2-Hour examination

SAMPLE EXAM:

I. Show your solution.

1. Marikina Shoe Manufacturing Company will produce a special-style shoe if the order
size is large enough to provide a reasonable profit. For each special-style order, the
company incurs a fixed cost of P1000 for the production setup. The variable cost is
P30 per pair, and each pair sells for P40.
i) Let x indicate the number of pairs of shoes produced. Develop a mathematical
model for the total cost of producing x pairs of shoes.
ii) Let P indicate the total profit. Develop a mathematical model for the total profit
realized from an order for x pairs of shoes.
iii) How large must the shoe order be before Marikina Shoe will break even?
2. A couple of entrepreneurial business students at State University decided to put their
education into practice by developing a tutoring company for business students.
While private tutoring was offered, it was determined that group tutoring before
tests in the large statistics classes would be most beneficial. The students rented a
room close to campus for $300 for three hours. They developed handouts based on
past tests, and these handouts (including color graphs) cost $5 each. The tutor was
paid $25 per hour, for a total of $75 for each tutoring session.
a) If students are charged $20 to attend the session, how many students must
enroll for the company to break even?
b) A somewhat smaller room is available for $200 for 3 hours. The company is
company is considering this possibility. How would this affect the break-even
point?
3. How many different signals, each consisting of 8 flags hung in a vertical lines can be
formed from a set of 4 distinguishable red flags, 3 distinguishable white flags and a
blue flag?
4. A delegation of 4 employees is selected each year from a department to attend the
National Convention of Innovators’ annual meeting. (i) In how many ways can the
delegation be chosen if there are 12 eligible employees? (ii) In how many ways if two
of the eligible employees will not attend the meeting together? (iii) In how many
ways if two eligible employees are married and will only attend the meeting
together?
5. A manufacturing firm employs three analytical plans for the design and
development of a product. For cost reasons, all three are used at
varying times. In fact, plans 1, 2, and 3 are used for 30%, 20%, and
50% of the products, respectively. The defect rate is different for the
three procedures as follows:
𝑃(𝐷|𝑃1 ) = 0.01, 𝑃(𝐷|𝑃2 ) = 0.03, 𝑃(𝐷|𝑃3 ) = 0.02,

where 𝑃(𝐷|𝑃𝑗 ) is the probability of a defective product, given plan j. If a

random product was observed and found to be defective, which plan
was most likely used and thus responsible?
 6. Suppose 800 misprints are distributed randomly throughout a book of 500
pages. Find the probability that a given page contains (i) exactly 2 misprints,
(ii) 2 or more misprints.
7. A company pays its employees an average wage of $15.90 an hour
with a standard deviation of $1.50. If the wages are approximately
normally distributed and paid to the nearest cent, what is the
percentage of the workers receive wages between $13.75 and $16.22
an hour inclusive?
8. Consider two stocks A and B. With stock A, there is a 0.8 probability that you receive
a payoff of $10,000 and a .2 chance that you receive a payoff of $ 10,000 and a 0.2
chance that you receive a payoff of $4000. With lottery B, you will receive a payoff of
$8800 for certain. You should verify for yourself that these two lotteries have the
same expected value, but that lottery A has a higher variance. For each of the utility
functions below, fill in the table below:
Utility Function Expected Expected Which Lottery Does the
Utility Lottery Utility Lottery Gives the utility function
A A highest EU exhibit risk
aversion, risk
neutral or risk
loving?
U = 100(I)1/2
U=I
U=(I)1/2/10000

9. You have a utility function given by U(I) = 2I + 10 (I) 1/2. You are considering two job
opportunities. The first pays a salary of $40,000 for sure. The other pays a base
salary of $20,000, but offers the possibility of a $40,000 bonus on top of your base
salary. You believe that there is a 0.50 probability that you will earn the bonus.
a) What is the expected salary under each offer?
b) Which offer gives you the higher expected utility?
c) Based on your answer to a) are you risk averse?
10. A firm is considering launching a new product. Launching the product require an
investment of P10 million (including marketing expenses and costs of new franchise).
The launch is risky because demand could either turn out to be low or high. If the
firm does not launch the product, its pay off is 0. Here are its possible payoffs if it
launches the product.
Outcome Probability Payoff if Firm Launches
Product
Demand is high 0.5 P20 million
Demand is low 0.5 -P20 million
i) Draw a decision tree showing the decisions that the company can make and the
payoffs from following those decisions. Distinguish the chance nodes from
decision nodes in the tree. Use circle shape for chance nodes and square shape
for decision nodes.
ii) Assuming that the firm acts as a risk-neutral decision maker, what action should
it choose? What is the expected payoff associated with this decision?
11. Monica Britt has enjoyed sailing small boats since she was 7 years old, when her
mother started sailing with her. Today, Monica is considering the possibility of starting a
company to produce small sailboats for the recreational market. Unlike other mass-
produced sailboats, however, these boats will be made specifically for children between the
ages of 10 and 15. The boats will be of the highest quality and extremely stable, and the
sail size will be reduced to prevent problems of capsizing. Her basic decision is whether to
build a large manufacturing facility, a small manufacturing facility, or no facility at all. With
a favorable market, Monica can expect to make $90,000 from the large facility or $60,000
from the smaller facility. If the market is unfavorable, however, Monica estimates that she
would lose $30,000 with a large facility, and she would lose only $20,000 with the small
facility. Because of the expense involved in developing the initial molds and acquiring the
necessary equipment to produce fiberglass sailboats for young children, Monica has decided
to conduct a pilot study to make sure that the market for the sailboats will be adequate.
She estimates that the pilot study will cost her $10,000. Furthermore, the pilot study can be
either favorable or unfavorable. Monica estimates that the probability of a favorable market
given a favorable pilot study is 0.8. The probability of an unfavorable market given an
unfavorable pilot study result is estimated to be 0.9. Monica feels that there is a 0.65
chance that the pilot study will be favorable. Of course, Monica could bypass the pilot study
and simply make the decision as to whether to build a large plant, small plant, or no facility
at all. Without doing any testing in a pilot study, she estimates that the probability of a
favorable market is 0.6. What do you recommend? Compute the EVSI.
II. Essay.
1. Discuss the different roles played by qualitative and quantitative approaches to
managerial decision making. Why is it important for a manger or decision maker
to have a good understanding of both of these approaches to decision making?
2. List and discuss the steps of the decision-making process.
3. Describe the various approaches used in determining probability values?
4. What is Baye’s theorem and when can it be used?
5. Differentiate non-parametric tests from parametric tests. Give 4 example for each
test.
6. Differentiate levels of measurement in terms appropriate measures of central
tendency. Give 2 example each level of measurement.
7. What is expected value and what does it measure? How is it computed for a
discrete probability?
8. What is variance and what does it measure? How is it computed for a discreet
probability distribution?