA
20 units @ 1
20
IIIB
8 units @ 5
40
IIIC
42 units @ 2
84
447
268
Lesson Eight
269
Step 3. Check solution to see if it represents the minimum cost possible in the same manner as
previously described i.e.
Dispatch & Reception Costs of used routes:
D(I) + R(A)
=3
D(I) + R(B)
= 16
D(I) + R(D)
=2
D(I) + R(Dummy) = 12
D(II) + R(A)
=1
D(III) + R(B)
=5
D(III) + R(C)
=2
=3
=16
=13
=2
=0
D(I)
=0
D(I)
=2
D(III) =11
Using these values the shadow costs of the unused routes can be calculated .The unused routes
are I:C,II:B,II:C,II:D,II:Dummy,III:D,and Dummy
D (I)
D (II).
D (II).
D (II)
D (II)
D (III)
D (III)
D (III)
+
+
+
+
+
+
+
+
R(C)
R (B)
R(C)
R (D)
R (Dummy)
R (A)
R (D)
R (Dummy)
=
=
=
=
=
=
=
=
Shadow
Costs
0+13
2+16
2+13
2+ 2
2+0
11+3
11+2
11+0
=13
=14
=11
=0
=2
=8
=9
=11
QUANTITATIVE TECHNIQUES
270
Available
Decesion Theory
I
II
III
40
20
50
A
25
5+
20
Requirements
B
25178+
C
42
D
8
8
Dummy
10
10
42
The maximum transferable number is the lowest number in the minus cell, i.e. 17. after the
transfer is made we get;
Available
I
II
III
40
20
50
A
25
22
3
B
250
25
C
42
D
8
8
Dummy
10
10
17
25
Step 3 is repeated again to check if the cost is minimum after setting D(I) = 0.
In our case after deducting shadow costs from actual costs we find that there are no more
negative numbers thus we deduce from the last table that the minimum transportation cost is,
(223) + (82) + (100) + (31) + (173) + (255) + (252) = Sh.311
W
25
38
15
26
X
18
15
17
28
Y
23
53
41
36
Z
14
23
30
29
270
Lesson Eight
271
Step 1. Reduce each column by the smallest figure in that column. The smallest figures are 15, 15,
23 and 14 and deducting these values from each element in the columns produces the following
table.
Table 2
A
B
C
D
W
10
23
0
11
X
3
0
2
13
Y
0
30
18
13
Z
0
9
16
15
A
B
C
D
W
10
23
0
0
Table 3
X
3
0
2
2
Y
0
30
18
2
Z
0
9
16
4
Note: Where the smallest value in a row is zero (i.e. as in rows A, B and C above) the row is, of
course, unchanged.
Step 3 Cover all the zero in the table 3 by the minimum possible number of lines. The lines may be
horizontal or vertical.
Table 4
A
B
C
D
W
10
23
0
0
X
3
0
2
2
Y
0
30
18
2
Z
0
9
16
4
Note: Line 3, covering Row B, could equally well have been drawn covering column X.
Step 4.Compare the number of lines with the number of assignments to be made (in this example
there are 3 lines and 4 assignments).If the number of line equals the number of assignments to be
made go to step 6.
If the number of lines is less than the number of assignments to be made (i.e. as in this example
which has three lines and four assignments) then
a) Find the smallest uncovered element from step 3, called X (in Table 4 this value is 2).
b) Subtract X to every element in the matrix.
c) Add back to every element covered by a line. If an element is covered by two lines, for
example, cell A: W in Table 4, X is added twice.
Note: The effect of these steps is that X is subtracted from all covered by one line remain
unchanged, and elements covered by two lines are increased by X.
QUANTITATIVE TECHNIQUES
272
Decesion Theory
Note: The effect of these steps is that X is subtracted from all uncovered elements, elements
covered by one line remains unchanged, and elements covered by two lines are increased by
X.
Carrying out this procedure on Table 4 produces the following results:
In Table 4 the smallest elements is 2. New table is
Table 5
A
B
C
D
12
25
0
0
3
0
0
0
0
30
16
0
0
9
14
2
Note: It will be seen that cells A: W and B: W have been increased by 2; cells A : X, A : Y,A :Z, B
:X,B:Y, B:Z, C:W and D:W are unchanged, and all other cells have been reduced by 2.
Step 5. Repeat steps 3 and step 4 until the number of lines covering the zero equals the number
of assignments without any further repetition, thus:
Table 6
A
B
C
D
12
25
0
0
3
0
0
0
0
30
16
0
0
9
14
2
Line 1
Line 2
Line 3
Line 4
Step 6 when the number of lines equals the number of assignments to be made, use the
following rules:
a) Assign to any zero which is unique to both a column and a row.
b) Assign to any zero which is unique to a column or a row.
c) Ignoring assignments already made repeat rule (b) until all assignments are
made.
Carrying out this procedure for our example results in the following:
a) (Zero unique to both a column and a row). None in this example.
b) (Zero unique column or row). Assign B to X and A to Z. The position is
now as follows.
Table 7
A
B
C
D
Row
Row
0
0
Satisfied
Satisfied
Column Satisfied
Column Satisfied
16
0
Column satisfied
Column satisfied
Column Satisfied
Column Satisfied
272
Lesson Eight
273
14
15
15
36
80 Miles
W
25
38
15
26
X
18
15
17
28
Y
23
53
41
36
Z
14
23
30
29
Contributions
to be gained
Step 1: Reduce each column by the largest figure in that column and ignore the resulting signs.
Table 9
A
B
C
D
W
13
0
23
12
X
10
13
11
0
Y
30
0
12
17
Z
16
7
0
1
QUANTITATIVE TECHNIQUES
274
Decesion Theory
W
3
0
23
12
X
0
13
11
0
Y
20
0
12
17
Z
6
7
0
1
W
3
0
23
12
X
0
13
11
0
Y
20
0
12
17
Z
6
7
0
1
Step 4. If a number of lines equals the number of assignments to be made go to step 6.If less, (as
in this example), carry out the uncovered element procedure previously described. This results
in the following table:
Table 12
A
B
C
D
W
0
0
20
9
X
0
16
11
0
Y
17
0
9
14
Z
6
10
0
1
Table 13
A
B
C
D
W
0
0
20
9
X
0
16
11
0
Y
17
0
9
14
Z
6
10
0
1
Step 6. Make assignment in accordance with the rules previously described which result in the
following assignment:
C to Z
D to X
A to W
B to Y
274
Lesson Eight
275
30
28
25
53
136
Notes:
a) It will be apparent that maximising assignment problems can be solved in virtually the
same manner as minimising problems.
b) The solution methods given are suitable for any size of matrix. If a problem is as small
as the illustration used in this chapter, it can probably be solved merely by inspection.
6
22
12
16
18
Bill
Charlie
Dave
12
18
16
8
14
20
15
18
12
10
12
20
15
20
17
Allocate the men to the jobs so as to minimise the total time taken and identify the job which
will not be dealt with.
QUANTITATIVE TECHNIQUES
276
2.
Decesion Theory
A company has four salesmen who have to visit four clients. The profits records from
previous visits are shown in the table and it is required to maximise profits by the best
assignments.
A
6
22
12
16
12
18
16
8
20
15
18
12
12
20
15
20
C
20
15
18
12
10
D
12
20
15
15
17
Customer 1
Answers to exercises
DUMMY
0
0
0
0
0
10
16
6
10
12
10
8
0
6
5
8
2
0
8
3
8
5
0
0
0
0
4
7
5
0
6
10
2
5
2
0
0
5
0
8
5
3
0
0
3
3
5 Lines so optimum.
Assignments
B to 4
C to 5
A to 1
Dummy to 2
8.3
NETWORK ANALYSIS
This is a system of interrelationship between jobs and tasks for planning and control of
resources of a project by identifying critical path of the project.
276
Lesson Eight
277
Terminology
Activity. Task or job of work, which takes time and resources e.g building a bridge. It is
represented by an arrow which indicates where the task begins and ends
Event (node). This is a point in time and it indicates the start or finish of an activity e.g in building
a bridge, rails installed. It is represented by a circle.
Dummy activity. An activity that doesnt consume time or resources, it is merely to show logical
dependencies between activities so as abide by rules of drawing a network, it is
represented by a dotted arrow
Network. This is a combination of activities and events (including dummy activities)
Loop
Dangling activity
Dummy Events
This is an event that does not consume time or resources, it is represented by dotted arrow.
Dummies are applied when two or more events occur concurrently and they share the same
head and tail events e.g. when a car goes to a garage tires are changed and break pads as well,
instead of representing this as;
A Tires Changed
QUANTITATIVE TECHNIQUES
278
Decesion Theory
CA
CR
Example of a network.
Activities
12
 where 1 is the preceding event where as 2 is the succeeding event of the activity
13
24
25
35
45
46
56
67
4
6
1
3
8.4
Network AnalysisTime Analysis
Assessing the time
a) After drawing the outline of the network time durations of the activities are then
inserted.
a) Time estimates. The analysis of the projects time can be achieved by using :
i.
Single time estimates for each activity. These estimates would be based on the
judgment of the individual responsible or by technical calculations using data
from similar projects
Multiple time estimates for each activity. the most usual multiple time
ii.
estimates are three estimates for each activity , i.e. optimistic (O), Most Likely
(ML), and Pessimistic (P). These three estimates are combined to give an
expected time and the accepted time formula is:
Expected time =
O + P + 4ML
6
For example assume that the three estimates for an activity are
Optimistic
11 days
Most likely
15 days
Pessimistic
18 days
278
Lesson Eight
279
Expected time =
11 + 18 + 4 (15 )
6
= 14.8 days
b) Use of time estimates. as three time estimates are converted to a single time
estimate. There is no fundamental difference between the two methods as
regards the basic time analysis of a network. However, on completion of the
basic time analysis, projects with multiple time estimates can be further
analyzed to give an estimate of the probability of completing the project by a
scheduled date.
c) Time units. Time estimates may be given in any unit, i.e. minutes , hours, days
depending on the project. All times estimates within a project must be in the
same units otherwise confusion is bound to occur.
Earliest start times (EST) Forward pass, Once the activities have been timed we can
assess the total project time by calculating the ESTs for each activity. The EST is
the earliest possible time at which a succeeding activity can start.
Assume the following network has been drawn and the activity times estimated in
days.
2
B
D
4
2
0
A
1
C
3
E
1
F
2
EST
2
3
D
4
2
0
0
A
1
1
1
C
3
3
4
E
1
4
7
F
2
5
9
The method used to insert the ESTs is also known as the forward pass, this is obtained
by;
EST = The greater of [EST (tail event) + Activity duration]
QUANTITATIVE TECHNIQUES
280
Decesion Theory
Latest Start Times (LST) Backward pass. this is the latest possible time with which a
preceding activity can finish without increasing the project duration. After this operation
the critical path will be clearly defined.
From our example this is done as follows;
2
3 3
B
2
0
0 0
A
1
1
1 1
C
3
3
4 6
LST
D
4
E
1
4
7 7
F
2
5
9
Critical Path. . This is the chain of activities in a network with the longest duration Assessment
of the resultant network shows that one path through the network (A, B, D, F) has
EST's and LST's which are identical this is the critical path.
The critical path can be indicated on the network either by a different colour or by
two small transverse lines across the arrows along the path, thus in our example we
have;
2
3 3
B
2
0
0 0
A
1
1
1 1
C
3
3
4 6
D
4
E
1
4
7 7
F
2
5
9
280
Lesson Eight
281
Activities along the critical path are vital activities which must be completed by their
EST's/LST's otherwise the project will be delayed.
Non critical activities (in the example above, C and E) have spare time or float
available. C and/ or E could take up to an additional 2 days in total without
delaying the project duration. If it is required to reduce the overall project duration
then the time of one or more of the activities on the critical path must be reduced
perhaps by using more labour, or better equipment to reducing job times.
FLOAT
Float or spare time can only be associated with activities which are noncritical. By definition,
activities on the critical path cannot have float. There are three types of float, Total Float, Free
Float and Independent Float. To illustrate these types of float we use the following example.
5
10 20
B
10
6
40 50
Total Float = Latest Finish time (LFT)  Earliest Start time(EST) time Activity
Duration
Total Float = 50  10  10
= 30 days
b) Free float Amount of time an activity can be delayed without affecting the
commencement of a subsequent activity at its earliest start time, but may affect float of
a previous activity.
Free Float = Earliest Finish Time(EFT)  EST  Activity Duration
c)
QUANTITATIVE TECHNIQUES
282
Decesion Theory
Note:
for examination purposes, float always refers to total float
The total float can be calculated separately for each activity but it is often useful to find the total float over
chains of noncritical activities between critical events
Example.
The following represents activities of a network.
Activity
Preceding Activity
Duration Days
A
4
B
A
7
C
A
5
D
A
6
E
B
2
F
C
3
G
E
5
H
B,F
11
I
G,H
7
J
C
4
K
D
3
L
I,J,K
4
Required:
a) Draw the network diagram and find the critical path
b) Calculate the floats of the network in question
Solution. (a)
E
2
4
13
G
5
23
H
11
11
5
12
I 7
B 7
F
1
0
A
4
2
4
C
5
30
J
4
6
9
10
L
4
34
7
10
282
Lesson Eight
283
First we draw the network structure ensuring it fits the data above
We then label all activities from 1 to 12 and indicate activity duration
Conduct a forward pass operation (to obtain the diagram above)
Operate backward pass to establish the critical path, thus we have
G
5
13 18
23 23
H
11 15
11
I 7
12 12
B 7
F 3
0 0
A
4
30 30
C
5
J
4
L
4
34 34
10 27
Therefore we get the critical path to be, A C F H I L
b) The floats of the network,
Activity
*A
B
*C
D
E
*F
G
*H
*I
J
K
*L
EST
0
4
4
4
11
9
13
12
23
9
10
30
LST
EFT
0
4
4
4
15
9
21
12
23
9
22
30
4
11
9
10
13
15
23
23
30
30
30
34
Activity
Duration
LFT
D
4
15
9
22
21
15
23
23
30
30
30
34
4
7
5
6
2
3
5
11
7
4
3
4
Total Float
Free Float
LFT EST D
EFTESTD
Independent
Float
EFTLSTD
4
12
8
5
17
17

5
17
17

17
5

QUANTITATIVE TECHNIQUES
284
Decesion Theory
Time required
(sum of duration)
14
7
9
4
Time available
(LFT of last activityEST of 1st activity)
19
8
26
21
Slack
This is the difference between the EST and LST for each event. Strictly it does not apply to
activities but on occasions the terms are confused in examination questions and unless the
context makes it abundantly clear that event slack is required, it is likely that some form of
activity float is required. Events on the critical path have zero slack.
8.5
Cost Scheduling
This is done by calculating the cost of various project durations, cost analysis seeks to find the
cheapest way of reducing the overall cost duration of a project by increasing labour hours,
equipment e.t.c.
Terminologies
Normal cost. The costs associated with a normal time estimate for an activity. Often the normal
time estimate is set at the point where resources (labour, equipment, etc.) are used
in the most efficient manner.
Crash cost. The costs associated with the minimum possible time for an activity. Crash costs,
because of extra wages, overtime premiums, extra facility costs are always higher
than normal costs.
Crash time. The minimum possible time that an activity is planned to take. . The minimum time is
invariably brought about by the application of extra resources, e.g. more labour or
machinery.
Cost slope. This is the average cost of shortening an activity by one time unit (day, week, month as
appropriate). The cost slope is generally assumed to be linear and is calculated as
follows:
Example
A project has the following activities and costs. You are required to prepare the least cost
schedules for all possible durations from normal time normal cost to crash time crash cost.
284
Lesson Eight
Activity
285
Preceding
Activity
A
A
B,C
A
B
C
D
E
Duration
days
4
8
5
9
5
Crash
time
3
5
3
7
3
1
4
Cost
(Shs).
360
300
170
220
200
60
70
50
40
80
3
14 14
C
4
0
0
420
510
270
300
360
D
9
B
8
2
9
(b)
Reduce by 1 day the activity on the critical path with the lowest cost slope. Thus we
reduce C at extra cost of Shs. 50.
Now
Project duration = 13 days
Project cost
= Shs. 1,300
Note: that all activities are now critical.
(c)
Further reducing the critical path by 1 day will require that more than one activity is
affected because there exist several critical paths.
Reduce by 1 day
A and B
D and E
B, C and D
A and E
Extra cost
60 + 70 = 130
40 + 80 = 120
70 + 50 + 40 = 160
60 + 80 = 140
Activities critical
All
All
All
A, D, B, E
QUANTITATIVE TECHNIQUES
286
Decesion Theory
Then the net cost for 12 day duration = 1,300 + (140 50) = 1,390.
The network becomes
1
3
D
3
3 (crash)
12
12
5
C
E
4
0
0
B
0
(d)
(e)
Final reduction possible is by reducing B, C & D for Shs. 160 the network then
becomes.
1
3
A
D
3
7 (Crash)
10
10
3 (crash)
4
C
E
3 (crash)
0
0
B
0
2
7
Duration = 10 days
Cost = Shs. 1,670
Critical activities = All.
Note: only critical activities affect project duration.
: Always look for a possibility of increasing the duration of a previously
crashed activity.
286
Lesson Eight
287
Example
A project has the following activity durations and resource requirements.
Activity
A
B
C
D
E
F
Preceding activity
C
B
D
Duration (days)
6
3
2
2
1
1
Required
i)
What is the networks critical path
Draw a gantt chart diagram indicating activity times, using their estimate.
ii)
Show resource requirement on a day to day basis assuming all events commence at their
iii)
estimates.
Assuming that only six employees are available, how will the activities be planned for?
iv)
Solution
i)
Activities
A
B
C
D
E
F
Duration
6
3
2
2
1
1
EST
0
0
0
2
3
4
LST
0
0
0
3
5
5
QUANTITATIVE TECHNIQUES
Man power
3
2
2
1
2
1
288
Decesion Theory
ii)
iii)
iv)
288
Lesson Eight
289
Node Networks
This network also known as a procedure diagram is represented with the same information as a
network diagram.
Its characteristics are;
Activities are shown in boxes instead of arrows
i)
Events are not represented.
ii)
iii)
The arrows linking boxes indicate the sequence precedence of activities.
Dummies arent necessary.
iv)
E.g.
Would appear as
QUANTITATIVE TECHNIQUES
290
Decesion Theory
Note:
i)
EST and LST are calculated by the same process we learnt earlier.
EFT and LFT are calculated by adding the activity time duration to EST and LST
ii)
respectively.
iii)
Critical path is similarly identified by identifying equal EST and LST throughout the
path.
290
Lesson Eight
291
LESSON 8 REINFORCING QUESTIONS
QUESTION ONE
Regal Investments has just received instructions from a client to invest in two shares; one an
airline share, the other an insurance share. The total maximum appreciation in share value over
the next year is to be maximized subject to the following restrictions:
the total investment shall not exceed Sh.100,000
at most Sh.40,000 is to be invested in the insurance shares
quarterly dividends must total at least Sh.2,600
The airline share is currently selling for Sh.40 per share and its quarterly dividend is Sh.1per
share. The insurance share is currently selling for Sh.50 per share and the quarterly dividend is
Sh.1.50 per share. Regals analysts predict that over the next year, the value of the airline share
will increase by Sh.2 per share and the value of the insurance share will increase by Sh.3 per
share.
A computer software provided the following part solution output:
Objective Function Value = 5,400
Airline shares
Insurance shares
Constraint
Total investment
Investment in insurance
Dividends
Variable Number
1,500
800
Reduced cost
0.000
0.000
Slack/Surplus
0.000
0.000
100.000
Dual prices
0.050
0.010
0.000
QUANTITATIVE TECHNIQUES
292
Decesion Theory
Lower limit
2.500
0.000
Current value
3.000
2.000
Upper limit
No upper limit
2.400
Lower limit
96,000.00
20,000.00
No lower limit
Current value
100,000
40,000
2,600
Upper limit
No upper limit
100,000.00
2,700.00
Required:
a)
b)
c)
d)
QUESTION TWO
a)
A baker makes two products; large loaves and small round loaves. He can sell up to 280 of
the large loaves and up to 400 small round loaves per day. Each large loaf occupies 0.01m3
of shelf space, each small loaf occupies 0.008m3 of space, and there is 4m3 of shelf space
available. There are 8 hours available each night for baking, and he can produce large loaves
at the rate of 40 per hour, and small loaves at the rate of 80 per hour. The profit on each
large loaf is Sh.5.00 and Sh.3.00 profit on the small round loaf.
Required:
In order to maximize profits, how many large and small round loaves should he produce?
b)
Summarize the procedure for solving the kind of quantitative technique you have used to
solve part (a) above.
(Q 6 June 2001)
QUESTION THREE
a)
A small company will be introducing a new line of lightweight bicycle frames to be made
from special aluminium alloy and steel alloy. The frames will be produced in two models,
deluxe and professional. The anticipated unit profits are currently Sh.1,000 for a deluxe
frame and Sh.1,500 for a professional frame. The number of kilogrammes of each alloy
needed per frame is summarized in the table below. A supplier delivers 100 kilogrammes of
the aluminium alloy and 80 kilogrammes of the steel alloy weekly.
Deluxe
Professional
Aluminium alloy
2
4
Steel alloy
3
2
Required:
i)
292
Lesson Eight
ii)
b)
293
Within what limits must the unit profits lie for each of the frames for this solution to
remain optimal?
Explain the limitations of the technique you have used to solve part (a) above.
(Q 6 Dec 2000)
QUESTION FOUR
a)
b)
The TamuTamu products company ltd is considering an expansion into five new sales
districts. The company has been able to hire four new experienced salespersons. Upon
analysing the new salespersons past experience in combination with a personality test
which was given to them, the company assigned a rating to each of the salespersons for
each of the districts .These ratings are as follows:
c)
Salespersons
A
B
C
D
Districts
1
2
92
90
84
88
90
90
78
94
3
94
96
93
89
4
91
82
86
84
5
83
81
93
88
The company knows that with four salespersons, only four of the five potential districts can
be covered.
Required:
i) The four districts that the salespersons should be assigned to in order to maximize the
total of the ratings
(Q 6 June 2002)
ii) Maximum total rating.
QUESTION FIVE
a)
Explain the value of sensitivity analysis in linear programming problems and show how
dual values are useful in identifying the price worth paying to relax constraints.
b)
QUANTITATIVE TECHNIQUES
294
Decesion Theory
Required:
Formulate this problem as a profit maximization problem and mention the basic
assumptions that are inherent in such models.
c)
An extract of the output from a computer package for this problem is given below:
Output solution
X1=120, X2 = 200, X3 = 200
Dual values
Constraints 3 150
Constraints 4 90
Constraints 5 20
Sensitivity analysis of objective function coefficients:
Variable
X1
X2
X3
Lower
limit
100
150
127.5
Original
value
250
170
150
Upper
limit
No limit
200
170
Lower
limit
320
200
80
350
1950
Original
value
500
250
120
400
2000
Upper
limit
No limit
No limit
130
412.5
2180
Constraints
1
2
3
4
5
Required:
i) Interpret the output clearly, including optimum product mix, monthly profit, unused
resources and dual values
ii) Explain the purpose of upper limits and lower limits for the variables X1,X2,X3 and
constraints 1 to 5.
iii) Calculate the increase in profit if the company is able to produce a further 10 CPU
80386 chips.
(Q7 July 2000 Pilot paper)
QUESTION SIX
Preface Retailers is a hightechnology retailer and mail order business. In order to improve its
process the company decides to install a new microcomputer system to manage its entire
operation (i.e. payroll, accounts, inventory).
Terminals for each of its many stores will be networked for fast, dependable service. The
specific activities that Preface will need to accomplish before the system is up and running are
listed below. The table also includes the necessary increased staffing to undertake the project.
294
Lesson Eight
295
Activity
A. Build insulated enclosure
B. Decide on computer system
C. Electrical wiring of room
D. Order and collect computer
E. Install air conditioning
F. Install computer
G. Staff testing
H. Install software
I. Staff training
Preceding
Activities
A
B
A
D, E
B
C, F
G, H
Duration
(Days)
4
1
3
2
4
2
5
2
3
Increased
Staff
1
3
2
1
2
2
1
1
1
Required:
a)
b)
c)
Draw a network diagram for the project and determine the critical path and its
duration.
Assuming that all activities start as soon as possible, draw a progress chart for the
project, showing the times at which each activity takes place and the manpower
requirements.
The union has decided that any staff employed on the project must be paid for the
duration of the project whether they work or not, at a rate of 500 per day.
Assuming that the same staff is employed on the different activities, determine the
work schedule that will minimise labour costs though not necessarily the project
time. What is the cost associated with this schedule?
Comment on the validity of the assumption.
QUANTITATIVE TECHNIQUES
296
Decesion Theory
COMPREHENSIVE ASSIGNMENT FOUR
Work out these question for three hours (exam condition) then hand them in to DLC for marking
Instructions:
Answer any THREE questions from SECTION I and TWO questions from SECTION II.
Marks allocated to each question are shown at the end of the question. Show all your workings
(2 marks)
(2 marks)
(2 marks)
(2 marks)
b) Consider the two person zero sum game between players A and B given the following payoff table:
Player A Strategies
1
2
Player B Strategies
1
2
2
4
3
2
1
6
2
3
Required:
i) Using the maximin and minimax values, is it possible to determine the value of the game?
Give reasons.
(3 marks)
ii) Use graphical methods to determine optimal mixed strategy for player A and determine
the value of the game.
(9 marks)
(Total: 20 marks)
QUESTION TWO
Central and Eastern Industries is planning to introduce a new mobile phone service. To do so,
the following activities are necessary:
Preceding
Expected
Standard
Activity
Activity
Time (weeks) Deviation (weeks)
A
6
1.0
B
3
0.5
C
A
5
1.0
D
A
4
1.0
E
A
3
0.5
F
C
3
0.5
G
D
5
1.0
H
B.D.E
5
1.0
I
H
2
0.5
J
F.G.I
3
1.0
The costs of the project are estimated to be Sh.10 million. If the projects is completed within 24
weeks the expected net revenue will be about Sh.100 million but if the deadline of 24 weeks is
296
Lesson Eight
297
not met, the service will fail to penetrate the market and a net revenue of Sh.2 million is
expected.
Required:
a) Determine how long the project would take.
b) If the start of activities B, E and G are respectively delayed by 3,2 and 2 weeks,
how would this affect the total project time?
c) Determine a 95% confidence interval for the expected time of the project
and explain your answer. Ignore the delays referred to in (b) above.
d) Determine the expected profit on this project. Again ignore the delays referred
in (b) above
(Total:
(8 marks)
(6 marks)
(3 marks)
(3 marks)
20 marks)
QUESTION THREE
a) Explain the value of sensitivity analysis in linear programming problems and show how dual
values are useful in identifying the price worth paying to relax constrains.
(4marks)
b) J.A Computers is a small manufacturer of personal computers. It concentrates production
on three models, a Desktop 286,and a laptop 486,each containing one CPU Chip. Due to
its limited assembly facilities J.A Computers are unable to produce more than 500 desktop
model or more than 250 Laptop models per month. It has one hundred and twenty 80386
chips (these are used in Desktop 386) and four hundred 80286 chips(used in desktop 286
model requires four hours of production time, and the laptop 486 requires three hours of
production time. J.A Computers have 2000hours of production time available for the
coming month. The company estimates that the profit on a desktop 386 is Sh.5000, for a
desktop 286 the profit is Sh.3400 and Sh.3000 profit for a Laptop 486.
Required:
Formulate this problem as a profit maximization problem and mention the basic
assumptions that are inherent in such models.
(7 marks)
a) An extract of the output from a computer package for this problem is given below:
Output solution
X1 = 120, X2 = 200, X3 = 200
Dual values
Constraints 3
Constraints 4
Constraints 5
150
90
20
Original value
500
250
120
400
QUANTITATIVE TECHNIQUES
Upper limit
No limit
200
170
Upper limit
No limit
No limit
130
412.5
298
Decesion Theory
5
X1
X2
X3
1950
=
=
=
2000
2180
Required:
i) Interpret the output clearly, including optimum product mix, monthly profit,
unused resources and dual values.
ii) Explain the purpose of upper limits for the variables X1, X2 ,X3 and
constraints 1 to 5.
iii) Calculate the increase in profit if the company is able to produce a further
10 CPU 80836 chips.
(Total:
(3 marks)
(3 marks)
(3 marks)
20 marks)
QUESTION FOUR
a) Give two applications of simulation in business.
(2 marks)
b) Collins Simiyu recently acquired a piece of land in Kitale. A property development company
has offered him Sh.300,000 for the piece of land. He has to make a decision on whether to
cultivate the piece of land or to sell it to the property development company. if he decides
to cultivate the land, there is a probability of getting a high, medium or low harvest. The
expected net income for each of the above states of harvest is shown below:
State of harvest
High
Medium
Low
From past experience, there is a 10 per cent probability that the harvest will be low, a 30 pr cent
probability that the harvest will be medium and a 60 per cent probability that the harvest will be
high. Collins Simiyu can engage an agricultural expert to carry out a survey on the productivity
of the land, which will cost him Sh.30,000. The agricultural expert gives the following
information as to the reliability of such surveys (prior probabilities).
Results of survey
Accurate
Not accurate
State of harvest
High
Medium
0.35
0.10
0.10
0.25
0.20
0.60
Low
0.05
0.15
0.20
Total
0.5
0.5
1.0
Required:
i) Construct a decision tree for the above problem.
ii) The expected monetary value for each decision
iii) The decision that you would recommend
(6 marks)
(10 marks)
(2 marks)
(Total: 20 marks)
QUESTION FIVE
a) Explain the difference between assignment and transportation problems.
(4 marks)
(4 marks)
298
Lesson Eight
299
c) Umoja Engineering Works Ltd. Has a network of branches all over Kenya. The branches
are used to service, repair and install equipment for their clients. Currently, the Nairobi
branch has four clients who require installation of equipment. Each client requires the
services of one engineer.
There are four engineers who are not engaged at the moment and can be assigned any one of the
tasks. However, these engineers have to travel from different locations and the Nairobi branch
has to meet their travel and subsistence allowances. The allowances vary from one engineer to
another and according to the client the engineer has been assigned to work for.
The table below shows the costs (in thousands of shillings) associated with each engineer.
Engineer
A
B
C
D
1
37.0
57.0
22.0
39.0
2
27.0
22.0
25.0
42.0
Client
3
34.0
79.0
61.0
54.0
4
21.0
34.0
45.0
43.0
Required:
i) The assignments to be made in order to minimize the total cost of the
engineers.
ii) The minimum cost of using engineers.
(10 marks)
(12 marks)
(Total: 20 marks)
SECTION II
QUESTION SIX
a) Define the following terms as used in the network analysis:
i)
ii)
iii)
iv)
v)
Crash time
Optimistic time
Forward pass
Dummy activity
Slack
(2 marks)
(2 marks)
(2 marks)
(2 marks)
(2 marks)
b) James Mutiso is a computer engineer in an information technology firm. The firm has
decided to install a new system to be used by the firms help desk. James Mutiso has
identified some activities required to complete the installation.
The table below provides a summary of the activities durations and the required number of
technicians:
Activity
12
13
24
25
34
36
45
56
67
Duration (Weeks)
3
1
3
2
2
4
2
2
2
QUANTITATIVE TECHNIQUES
300
Decesion Theory
Required:
i) Draw a gantt chart for the project.
(6 marks)
ii) Mr. Mutiso would like to reschedule activities so that not more than 6 technicians
are required each week.
Determine if this is possible and how it can be achieved by rescheduling
the activities.
(4 marks)
(Total: 20 marks)
QUESTION SEVEN
Regal investments has just received instructions from a client to invest in two shares; one an
airline share, the other an insurance share. The total maximum appreciation in share value over
the next year is to be maximized subject to the following restrictions:
The total investment shall not exceed Sh.100,000
At most Sh.40,000 is to be invested in the insurance shares
Quarterly dividends must total at least Sh.2,600
The airline share is currently selling for Sh.40 per share and its quarterly dividend is Sh.1 per
share. The insurance share is currently selling for Sh.50 per share and the quarterly dividend is
Sh.1.50 per share. Regals analysts predict that over the next year, the value o f the airline share
will increase by Sh.2 per share and the value of the insurance share will increase by Sh.3 per
share.
A computer software provided the following part solution output:
Objective Function Value = 5,400
Variable
Airline shares
Insurance shares
Number
1,500
800
Reduced cost
0.000
0.000
Constraint
Total investment
Investment in insurance
Dividends
Slack/Surplus
0.000
0.000
100,000
Dual prices
0.050
0.010
0.000
Lower limit
2.5000
0.000
Current value
3.000
2.000
Upper limit
No upper limit
2.400
Lower limit
96,000.00
20,000.00
No lower limit
Current value
100,000
40,000
2,600
Upper limit
No upper limit
100,000.00
2,700.00
Required:
i) Formulate the above problem.
ii) Explain what reduced cost and dual prices columns above mean.
iii) How should the clients money be invested to satisfy the restrictions?
iv) Suppose Regals estimate of the airline shares appreciation is in error, within
STRATHMORE UNIVERSITY STUDY PACK
(7 marks)
(5 marks)
(4 marks)
300
Lesson Eight
301
what limits must the actual appreciation lie for the answer in (c) above to
remain optimal?
(4 marks)
(Total: 20 marks)
QUESTION EIGHT
The linear programming model and output model below represent a problem whose solution
will tell a road side kiosk owner how many of the four different types of household goods to
stock in order to maximize profits. It is assumed that every item stocked will be sold. The
variables measure the packets of Unga, Spaghetti, Rice and Sugar to stock respectively. The
constraints measure storage space in units, special display racks, demand and a marketing
restriction, respectively.
Maximize Z = 4X1+ 6X2+ 5X3+ 3.5X4
Subject to :
2X1 + 3X2+ 3X3+ X4 120
1.5X1 + 2X2
2X2 + X3 + X4
X2 + X3
Where X1
X2
X3
X4
=
=
=
=
(1)
54
72
12
(2)
(3)
(4)
packets of Unga
packets of Spaghetti
packets of Rice
packets of Sugar
Optimal solution
Variable
X1
X2
X3
X4
Value
12.00
0.00
12.00
60.00
Reduced cost
0.50

Constraint
1
2
3
4
Stack/surplus

Dual/shadow price
2.00
1.50
2.50
Current value
Current value

QUANTITATIVE TECHNIQUES
Upper limit
5.00
6.50
7.50
No limit
Upper limit
168
No limit
96
24
302
Decesion Theory
Required:
a) Determine the retailers optimal profit level.
b) Determine and interpret the missing values under:
i)
ii)
iii)
iv)
v)
c) Interpret the value 0.50 under the reduced cost column and values; 2.00, 1.50
and 2.50 under the dual/shadow price column
d) Determine whether the current, optimal solution would change if the
current profit of packets of Unga is increased by Sh.2.00.
e) Determine by how much the amount of space would increase before there
is a change in the dual/shadow price.
f) The above problem could have been solved manually. Explain how the
optimal solution can be determined using the manual approach.
(Total:
(2 marks)
(2 marks)
(2 marks)
(2 marks)
(2 marks)
(2 marks)
(2 marks)
(2 marks)
(2 marks)
(2 marks)
20 marks)
302
Revision Aid
303
LESSON NINE
Revision Aid
SOLUTIONS
LESSON ONE
QUESTION ONE
1. (3, 12)
2. (12, 0)
4. ( 8 ,
3. (10, 4)
8)
QUESTION TWO
a) x = 0, y = 4; b) x = 3, y = 3; c) x = 10.5, y = 36
QUESTION THREE
Population =
Pnorth 23.33
=
Psouth 46.67
QUESTION FOUR
1.
60
The vector for final demand = 60
60
The input/output coefficient matrix (also called the matrix for technical coefficients). Call it
A
80
320
80
A = 320
80
320
100
400
200
400
100
400
100
300
60
300
100
300
14
= 1
4
1 4
1
1
1
4
2
4
1
5
1
3
1
X = AX + Y
X = (I A )1Y
QUANTITATIVE TECHNIQUES
304
Lesson Nine
1 0 0 1 4
I A = 0 1 0 1 4
0 0 1 1 4
17
60
240 13
60
Inverse (I  A)1=
23 3
16
1
4
5
12
1
4
13
60
7
30
5
16
1
1
1
4
2
4
3 4 1 4 13
1 = 1
1
1 5
5
2
4
1
1 4 1 4 2 3
3
1
68 60 52
= 1 52 100 56
23
45 60 75
68 60 52 60
10,800
1
1
Therefore X =
52 100 56 60 = 17, 480
23
23
45 60 75 60
10,800
469.57
= 542.60 in Shs
469.57
QUESTION FIVE
i)
0.4 0.6 t1 b1
0.5 0.25 t = b
2 2
ii)
Put t1= 400 and t2= 700 and the matrix equation becomes.
2
b1 = (0.4 400) + (0.6 700)
= 580 kilos
That is
0.4 0.6
0.5 0.25
which is
Revision Aid
305
1.25 3.0
2.5 2.0
2
Thus;
t1 =  1.25600 + 3.0 450
= 600 kilos
and
t2=  2.5600  2 .0 450
= 600 kilos
QUESTION SIX
i)
2
A3 =
3
3
3
10
2
A2 =
ii)
F(A)
10
2
3
15
14
26
39
51
=
3
3
A3 3A2 2A + 41
14
26
3
15
10
2
3
2
39
51
3
15
3
14
26
30
39
51
9
45
6
16
28
42
86
A1 =
1_
12
iii)
2
=
3
1
4
1
4
QUANTITATIVE TECHNIQUES
1
0
3
+4
1
6
1
6
306
Lesson Nine
QUESTION SEVEN
i)
12
10
15
15
20
18
16
24
22
=
=
=
348 pence
536 pence
660 pence
348
=
536
660
=
=
=
3.48
5.36
6.60
ii)
10
15
16
3,000
100
15
20
24
10
15
50)15
20
16
24
4,300
80
or (100 80
1,480
50
620
QUESTION EIGHT
a)
NP =
10
60
12
0
50
20
storage maintenance
2
3
2
0.5
1.5
0.5
= 156p
=160p
= 48p
= 40p
156
160
48
40
=
=
=
=
1.56
1.60
0.48
0.40
b)
A
storage maintenance
Revision Aid
Day I
307
Y
W
Day II
10
40
10
0
50
20
10
40
10
15
60
20
2
3
2
0.5
1.5
0.5
150
120
2
3
2
0.5
1.5
0.5
191
165
c)
10
150
45
C
191
60.5
165
52.5
+3
120
30
cost in
pence
storage maintenance
45
30
Cost in pence
QUANTITATIVE TECHNIQUES
60.5
52.5
cost in
pence
308
Lesson Nine
LESSON TWO
QUESTION ONE
a)
b)
2
x3
1
1 + 2x
c)
y=
d)
1
,
x
dy
1 3
= x 2
dx
2
QUESTION TWO
dc
= 2Q 30
dQ
Therefore Q = 15 at minimum
Note:
d 2c
= 2 which is positive indicating a minimum value
dQ 2
QUESTION THREE
n() = 250
P + 12 + 59 = 147 giving P = 76
Q + 59 + 37 = 102 giving Q = 6
i)
ii)
x = 76 + 12 + 14 = 102
Revision Aid
309
x = 12 + 59 + 6 = 77
z = 37 + 14 + 6 = 57
iii)
QUESTION FOUR
i)
x3
R = 14 + 81x
12
dR
3x 2
= 81
dx
12
d 2R
6x
x
= 0
=
2
dx
12
2
i.e. 81 x x=2 0
81
= 0 thus
d2R
x
=
2
2
dx
d2R
= 9
dx 2
when x = 18,
which is negative
(18 )3
12
= Ksh.986
iii)
= 45.78
i.e. Ksh.54.78
QUESTION FIVE
i)
QUANTITATIVE TECHNIQUES
310
Lesson Nine
PRODUCTION DEPARTMENT
Marginal Revenue = Revenue per unit = 6 + 6 0.8
= Shs.10.8 per unit
Cost per unit =
Therefore
20,000
20,000
Q
Giving Q =
+ 6.0002 = 10.8
20,000
4.7998
= 4,166.84
= 4,167 units
ii)
SALES DEPARTMENT
Profit = Revenue Cost
Revenue = Sales price x Quantity = p(40,000 2,000p)
= 40,000p 2,000p2
Cost
=
=
=
=
Profit =
2 X q + 6,000 + 6q + 80% of 6q
2q + 6p + 4.8q + 6,000
12.8q + 6,000
12.8 (40,000 2,000p) + 6,000
4,000p + 65,600
Revision Aid
d 2
dp 2
P=
311
65,600
400
4,000p + 65,600
When
d
dp
= 0
16.4
Profit
= 68,338.8 59,336.85
= Shs.9,002
iv)
(40,000 2,000p)p
[Q = 40,000 2,000p]
Cost
Profit
=0
and
d 2
is ve
dp 2
4,000p + 56,000.4
QUANTITATIVE TECHNIQUES
312
Lesson Nine
Therefore
d 2
dp 2
which is ve
Quantity
47,998
40,000 2,000 14
12,000 units.
QUESTION SIX
a) Quadratic functions in decision making.
Due to economies of scale, the cost of production is usuall dependent upon volume of sales.
Total revenue = sale price per unit quantity sold (say x)
Sales price is usually a function of x; f(x).
; which may be a quadratic function
Hence total revenue = f(x) x
Using calculus techniques (i.e. maxima and minima) we can calculate the optimum value
of x, which might give maximum profits or minimum costs.
b) Demand function p = 400 q
100
+ 100 5q + q 2
q
1000
=
+ 100 5q + q 2 q = 1000 + 100q 5q 2 + q 3
q
1000
Fixed cost
=
(100 is fixed cost)
q
Quantity produced and sold
= average fixed cost/unit
as quantity sold gradually increases, average fixed cost per unit
decreases
ii.
Revision Aid
313
= 300 q + 4 q 2 q 3 1000
d
2
dq
= 300 + 8q 3q (puting
we get q =
d
=0 )
dq
8 60.53
11.422 Kg (note that the negative part of q is invalid)
6
d 2
= 8 6q
dq 2
for q = 11.422 ;
d 2
is negative, it gives the mximumvalue of .
dq 2
iii.
p x 13 + 2 x + y = 0 (Product x demand function)
p y 13 + x + 2 y = 0 (Product y demand function)
p x = 13 2 x y and p y = 13 x 2 y
total revenue for x = (13 2 x y ) x = 13 x 2 x 2 xy
total revenue for y = (13 x 2 y ) y = 13 y xy 2 y 2
total revenue for x and y combined = (13 x 2 x 2 xy ) + 13 y xy 2 y 2
= 13 x + 13 y 2 x 2 2 y 2 2 xy
total cost = x + y
Profit = Total revenue  total cost
= (13 x + 13 y 2 x 2 2 y 2 2 xy ) ( x + y )
= 12 x + 12 y 2 x 2 2 y 2 2 xy
px 13 + 2 x + y = 0 (Product
Using partial differentiation and standard calculus techniques for maxima and minima
= 12 4 x 2 y,
x
2
= 4 (ve),
x 2
= 12 2 x 4 y
y
2
= 4 (ve)
y 2
2
= 2
xy
QUANTITATIVE TECHNIQUES
314
Lesson Nine
Rules :
For maximum or minimum values
=0,
=0
x
y
2 2 2
For maximum value 2 2
x y xy
In this case, 12 2 x 4 y = 0 ; 12 4 x 2 y = 0
which gives; x = 2 units , y = 2 units
other conditions are a lso certified.
Price P x = 13 4 2 = 7
Price P y = 13 2 4 = 7
QUESTION SEVEN
i.
4 12 y 820
Note that 640, 000 has been written as 640 (in thousands)
5 8
multiplying both sides with an inverse matrix of
we get;
4 12
1 12 8 640
1 12 8 5 8 x
60 32 4 5 4 12 y 60 32 4 5 820
1 28 0 x 1 1120
28 0 28 y 28 1540
x 40
=
y 55
thus x = 40, y = 55
ii.
1. Marginal productivity
60
+ 10 (this is the rate of change)
x2
total productivity P is given by the function
60
P = 2 + 10 dx
x
60
=
+ 10 x + C where C is a constant
x
Revision Aid
315
60
+ 10(5) + C
5
thus C = 24
60
+ 10 x + 24
x
when x = 10
Hence P =
P=
60
+ 10(10) + 24 = 118 furnaces
10
2. Marginal productivity is the increase in output of electric furnaces per week if the
capitalization is increased by Sh.1 million.
QUANTITATIVE TECHNIQUES
316
Lesson Nine
LESSON THREE
QUESTION ONE
a) Discrete data have distinct values with no intermediate points, whereas continuous data can have
any values over a range either a whole number or any fraction.
b) Dispersion is the variation or scatter of a set of values.
Standard deviation is represented by;
s=
( x x)
n 1
( x x)
coefficient of variation =
100%
.
d) See Text
QUESTION TWO
a)
Payment in days
Midpoint
x
7
12
17
22
27
32
37
42
59
10 14
5 19
20 24
25 29
30 34
35 39
40 44
Arithmetic Mean =
Number of customers
f
4
10
17
20
22
16
8
3
100
fx = 2, 405 = 24.05days
f 100
f
28
120
289
440
594
512
296
123
2,405
fx2
196
1,440
4,913
9,680
16,038
16,384
10,952
5,292
64,895
Revision Aid
317
b)
fx
f
Standard deviation =
64,895 2, 405
100
100
fx
= 8.4
c) Histogram to show payment record of 100 customers
Number of
Customers
25
22
20
20
17
15
16
10
10
8
4
3
4.5
9.5
14.5
19.5
24.5
29.5
34.5.
39.5
44.5
Days taken to settle debt
d) Out of 100, 16 i.e. in the class 30 to 34 days and 8 lie in the class 35 to 39 days. Therefore, the
best estimate that an unpaid invoice chosen at random will be between 30 and 39 days old is
2,478
64
0.24
QUESTION THREE
a) The smallest value in the distribution is 105, the largest in the distribution is 142. The range to
be spanned is 142 105, i.e. 37. The following grouping is a suggestion.
The classes should be of equal width.
Group
105 but less than
110
110
115
115
120
120
125
125
130
130
135
135
140
140
145
Tally
II
IIII
IIII
IIII III
IIII IIII
IIII
IIII
II
Frequency
2
5
4
8
10
5
4
2
40
QUANTITATIVE TECHNIQUES
318
Lesson Nine
Group
105 but less than
110
115
120
125
130
135
140
110
115
120
125
130
135
140
145
=
=
=
Frequency Cumulative
Frequency
2
2
5
7
4
11
8
19
10
29
5
34
4
38
2
40
125 p
119 p
131 p
(131 119)
12
6p
=
=
=
c)
Group
105 but less than
110
115
120
125
130
135
140
110
115
120
125
130
135
140
145
Midpoint
107.5
112.5
117.5
122.5
127.5
132.5
137.5
142.5
f
2
5
4
8
10
5
4
2
40
x =
Thus
x = 5,000 40
fx
f
x = 125p
Continuing now with x = 125 we can calculate the standard deviation
fx
215.0
562.5
470.0
980.0
1,275.0
662.5
550.0
285.0
5,000
Revision Aid
319
Group
105 but less than
110
115
120
125
130
135
140
110
115
120
125
130
135
140
145
(x  x )
f (x x )2
107.5
112.5
117.5
122.5
127.5
132.5
137.5
1425
17.5
12
.7.55
2.5
2.5
7.5
12.5
17.5
2
5
4
8
10
5
4
2
40
612.50
781.25
225.00
50.000
62.50
281.25
625.00
612.50
3,250.00
=
2
f xx
f
3250
40
= 81.25
d)
i)
This distribution is very nearly normal and so consequently the mean at 125 and the median at
just over 125 are close to one another.
ii)
The semiinterquartile range and the standard deviation both measure dispersion. The semiinterquartile range, in this case 6p, gives the dispersion around the median. The standard
deviation measures the dispersion around the mean, in this case 9p, for the whole distribution
QUESTION FOUR
Use the same method as in question 77 to find mean and standard deviation or use the formulae
Mean
f xx
fx
f
2
Supermarket A
599
Mean
Standard Dev
30.49
30.5
12
49.92
Supermarket B
QUANTITATIVE TECHNIQUES
320
Lesson Nine
Mean
613
Standard Dev
12
51.1
34.25
51.08
30.5
49.92
100
61.1%
34.25 100
51.1
=
67.02
Hence variability of supermarket B is relatively greater than supermarket A
QUESTION FIVE
The objective of this question is to test the candidates knowledge of:
Use of base and current weighting index numbers and contrast their construction.
a) To establish the base weighted indices, the weights are the quantities used in 1981. the
following tabulation leads to the solution.
For 1981
Competent
Weight
A
B
C
D
Price ()
3
4
1
7
3.63
2.11
10.03
4.01
Price X weight ()
10.89
8.44
10.03
28.07
57.4
For 1982
Competent
Weight
A
B
C
D
Price ()
3
4
1
7
4.00
3.10
10.36
5.23
Price X weight ()
12.00
12.40
10.36
36.61
71.37
For 1983
Competent
A
B
C
D
Weight
Price ()
3
4
1
7
4.49
3.26
12.05
5.21
Price X weight ()
13.47
13.04
12.05
36.47
75.03
Revision Aid
321
100
71.37
1982,
57.43
75.03
1983
57.43
100
124.27
100
130.65
b) The current weighted indices use the weights of the components in 1982 to establish the
1982 index, then the weights of the components in 1983 for the 1983 index. The following
tabulation leads to the solution.
The 1981 index as before 100
For 1982
Component
Weight
1982
1981
Price ()
A
B
C
D
2
5
1
6
3.63
2.11
10.03
4.01
1981
Price
Weight ()
7.26
10.55
10.03
24.06
51.90
1982
Price ()
4.00
3.10
10.36
5.23
1982
Price
Weight ()
8.00
15.50
10.36
31.38
65.24
Component
Weight
1981
Price ()
A
B
C
D
2
6
1
5
3.63
2.11
10.03
4.01
1981
Price
Weight ()
7.26
12.66
10.03
20.05
50.00
1982
Price ()
4.49
3.26
12.05
5.21
1982
Price
Weight ()
8.98
19.56
12.05
26.05
66.64
c) Laspeyres price indices use weights at the base period, whereas Paasche price indices use
weights from the current period.
QUANTITATIVE TECHNIQUES
322
Lesson Nine
The weights at the base period will always be available whereas the current weights may not
always be available. In application like Retail or Consumer Price Index establishing the
current weights will be much more difficult and expensive than establishing the current
prices. These arguments give a preference for the Laspeyres type of index number.
It can be argued that the use of current weights reflects the present situation more
accurately, giving a preference for the Paasche type of index number. However, in
computing the series of index numbers, it is clearly demonstrated in part (a) that the
denominator need only be calculated once in the series for base weighted indices, whereas a
recomputation is needed for current weighted indices. This leads to a favouring of the
Laspeyres type index.
QUESTION SIX
a)
i)
PQ
PQ
n
100
That is the weighting factor in the calculation is the quantity at the base period.
For 1983
Component
Quantity
Price (1982)
Quantity 1982
Price1982
Price 1983
Quantity1982
Price1982
A
B
C
D
E
10
6
5
9
50
3.12
11.49
1.40
2.15
0.32
31.20
68.94
7.00
19.35
16.00
142.49
3.17
11.58
1.35
2.14
0.32
31.70
69.48
6.75
19.26
16.00
143.19
143.19
100
142.49
100.49
For 1984
Component
A
B
C
D
Quantity
1982
10
6
5
9
Price
1984
3.2
11.67
1.31
2.63
Quantity 1982
Price 1984
32.00
70.20
6.55
23.67
Revision Aid
323
E
50
0.32
16.00
148.24
142.49
100
104.04
ii)
PQ
PQ
n
100
That is the weighting factor in the calculation is the quantity at the current year.
For 1983
Component
Quantity
Price (1982)
Quantity 1982
Price1982
Price 1983
Quantity1982
Price1982
A
B
C
D
E
12
7
8
9
53
3.12
11.49
1.40
2.15
0.32
37.44
80.43
11.20
19.35
16.96
165.38
3.17
11.58
1.35
2.14
0.32
38.04
81.06
10.80
19.26
16.96
166.12
166.12
100
165.38
100.45
For 1984
Component
Quantity
Price (1982)
Quantity 1982
Price1982
Price 1983
Quantity1982
Price1982
A
B
C
D
E
14
5
9
10
57
3.12
11.49
1.40
2.15
0.32
43.68
57.45
12.60
21.50
18.24
153.47
3.20
11.67
1.31
2.63
0.32
44.80
58.35
11.79
26.30
18.24
159.48
QUANTITATIVE TECHNIQUES
324
Lesson Nine
=
=
iii)
159.48
153.47
103.92
100
Year
1983
1984
Laspeyres
100.49
104.03
Paasche
100.45
103.92
There is little to choose between the two measures in 1983 as the weightings, that is, the
quantity for 1982 and 1983 are close. The situation is different in 1984 where the weightings
have increased in three cases by a significant amount over the 1982 figures resulting in a
large increase in the Laspeyres index than the Paasche index.
b) An index of industrial production would probably by calculated on a month by month basis
by central government, indicating in percentage terms by how much production in the
industrial sector has either grown or declined over the previous month or year. The full
index would be made up from components which apply to particular sectors and so it is
possible for an employer to measure increase or decrease in production in that sector and
increase in production may thus be rewarded and a decrease would be looked upon with less
favour.
An index of retail prices would also probably be calculated on a month by month basis by
central government, and is an indication in percentage terms of the increase or decrease in
retail prices. This measure is often used to quantify inflation. A trade union may therefore
argue its case for an increase in pay to be greater than or equal to the rate of inflation to
keep up with the cost of living and not decrease the living standard s of its members. An
index of wages may also be published by central government, and may be available for
different industrial sectors.
QUESTION SEVEN
Note: The production for 1980 and 1990 is given in 1,000 boxes. As long as units are kept the
same throughout the problem, the rates will not change.
Produce
Cabbages
Tomatoes
Onions
Spinach
Production
1,000 boxes
1980 Qo
48,600
22,000
47,040
43,110
Price per
box
Po(Shs)Pn
1980
1990
1990 Qn
62,000
37,440
61,430
55,720
100
220
180
130
150
310
200
170
5.3279
4
Pn
Po
P o Qo
1.5
1.4091
1.1111
1.3077
5.3279
4,860,000
4,840,000
8467,200
5,604,300
23,71,500
133.20
pn qo
7,290,000
6,820,000
9,408,000
7,328,700
30,846,700
Revision Aid
325
Hence there is a 33.2% increase in average price of the four horticultural products from
1980 to 1990.
b) Laspeyres Price Index
30,846,700
23,771,500
100
129.76
% increase 29.76%
c) Paasches Price Index
pnqn 100
pOqn
And
d) Marshall Hedgeworth index =
p n qn
9,300,000
11,606,400
12,286,000
9,472,400
42,664,800
Cabbages
Tomatoes
Onions
Spinach
e) Paasches index
% increase
f)
p o qn
6,200
8,236,800
11,057,400
7,43,600
32,737,800
42,664,800
32,737,800
100
pn + qn
110,600
59,400
108,470
98,830
pn (qn + pn)
16,590,000
18,426,400
21,694,000
16,801,100
73,511,500
130.32
30.32%
73,511,500
56,509,300
100
130.09
130.4
30%
(129.76 130.32)1/2
QUANTITATIVE TECHNIQUES
= 30%
pn(pn + qn)
11,060,000
13,076,800
19,524,600
12,847,900
56,509,300
326
Lesson Nine
LESSON FOUR
Question 1 and 2
See text
QUESTION THREE
r2x1 = 0.78
This is the coefficient of determination of miles traveled to cost and means that 78% of total
cost is attributable to mileage
r2x1 = 0.16 i.e. 16% of cost is accounted for by the type of journey
R2 = 0.88 is the overall coefficient of determination and indicates that the multiple regression
equation accounts for 88% of the total variation in costs.
The coefficient in the equation are:
a = 86
b1 = 0.37
b2 = 0.08
= fixed costs
= amount per mile
= influence of the type of journey
QUESTION FOUR
Forecasts produced by
3 monthly
Moving average
450
437
417
397
383
377
380
407
443
470
423
410
397
388
395
410
425
424
Revision Aid
327
QUESTION FIVE
a)
Year
Qtr
1990/91
b)
1
2
3
4
1
2
3
4
1
2
3
4
1
2
3
49
37
58
67
50
38
59
68
51
40
60
70
50
42
61
Sum of
four qtrs
Sum of two
qtrs
Trend
Actual
minus
trend
Actual
/
trend
211
212
213
214
215
216
218
219
221
220
222
223
423
425
427
429
431
434
437
440
441
442
445
52.875
53.125
53.375
53.625
53.875
54.25
54.625
55
55.125
55.25
55.625
5.125
13.875
3.375
15.625
5.125
13.75
3.625
15
4.875
14.75
5.625
1.097
1.261
0.937
0.709
1.095
1.253
.934
0.727
1.088
1.267
0.899
Either
Year
1990/91
1991/1992
1992/93
1993/94
Total
Average
Seasonal variation
Q1
3.375
3.625
5.625
12.625
4.208
4
Additive model
Quarter
Q2
Q3
5.125
15.625
5.125
15
4.875
______
_____
30.625
15.125
15.313
5.042
15
5
Q4
13.875
13.75
14.75
______
42.375
14.125
14
= 0.354
=0
Or
Multiplicative model
Quarter
Q2
Q3
1.097
0.709
1.095
0.727
1.088
Year
Q1
1990/91
1991/1992
0.937
1992/93
0.934
1993/94
0.899
Total
2.770
0.718
Average
0.923
0.718
Adjustment factor*
1.0015
1.0015
Seasonal variation
0.924
0.719
* adjustment factor = 4/(3.994) = 1.0015
3.280
1.093
1.0015
1.095
QUANTITATIVE TECHNIQUES
Q4
1.261
1.253
1.267
3.781
1.260
1.0015
1.262
= 3.994
= 4.000
328
Lesson Nine
ii)
By eye, establish an appropriate forecast of the trend for the last qurter of 1993/94 and
the first three quarters of 1994/5. (Note: linear regression or the high/low method may
be appropriate methods to establish the forecast.)
Adjust the forecast trend for these quarters for the seasonal variations:
iii)
Additive model
Estimated data value = forecast trend value + appropriate seasonal variation value.
Multiplicative method
Multiply each point by the appropriate seasonal factor.
QUESTION SIX
a)
A = y bx
b=
)(
x=x yy
2
xx
)
A
x=
2
8
6
8
10
4
4
2
6
10
60
6
6
6
6
6
6
6
6
6
6
x x
4
2
0
2
4
2
2
4
0
4
60
60
132
100
120
150
84
90
68
104
140
1,048
104.8
104.8
104.8
104.8
104.8
104.8
104.8
104.8
104.8
104.8
y=
10
Therefore b =
B
y
804
80
1,048
10
y y
44.8
27.2
4.8
15.2
45.2
20.8
14.8
36.8
0.8
35.2
= 104.8
= 10.05
Age of vehicles
(years)
1
2
Cost
( = 10)
54.55
64.60
AB
179.2
54.4
0
30.4
180.8
41.6
29.6
147.2
0
140.8
804.0
(x  x )2
16
4
0
4
16
4
4
0
16
16
80
Revision Aid
329
3
4
5
6
7
8
9
10
74.65
84.70
94.75
104.80
114.85
124.90
134.95
145.00
QUESTION SEVEN
a) Two possible reasons for the large variation in output each month are:
Seasonal variation
Production problems in some months
The graph shows there is a strong positive relationship between output and costs. This means
that output may be used to predict costs.
QUANTITATIVE TECHNIQUES
330
Lesson Nine
x
16
20
23
25
25
19
16
12
19
25
28
12
240
b=
a=
y
170
240
260
200
280
230
200
160
240
290
350
200
2,920
xy
2,720
4,800
5,980
7,500
7,000
4,370
3,200
1,920
4,560
7,250
9,800
2,400
61,500
10
x2
256
400
529
625
625
361
256
144
361
625
784
144
5,110
37,200
3,720
y2
28,900
57,600
67,600
90,000
78,400
52,900
40,000
25,600
57,600
84,100
122,500
40,000
745,200
=
10
240
= 43.333
12
y = 43.333 = 10x
This means that when output is zero, costs are zero 43.333, and that for every one unit increase
in output, costs will rise by 10. This assumes linearity.
QUESTION EIGHT
i.
The tabulation of the trend pattern is as follows and has been computed using the formula
Trend = Sales Seasonal deviation
Year
Quarter
Sales
1983
2
3
4
1
2
3
4
1
2
3
4
1
2
3
4
1
000
360
530
354
304
430
750
395
340
500
660
509
374
590
710
521
440
1984
1985
1986
1987
Seasonal
deviation
000
Trend
42
128
37
276
93
145
12
153
15
165
43
153
396
432
467
474
488
485
488
507
524
539
547
557
000
Revision Aid
ii.
331
Quarter
3
128
145
165
438
146
147
37
12
43
18
6
5
276
153
153
582
194
193
4
42
93
15
150
50
51
Total 4
Total 0
iii.
147
193
51
QUESTION NINE
The object of this question was to test the candidates knowledge of the time series and the
ability to present data on a labeled diagram
Year
Quarter
Costs
1980
1981
IV
I
II
III
IV
I
II
III
IV
I
II
III
IV
I
II
III
1560
1730
1554
1504
1630
1950
1595
1540
1700
1860
1709
1574
1790
1910
1721
1640
1982
1983
1984
Four quarter
total
Trend
Deviation
6348
6418
6638
6679
6715
6785
6695
6809
6843
6933
6983
6995
7061
12766
13056
13317
13394
13500
13480
13504
13652
13776
13916
13978
14056
1595.77
1632.00
1664.63
1674.25
1687.50
1685.00
1688.00
1706.50
1722.00
1739.50
1747.25
1757.00
41.75
128.00
34.63
275.75
92.50
145.00
12.00
153.50
13.00
165.50
42.75
153.00
QUANTITATIVE TECHNIQUES
332
Lesson Nine
a) The calculations for the trend figures and the deviations are summarized in the above table
The seasonal effect is removed from the data by first totaling four quarter figures, then
totaling the four quarter figures in pairs and finally dividing by eight and centering the trend
figure at the middle point
Deviation is the difference between the costs and the corresponding trend figure
b) The seasonal deviation is another calculation produced from a table
Year
1983
1984
1985
1986
Total
Average
Adjusted
average
Seasonal
deviation
I
275.75
153.50
153.00
582.25
194.08
192.70
193.00
Deviations
II
41.75
92.50
13.00
Seasonal
Quarter
III
128.00
145.00
165.50
147.25
49.08
50.46
438.50
146.17
147.55
20.12
6.71
5.33
50.00
148.00
IV
34.63
12.00
42.75
Total = 5.54
Total = 0.02
Revision Aid
333
LESSON FIVE
QUESTION ONE
a) The Poisson distribution is appropriate because there is a small probability of an event
occurring these are discrete values and the average of these events (i.e. m = np) is below
10 (50 0.1 = 5)
b) The Poisson formula is
x e
P( x) =
!
In this exmple m = np = 50(0.02) =1
P ( x 2) = P(x=0) +P ( x=1 ) + p (x=2 )
=1
e e 2e
=
+
+
0!
1!
2!
Pa
1.000
0.920
0.544
0.125
0.020
QUESTION TWO
(a)
(i)
(ii)
(iii)
This is because either A or B could be detected, A and C, or B and C. Each of these situations is
equally probable, with the probability given in part (i).
(b) (i) The probability that the defect is undetected by the inspection procedure is
0.3.
QUANTITATIVE TECHNIQUES
334
Lesson Nine
The probability that it is undetected by the secondary check is 0.4.
The probability that it is undetected by both is 0.3 0.4 = 0.12
(ii)
Therefore the proportion of faults detected by the inspection procedure and secondary check,
respectively, is
0.7
0.18
and
0.7 + 0.18
0.7 + 0.18
that is
70
18
and
88
88
QUESTION THREE
Let F represent a unit which has been found to be faulty.
Let P(S1) = probability that a unit chosen at random comes from S1
Let P(S2) = probability that a unit chosen at random comes from S2
Let P(S3) = probability that a unit chosen at random comes from S3
P(S1) = 0.40
P(S2) = 0.35
P(S3) =
0.25
1.00
Revision Aid
335
P( F S1 ) = 0.02
P( F S2 ) = 0.03
P( F S3 ) = 0.04
The required probability may be expressed as;
P(S1 F)
the unknown probability is P(F) to be slotted into the formula
Note that
P( S1 F) =
P( S2 F) =
P( S3 F) =
P(S1 ) P( F S1 )
P(F)
P(S2 ) P( F S2 )
P(F)
P(S3 ) P( F S3 )
P(F)
thus
P(S1 ) P( F S1 )
P(F)
P( S1 F) =
Gives
0.4 0.02
0.0285
= 0.2807
QUESTION FOUR
QUANTITATIVE TECHNIQUES
336
Lesson Nine
QUESTION FIVE
P = 0.6 q = (1p) = 1.06 = 0.4
=
pq
n
0.6 0.4
200
z=
= 0.035
0.65 0.60
= 1.43
0.035
Which gives 0.4236 (42.36%)
This means there is a (0.50.4236) 0.0764(7.64%) chance of 65% or more passing the first
attempt. This is graphically shown below.
Probability
density
42.36%
7.64%
0.60
0.65
X
proportions
QUESTION SIX
a) The lefthand tail of the distribution below 900 hours represents the number of lamps that
will fail before 900 hours. Accordingly, if the probability of the distribution above 900 hours
is found and deducted from 0.5, the required number can be found thus:
z=
1000 900
= 1.33 The probability of which is 0.4082
75
STRATHMORE UNIVERSITY STUDY PACK
Revision Aid
337
z=
1000 950
= 0.67
75
The probability of which is 0.2486
z=
1000 925
=1
75
The probability of which is 0.3413
z=
1000916
84
=1 s.d.=
=100
s.d.
0.84
QUANTITATIVE TECHNIQUES
338
Lesson Nine
LESSON SIX
QUESTION ONE
The sample mean is 150 grams so that the estimate of the population mean is 150 grams.
i.e. x = 150 grams = = 150 grams
Where x means W best estimate of X.
When n= 625
Standard error of the mean
s
30
=
=1.2grams
n 625
When n =1225
30
sx =
=0.857 grams
1225
QUESTION TWO
Correction factor =
Nn
800 80
=
= 0.9493
N1
800 1
n
80
= 1
= 0.9486
N
800
It will be seen that to three significant figures, it is accurate enough for all practical purposes, the
two formulae give the same result, i.e. 0.949.
Standard deviation error of the means
n
=
n
N
6
0.949
80
= 0.637 grams
Note: The standard error without correction is
6
= 0.671 grams
80
Thus the precision of the sample estimate, measured by the standard error, is determined not
only by the absolute size of the sample but also to some extent by the proportion of the
population sampled.
Revision Aid
339
QUESTION THREE
The Central Limit Theorem states that the means of samples (and the medians and standard
deviations) tend to be normally distributed almost regardless of the shape of the original
population.
QUESTION FOUR
See text
QUESTION FIVE
H0 :2 =1
1 (onetail test)
H1 : 2 >
P1 =
200
= 0.2
1000
p2 =
240
=0.22
1091
p=
200+240
= 0.21
1000+1091
S P1 P2 =
0.21 0.79
1000
0.21 0.79
1091
= 0.0178
z=
0.200.22
=1.12
0.0178
The critical value of onetailed test t the 5% level is 1.64 so that as the calculated value is
lower than this value we conclude there is insufficient evidence to reject the null
hypothesis.
H 0 :1  2 =0
QUESTION SIX
H1:1  2 =0
QUANTITATIVE TECHNIQUES
340
Lesson Nine
s x1 =
s x2 =
SP
n1
68.77
= 19.85
12
sp
68.77
=
= 22.92
n2
9
t=
x1 x 2
1060 970
=
= 2.97
s(x1 x 2 )
30.32
QUESTION SEVEN
We are testing whether the observed number of defects fits a binomial distribution, thus;
H0: the observed number of defects conforms to a binomial distribution of the form
(p+q) 5 where p=0.18
H1 :that the observations do not conform.
The observed frequencies are already given so its only necessary to calculate the frequencies
expected from a binomial distribution to the power 5 i.e. (p+q)5, where p=0.18 and q=10.18=
0.82.
The probabilities of the various values of p and q can be found from binomial probability tables
if available. Alternatively they can be calculated from the binomial expansion. I.e.
P5 +5 (p4 q)+ 10(p3 q2)+ 10(p2 q3)+ 5(p q4)+q5
This shows the probabilities for 5, 4, 3, 2, 1 and 0 defectives and when p = 0.18 (the probability
of a bulb being defective) and q=0.82 (the probability of not being defective) the probabilities
range from 0.0002 (i.e. 0.185) for five defectives to 0.3711 (0.825) for no defectives. When the
probabilities are known they are multiplied by 100 boxes to find the expected frequencies which
are used in the normal X2 procedures.
The table below summarises the calculations:
Revision Aid
Defectives
0
1
2
3
4
5
341
No. of boxes
Observed
40
37
17
5
1
0
Binomial
Probabilities
0.3711
0.4069
0.1786
0.0392
0.0040
0.0002
Expected
Frequency
37.11
40.69
17.86
3.92
0.4
0.02
(O  E) 2
8.35
13.62
0.74
2.76
(O  E) 2
E
0.22
0.33
0.04
0.64
1.23
Note: Because of the very small values of the expected frequencies for 3, 4 and 5 defectives they
have been combined into one but it makes little difference to the results if they are not
combined.
The calculated 2 value is compared with the 2 value for the appropriate degrees of freedom.
Because the last three classes have been combined there are four classes remaining, i.e. for 1, 2
and the combined class for 35 rejects thus
V =n 2 = 4  2=2.
The X2 value for two degrees of freedom at the 5% level is 5.991 and, as the calculated value of
1.23 is well below this, we accept the null hypothesis and conclude that the observed values fit a
binomial distribution to the power 5 when p = 0.18.
Note: If the last three classes had not been combined, the calculated X2 score would have been
1.8 and there would have been 4 degrees of freedom. At 4 degrees of freedom the score is 9.488,
so the conclusion would be the same, i.e. we accept the Null Hypothesis.
QUESTION EIGHT
See text
QUESTION NINE
1.
a)
S.e. =
pq
n
0.1 0.9
80
= 0.033
6
80
= 0.075
0.1 0.075
= 0.75 standard errors
0.033
This is less than the standard errors at the 5% level 1.96 so we conclude there is no
significant improvement in deliveries.
QUANTITATIVE TECHNIQUES
342
Lesson Nine
b)0.75 standard errors from the mean would cover 0.2734 i.e. 54.68%, say 55% of the
population, so the MDs claim could be accepted at any level of confidence
2.
n
10
= 1.986
= 2.093
n1
9
2.093
= 0.66
10
There are 101 =9 d.f and it is a onetailed test. The 5%value for a onetailed test is
1.833.
The sample mean should be within 1.833*0.66 gms = 1.21 gms.
The actual difference is 4.683.8 gms= 0.88 gms so the figures do not support the
Purchasing Managers assertion.
Revision Aid
343
LESSON SEVEN
QUESTION ONE
a)
NPV
45
Sell immediately
120
Succeed 0.55
48
Fail 0.45
40
53.5
Drill immediately
70
1
Tests
53.5
65
Sell
Succeed 0.7
Drill
70
Fail 0.2
Fail 0.3
15
Sell
50
15
3
100
Drill
Fail 0.8
50
b).
Drilling Immediately:
Tests:
QUANTITATIVE TECHNIQUES
344
Lesson Nine
QUESTION TWO
a) tree diagram
Profits before construction
costs (000)
On time (p = 0.3)
Continue as present
Employ consultants
(Cost = 200,000)
1,000
On time
b) EV calculations
EV(present arrangement) = (0.31000) + (0.23900) + (0.23800) + (0.23700)
= 860
EV (with consultants) = 785
c) on strict EV calculations the firm should not use consultants, however management may
consider to use consultants in order to improve the chances of completing on time thus
safeguarding their reputation.
QUESTION THREE
See text
QUESTION FOUR
Let the value of the small store be = 1
And let the value of the large store be = 2
If both survive, A loses nothing, if only larger store survives, A loses 1 and if smaller store
survives, A will lose 2.
Revision Aid
345
DEFENDER
B
I
II
Row
Minimum
2
2
1
1
II
Column
Maximum
There is no saddle point.
I
0
II
2
0(2)=2
II
1
0(1)=1
0(1)=1
0(2)=2
I
0
II
2
1/3
II
1
2/3
2/3
1/3
QUANTITATIVE TECHNIQUES
346
Lesson Nine
The values of the game
=01/32/3 +(2)(1/31/3) +(1)2/32/3 +01/32/3
=02/94/9+0
= 6/9
= 2/3
QUESTION FIVE
Y
1
2
2
2
X
Column
Maximum
2
1
2
2
1
2
1
1
Row
Minimum
1
2
0
2p+1q+1r
2p+0q+1r
1p+2q1r =
2p+1q+1r =
2p+0q+1r =
2p+1q+1r.. (1)
2p+0q+1r(2)
1
..(3)
q=8/17,
and
r=7/17
= 2p+1q+0r = 1p+1q+1r
1
Revision Aid
347
q=5/17,
and
r= 9/17
3: 5: 9
2: 8: 7
2 3
8 3
7 3
i.e. 1 + 2 + (1)
17 17
17 17
17 17
+6 other values calculated in the same way as above
which amount to 11/17
Alternatively
Value of the game is
1 3 + (2) 5 + 2 9 11
=
3+5+9
17
QUANTITATIVE TECHNIQUES
348
Lesson Nine
LESSON EIGHT
QUESTION ONE
a)
Let x1 and x2 be the number of shares invested in airline and insurance shares respectively.
Then the objective function will be as follows:
Objective function (maximize)
z = 2x1 + 3x2
Share appreciation.
Reduced cost represents the amount that objective function coefficient of a nonbasic
decision variable must improve (increase in this case) to be put into the basic. In this case
since reduced cost is equal to zero for both variables, it means they are in the basic.
Dual prices on the other hand mean the amount that share appreciation will improve in
case any of the limiting constraints is increased by one unit. This occurs for constraints that
the slack is exactly zero. In this case total investment and investment in insurance do have
positive dual prices while Dividends does have zero dual price (can not increase share
appreciation if increased by one unit).
c)
From the computer solution, the clients money should be invested as follows, to satisfy the
restrictions:
1500 shares to be invested in Airline shares, and
800 shares to be invested in insurance shares, to give an optimum quarterly share
appreciation of sh. 5400.
d)
For the optimal decision to remain the airline shares appreciation should not be lower than
2.5, but can be any higher amount. That is, the optimum solution is insensitive to increase
in the share appreciation.
QUESTION TWO
a)
Profit
x1 280
x2 400
10x1 + 8x2 4000
25x1 + 12.5x2 8000
5
x1, x2 0
Revision Aid
349
x2
400A
300
C
200
100
D
F
0
100
100
200
300
400
x1
3
4000 8 400
= 80
10
QUANTITATIVE TECHNIQUES
(3)
500
350
Lesson Nine
250x1 + 125x2 = 80,000
(4)
Deducting equation (4) from Equation (3) gives:
75x2 =20,000
x2 =266.7
x1 =
4000  8 266.7
= 186.7
10
8000 + 280 25
= 80
12.5
ProfitD
ProfitE
NOTE: Two methods can be used to solve the problem. It is easily solved using the
graphical rather than the simplex method, since it is just two variables and sensitivity
analysis is not required.
b)
To solve this kind of problem (linear programming problem) the following procedure is
followed:
First, the problem has to be formulated. That is, the objective function and constraints
are determined.
Objective function is that which is to be optimised.
Constraints are the limitations in resources.

Thirdly, the constraints are taken as equalities and a line graph drawn. The unwanted
regions are shaded out. Resulting region indicates the feasible region. The optimum
point exists where there are corner points, which show extreme amounts. For
maximization it is the outer ones to the right and up. For minimization it is the lower
side.
Lastly, the profit is determined at those points where there is maximum profit, is the
point to be used.
Revision Aid
351
QUESTION THREE
a)
i)
Profit sh.
Aluminum alloy
Steel alloy
In standard form:
0 = z 1000x1 1500x2 + 0s1 + 0s2
100 = 2x1 + 4x2 + s1 + 0s2
80 = 3x1 + 2x2 + 0s1 + s2
Table 1
s1
s2
z
Table 2
x2
s2
z
x1
2
3
1000
x2
4
2
1500
s1
1
0
0
s2
0
1
0
Solution
100
80
0
Ratio
25
40
1/4
2
250
1
0
0
1/4
1/2
375
0
1
0
25
30
37,500
50
15
Table 3
0
1
3/8
1/4
x2
x1
1
0
1/4
1/2
z
0
0
312.5
125
Stop here
The optimal weekly production schedule is as follows:
Deluxe bicycle Frame = 17.5 17
Professional bicycle Frame = 15
ii)
17.5
15
41,250
1 < 1250
125 + 1/21 > 0
1 > 250
s2
From the two conditions:
250 < 1 < 1250 and
QUANTITATIVE TECHNIQUES
352
Lesson Nine
750 < C1 < 2250
To avoid entry of
s1
312.5 + 3/82 > 0
s2
125 1/42 > 0
2 > 833.33
2 > 500 2 < 500
NOTE: This problem could be solved graphically with part (i) Easily determined. Part
(ii) Limits will be determined from equating slopes of the objective function which has
coefficients with constraints nearest to it.
For part (ii), accurate drawings will be required. Intuition will have to be followed and
there will be an assumption that fractions are possible.
b)
QUESTION FOUR
a)
A feasible solution is one that satisfies the objective function and given constraints
Transportation problem is a special linear programming problem where there a
number of sources and destinations and an optimum allocation plan is required. Total
demand equal total supply
iii) Assignment problem is a special kind of transportation problem where the number of
sources equals the number of destinations. That means for every demand there is one
supply.
This is a case of assignment problem.
Assignment problems usually require that the number of sources equal the number of
supply. Here there are 5 districts and only 4 salespersons. A dummy salesperson E is
introduced with zero ratings.
i)
ii)
b)
Sales persons
A
B
C
D
E
Districts
1
2
92
90
84
88
90
90
78
94
0
0
3
94
96
93
89
0
4
91
82
86
84
0
5
83
81
93
88
0
Revision Aid
353
A
B
C
D
E
1
9
3
4
0
0
2
7
7
4
16
0
3
11
15
7
11
0
4
8
1
0
6
0
5
0
0
7
10
0
Secondly, for each column, the lowest rating is reduced from every rating in the particular
column. In this case the table will remain the same since the dummy salesperson has ratings
of zero for every district.
Thirdly a revision of the opportunityrating table is done.
The smallest rating in the table not covered by the lines is taken (in this case it is one). This
is reduced from all the uncrossed ratings and added to the ratings at the intersection of the
crossings. Then all the zeroes are to be crossed by the least number of vertical and
horizontal lines. If the number of lines equal the number of rows (or columns = 5 in this
case) then the final assignment has been determined.
Otherwise the following steps are followed.
1
2
3
4
5
A
8
6
10
8
0
B
2
6
14
0
0
C
4
4
7
0
8
D
0
16
11
6
11
E
0
0
0
0
1
Third step is repeated as follows:
1
A
6
B
0
C
2
D
0
E
0
2
4
4
2
16
0
3
8
12
5
11
0
4
8
0
0
8
2
5
0
0
8
13
3
Still the optimal solution has not been reached. Third step is again repeated to give the
following table:
1
2
3
4
5
A
6
2
6
8
0
B
0
2
10
0
0
C
2
0
3
0
8
D
0
14
9
8
13
E
0
0
0
4
5
An optimal assignment can now be determined since the number of lines crossing the
ratings is equal to 5.
Lastly, the assignment procedure is that a row or column with only one zero is identified
and assigned. This row or column is now eliminated. The other zeroes are then assigned
until the last zero is assigned. This stepbystep assignment is shown on the following table
from the first one to the fifth one.
QUANTITATIVE TECHNIQUES
354
Lesson Nine
District
1
10
14
13
4
5
Sales person
0
1
D
E
0
0
District
5
4
2
1
Rating
83
82
90
78
333
QUESTION FIVE
a)
b)
Let x1, x2 and x3 be the units of desktop 386, Desktop 286 and laptop 486
Maximize profit
Z = 5000x1 + 3400x2 + 3000x3
Subject to
limit of desktop models
x1+x2500
limit of laptop model
x3 250
x3 120
limit of 80386 chips
limit of 80286 chips
x2+x3400
5x1+4x2+3x22000 hours available
Assumptions
x1, x2, x3 0
Linearity/proportionality
Revision Aid
355
Divisibility
Deterministic
Additive
i)
The optimum product mix is that the numbers of units to produce are
Desktop 386120
Desktop 286200
Laptop 486200
Maximum profit is
Z=5000120+3400200+3000200=Sh1,880,000
Unused resources include the following
JK computers can still produce 180 more desktop models (500120200) and 50 laptop
models (250200)
For used up resources the prices to pay for any additional unit are as follows
Sh150 for 80386 chip
Sh90 for 80286 chip
Sh20 for any hour
ii)
The range for the variables x1, x2 and x3 are to indicate where the number of units can
change without affecting the basic solution
c)
The range for the constraints indicate the extent the resources can be changed without
altering the basic solution of the linear programming problem
iii) The dual value of 80386 chip is Sh 150. That is the addition increase in profit due to
increase of one chip. So if the company increases the number of chips by 10, the
additional profit will be 10150=Sh1,500.
QUESTION SEVEN
a) Network
EST
LST
1 6
10 10
8 8
12 12
15 15
4 4
QUANTITATIVE TECHNIQUES
356
Lesson Nine
0
10
11 12
13
14
15
Time scale
(days)
Critical
activities
Other
activities
G
C
Activities
A, B
A, D, G
A, G
C, E, G
C, E
E
F
H
I
Revision Aid
357
MOCK EXAMINATION
Work out these question for three hours (exam condition) then hand them in to DLC for marking
Instructions:
Answer any THREE questions from SECTION I and TWO questions from SECTION II.
Marks allocated to each question are shown at the end of the question. Show all your workings
QUESTION ONE
a) Explain the importance of set theory in business
(4marks)
(8marks)
b) By use of matrix algebra, develop the leontief inverse matrix.
c) Digital ltd manufactures and sells floppy disks at Nairobi industrial area. The average
revenue (AR)(in thousands of shillings )of producing x floppy disks are given by the
following functions
ATC = 12 x 2 52 x + 50 + 50x
And
AR=8002X2
Where: x is the number of floppy disks produced
Required:
i.
The profit function
The number of floppy disks required to maximize profit
ii.
iii.
The maximum profit
(3marks)
(3marks)
(2marks)
(Total: 20marks)
QUESTION TWO
a) State any five problems encountered in the construction of the consumer price index
(5marks)
b) An investment analyst gathered the following data on the 91day Treasury bill rates for the
years 2003and 2004
Month
Treasury bill rates (%)
2003
2004
January
3.2
5.5
February
3.0
5.2
March
2.8
4.3
April
2.5
3.6
May
2.9
3.3
June
3.4
2.7
July
3.7
2.4
August
4.0
2.0
September
3.8
2.3
October
4.2
2.8
November
4.5
3.1
December
5.1
3.7
The analyst would like to determine if on average there was a significant change in the
Treasury bill rates over the two years.
QUANTITATIVE TECHNIQUES
358
Lesson Nine
Required:
i.
The mean and variance of the Treasury bill rates for each year
(10marks)
Determine if there is a significant difference in the average Treasury bill rates (use a
ii.
significant level of 1%).
(5marks)
Note: S2=
QUESTION THREE
a) Describe the characteristics of the following statistical distributions
Binomial distribution
i.
Poisson distribution
ii.
(3marks)
(3marks)
b) High Grade Meat Ltd produces beef sausages And sells them to various supermarkets .In
order to satisfy the industrys requirements ,the firm may only produce 0.2percent of
sausages below a weight of 80 grammes .The sausage producing machine operates with a
standard deviation of 0.5 grammes .The weights of the sausages are normally distributed
The firms weekly output is 300,000sausages and the sausage ingredients cost shs5.00
per 100 grammes ,sausages with weights in excess of 82 grammes require additional
ingredients costing sh 2.50 per sausage
Required
i.
The mean weight at which the machine should be set
ii.
The firms weekly cost of production
(4marks)
(10marks)
(Total: 20marks)
QUESTION FOUR
a) A survey of undergraduate students at High Fliers University (HFU)showed the following
results regarding gender and the fields of specialization in their studies
Gender
Male
Female
Total
Field of specialization
Business
Science
Arts
100
250
100
50
100
200
300
200
300
Total
450
350
800
Required
i.
Determine if the field of specialization in the studies is dependent on gender (use
significance level of 5%)
(10marks)
An earlier survey showed that the proportion of female students taking science was only
ii.
10%of the total student population taking science .Does the data above show any
significant improvement in the proportion of female students taking science (use a
significance level of 5%)
(6marks)
b) Charles Nzioka who is a barber has found out that he can shave on average 4 customers per
hour .The arrival rate of customers averages 3customers per hour
Required
i.
The proportion of time that Charles Nzioka is idle
(1 mark)
The probability that a customer receives immediate service upon arrival (1mark)
ii.
Average number of customers in the queuing system
(1 mark)
iii.
Revision Aid
iv.
359
(1 mark)
(Total: 20marks)
QUESTION FIVE
a.
Differentiate between the additive model and the multiplicative model as used in time series
analysis
(4marks)
b. The sales data of XYZ Ltd (in millions of shillings) for the year 2001 to 2004 inclusive are
given below.
Quarter
Year
1
2
3
4
2001
40
64
124
58
2002
42
84
150
62
2003
46
78
154
96
2004
54
78
184
106
Required
i.
The trend in the data using the least square method
(8marks)
The estimated sales for each quarter of the year 2004
(4marks)
ii.
The percentage variation of each quarters actual sales for the year 2004 (4marks)
iii.
(Total: 20marks)
SECTION II
QUESTION SIX
a. Give two applications of simulation in business
(2marks)
b. Collins Simiyu recently acquired a piece of land in Kitale .A property development company
has offered him 300,000 for the piece of land .He has to make a decision on whether to
cultivate the piece of land or to sell it to the property development company If he decides to
cultivate the land ,there is a probability of getting a high ,medium ,or low harvest .The
expected net income for each of the above states of harvest is shown below:
State of harvest
Net income (sh)
High
500,000
Medium
100,000
Low
(20,000)
From past experience there is a 10percent probability that the harvest will be low, a 30 per
cent probability that the harvest will be medium and a 60percent probability that the harvest
will be high .Colins Simiyu can engage an agricultural expert to carry out a survey on the
productivity of the land which will cost him sh30, 000. The agricultural expert gives the
following information as to the reliability of such surveys (prior probabilities)
Results of survey
Accurate
Not accurate
High
0.35
0.25
0.60
state of harvest
Medium
0.10
0.10
0.20
Low
0.05
0.15
0.20
Required
i.
Construct a decision tree for the above problem
The expected monetary value for each decision
ii.
The decision that you would recommend
iii.
QUANTITATIVE TECHNIQUES
Total
0.5
0.5
1.0
(6marks)
(10marks)
(2marks)
(Total: 20marks)
360
Lesson Nine
QUESTION SEVEN
a. Explain the difference between assignment and transportation problems (4marks)
b.
State the assumptions made in solving a transportation problem
(4marks)
Umoja Engineering Works Ltd has a network of branches all over Kenya .The
c.
branches are used to service, repair and install equipment for their clients .Currently,
the Nairobi branch has four clients who require installation of equipment .Each
client requires the services of one engineer
There are four engineers who are not engaged at the moment and can be assigned
any one of the tasks .However, these engineers have to travel from different
locations and the Nairobi branch has to meet their travel and subsistence
allowances. The allowances vary from one engineer to another and according to the
client the engineer has been assigned to work for.
The table below shows the costs (in thousand of shillings) associated with each
engineer
Client
1
2
3
4
Engineer
A
37.0
27.0
34.0
21.0
B
57.0
22.0
79.0
34.0
C
22.0
25.0
61.0
45.0
D
39.0
42.0
54.0
43.0
Required
i.
The assignments to be made in order to minimise the total cost of
engineers
(10marks)
The minimum cost of using the engineers
(2marks)
ii.
(Total 20marks)
QUESTION EIGHT
a.
b.
(2marks)
(2marks)
(2marks)
(2marks)
(2marks)
James Mutiso is a computer engineer in an information technology firm .The firm has
decided to install a new computer system to be used by the firms helpdesk .James
Mutiso has identified nine activities required to complete the installation.
The table below provides a summary of the activities durations and the required number
of technicians
Activity
12
13
24
25
34
36
45
56
67
Duration(weeks)
3
1
3
2
2
4
2
2
2
Revision Aid
361
Required:
i.
Draw a gantt chart for the project
(6 marks)
Mr. Mutiso would like to reschedule the activities so that not more than 6 technicians are
ii.
required each week
Determine if this is possible and how it can be achieved by rescheduling the activities.
(4marks)
(Total 20marks)
QUANTITATIVE TECHNIQUES