SIE 321 Probabilistic Models in OR Homework 5

Problem 1. Management of the Telemore Company is considering developing and marketing a new
product. It is estimated to be as likely that the product would prove to be successful as
unsuccessful. It it were successful, the expected profit would be $1,800,000. If unsuc-
cessful, the expected loss would be $1,500,000. A marketing survey can be conducted at a
cost of $300,000 to predict whether the product would be successful. Past experience with
such surveys indicates that successful products have been predicted to be successful 70.0
percent of the time, whereas unsuccessful products have been predicted to be unsuccessful
80.0 percent of the time.

(a) Find the optimal policy regarding whether to conduct the market survey and whether
to develop and market the new product.
(b) What is the maximum cost of survey that makes it worth conducting?
(c) What is the survey methods could be improved so that it provides more accurate
estimates of market success, what is the maximum cost of such an improved survey?

Problem 2. The Hit-and-Miss Manufacturing Company produces items that have a probability p of
being defective. These items are produced in lots of 150. Past experience indicates that p
for an entire lot is either 0.05 or 0.25. Furthermore, in 90.0 percent of the lots produced,
p equals 0.05 (so p equals 0.25 in 10.0 percent of the lots). These items are then used
in an assembly, and ultimately their quality is determined before the final assembly leaves
the plant. Initially the company can either screen each item in a lot at a cost of $10
per item and replace defective items or use the items directly without screening. If the
latter action is chosen, the cost of rework is ultimately $100 per defective item. Because
screening requires scheduling of inspectors and equipment, the decision to screen or not
screen must be made 2 days before the screening is to take place. However, one item can
be taken from the lot and sent to a laboratory for inspection, and its quality (defective or
nondefective) can be reported before the screen/no screen decision must be made. The
cost of this initial inspection is $20.

(a) Find the optimal policy that minimizes the expected cost of manufacturing
(b) Compute EVPI
(c) Compute EVE

Problem 3. The Athletic Department of Leland University is considering whether to hold an extensive
campaign next year to raise funds for a new athletic field. The response to the campaign
depends heavily upon the success of the football team this fall. In the past, the football
team has had winning seasons 60 percent of the time. If the football team has a winning
season (W) this fall, then many of the alumnae and alumni will contribute and the cam-
paign will raise $3 million. If the team has a losing season (L), few will contribute and
the campaign will lose $2 million. If no campaign is undertaken, no costs are incurred.
On September 1, just before the football season begins, the Athletic Department needs to
make its decision about whether to hold the campaign next year.

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A famous football guru, William Walsh, has offered his services to help evaluate whether
the team will have a winning season. For $100,000, he will carefully evaluate the team
throughout spring practice and then throughout preseason workouts. William then will
provide his prediction on September 1 regarding what kind of season, W or L, the team will
have. In similar situations in the past when evaluating teams that have winning seasons
50 percent of the time, his predictions have been correct 75 percent of the time.

(a) Determine the optimal policy regarding whether to hire William and whether to un-
dertake the campaign.
(b) What is the maximum price that the team should pay for William’s services?
(c) Assuming that an analysis more accurate than William’s can be conducted by a differ-
ent expert, what is the maximum cost of such an analysis for the team?