ICS/ISE 215

Worksheet 2
ICS/ISE 215 | Operations Research
31 August 2018

Note
We will attempt as many questions as possible in the tutorials. During the
tutorials, you are encouraged to highlight areas where you have problems.

1. A certain company owns 15 000 hectares of land in Lupane district that may have gold deposits.
The company is faced with a decision whether to explore extensively for gold or to lease the
land or to sell it. For each of these three alternatives, three states of nature may exist:β1 , a large
gold deposit; β2 , a small gold deposit; β3 , no gold deposit.The payoff table associated with the
various states is as follows:

β1 β2 β3
Explore extensively $ 6 000 $4 000 -$500
Lease land $ 5 000 $2 000 $1 500
Sell land $ 400 $1 000 $3 000

For each of the following decision criteria, determine the optimal decision:

(a) Maximax, (c) Expected monetary value,

(b) Minimax regret, (d) Expected opportunity loss.

2. A doctor has been thinking about starting his own independent nursing home. The problem is
to decide how large nursing home should be? The annual returns will depend on both the size of
nursing home and a number of marketing factors. After a careful analysis, the doctor developed
the following table:

Size of Nursing home Good market Fair market Poor market

Small 50 000 20 000 10 000
Medium 80 000 30 000 20 000
Large 100 000 30 000 40 000
Very large 300 000 25 000 -20 000

Which strategy should the Doctor choose on the basis of :

(a) Maximin criterion,

(b) Maximax criterion,
(c) Hurwicz criterion (with α = 0.7).

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3. A chocolate factory is trying to decide between 2 types of chocolate bar, a white chocolate and
a dark chocolate. The payoff to each under 3 states of the economy is given in the following
payoff table:

Recession Stable Economy Boom

Dark chocolate 50 100 500
White chocolate 10 150 200

Suppose that the probability of a recession is 0.2 the probability of a stable economy is 0.5 and
the probability of a boom is 0.3.

(a) Calculate the expected monetary value for each of the two alternative actions facing the
chocolate company.
(b) Calculate the expected opportunity loss for each of the alternative courses of action facing
the chocolate company.

4. A toy company is bringing out a new type of toy. The company is attempting to decide whether
to bring out a full, partial, or minimal product line. The company has three level of product
acceptance and has estimated their probability of occurrence. Management will make its deci-
sion on the basis of maximizing the expected profit from the year of production. The relevant
data are show in the following table:

Product
Acceptance
Good Fair Poor
Full 80 50 -25
Partial 70 45 -10
Minimum 50 40 0
Probability 0.2 0.4 0.4

(a) Develop an opportunity loss table and calculate the EOL values.
(b) What is the best course of action?

5. A farmer can plant either corn or soyabeans. The probabilities that the next harvest prices of
these commodities will go up, stay the same, or go down are 0.25, 0.30 and 0.45, respectively.
If the prices go up, the corn crop will net $30 000 and the soyabeans will net $10 000. If the
prices remain unchanged, the farmer will break even. But if the prices go down, the corn and
soyabeans crops will sustain losses of $35 000 and $5000, repectively.

(a) Represent the farmer’s problem as a decision tree.

(b) Which crop should the farmer plant?

6. A Toy company must decide the course of action to follow in promoting a new whistling yo-yo.
Initially management must decide whether to conduct a test marketing program or not. The
test marketing will give them a measure of success of marketing the yo-yo national. After test

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marketing the yo-yo, management must decide whether to abandon it or nationally distribute
it. A national success will increase profits by $500 000 and failure will reduce profits by $100
000. Abandoning the project will not affect profits. Test marketing will cost $10 000. The
management at the company has a feeling that there are 9 chances in 20 that the project will
be a national success. Test marketing results are known to accurate 70% of the time.

(a) Represent the problem as a decision tree.

Calculate the following:
(b) the probability that there will be a national success given that marketing predicted a
national success.
(c) the probability that there will be a national failure given that test marketing pre- dicted a
national success.
(d) the probability that there will be a national success given that test marketing pre- dicted
a national failure.
(e) the probability that there will be a national failure given that test marketing pre- dicted a
national failure.

Typeset in LATEX.
c 2018 T. N. Mutusva

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