Professional Documents
Culture Documents
Exam Questions
Question I
Waldo Books
States of Nature
Number of Books Demanded
Amount Ordered 50 100 150 200
50 $500 $500 $500 $500
100 ($300) $1,000 $1,000 $1,000
150 ($1,100) $200 $1,500 $1,500
200 ($1,900) ($600) $700 $2,000
EVPI = Either Min expected Regret or EWPI – EWOPI; Min Expected Regret = 485
Page 1 of 10
b) EWPI = 0.2(500)+0.35(1000)+0.25(1500)+0.2(2000) = 1225; EWOPI = 740; EVPI = 1225– 740 = 485
*****=====+++++
Question III
A decision maker has determined a payoff table for three decision alternatives A, B, and C as well as three
states of nature X, Y and Z:
Page 2 of 10
Decision Maximax Maximin LaPlace Hurwicz
A 750 -100 350 495
B 700 200 490 550
C 600 400 500 540
(e) Regrets
Decision X Y Z Maximum
A 0 170 500 500
B 50 0 200 200
C 150 70 0 150
The decision is C: (4 marks)
The EVPI is 80
(i)
EVPI = EWPI – EWOPI
EWPI = 0.4(750) + 0.3(570) + 0.3(400) = 591
EWOPI = 511 (Maximum EMV)
EVPI = 591 – 511 = 80
Decision Trees
Page 3 of 10
Folding Back
(c)
EVSI = EWSI – EWOSI ;
EVSI = 321 + 30 – 300 = 51
(d)
EVPI = EWPI – EWOPI
EWPI = 0.4*0 + 0.4*350 + 0.2*1600 = 460;
EWOPI = 300
EVPI = 460 – 300 = 160
(e)
Efficiency = EVSI/EVPI = 51/160 = 31.875%
Page 4 of 10
Question V
Page 5 of 10
A company is planning a plant expansion.
The drawing of the tree will show that we need the following probabilities: P(F); P(U); P(H|F); P(L|F); P(H|U) and
P(L|U).
P(F) = P(F|H)*P(H) + P(F|L)*P(L) = 0.84*0.69 + 0.16*0.31 = 0.63; P(U) = 1 – P(F) = 0.37
P ( F | H ) P( H ) 0.84*0.69
P( H | F ) = = = 0.92 ; thus P(L|F) = 0.08
P( F ) 0.63
P(U | H ) P( H ) 0.16*0.69
P( H | U ) = = = 0.30 thus P(L|U) = 0.70
P(U ) 0.37
Page 6 of 10
EVSI = EWSI – EWOSI = 83.72 – 63.2 = 20.52 (million)
EVPI = EWPI – EWOPI = 150*0.69 + -$30*0.31 – 63.2 = 94.20 – 63.2 = 31 (million)
Efficiency = 20.52/31 *100 = 66.19%
Question VI
Bakery Products is considering the introduction of a new line of products.
P(G) = P(G|F)*P(F) + P(G|U)*P(U) = 0.8*0.5 + 0.4*0.5 = 0.6; therefore P(B) = 0.4
Page 7 of 10
P (G | F ) P ( F ) 0.4
P( F | G ) = = = 0.67; P (U | G ) = 1 - P ( F | G ) = 0.33
P (G | F ) P( F ) + P(G | U ) P(U ) 0.6
P( B | F ) P( F ) 0.2*0.5
P( F | B) = = = 0.25; P (U | B ) = 1 - 0.25 = 0.75
P ( B | F ) P( F ) + P( B | U ) P (U ) (0.2)(0.5) + (0.6)(0.5)
Page 8 of 10
EVSI = 17,380 + 5,000 – 10,000 = 12,380
EVPI = EWPI – EWoPI; EWPI = 0.5*100,000 + 0.5*0 = 50,000; EWOPI = 10,000; EVPI = 40,000
Efficiency = 12,380/40,000 = 30.95%
Page 9 of 10
Decision: Do not buy the forecast and Bid. Expected Profit = $20,000
EVSI = 0
EVPI = EWPI – EWOPI
EWPI = 0.2*500,000 + 0.8*0 = 100,000
EWOPI = 20,000
EVPI = 80,000
Efficiency = 0
Page 10 of 10