Ambo Institute of Technology

Department of Industrial Engineering

Stochastic Operations Research Models Worksheet 1

Stochastic Process
1. Assume that a Poisson random variable has the mass function P(X=k) = (λke-λ)/k! for
(k=0, 1, 2, . . .). Find the mean and variance of this Poisson random variable.

2. If the number of accidents occurring on a highway each day is a Poisson random variable
with parameter λ=3, what is the probability that no accidents occur any day? Also
determine the probability that there is at least one accident.

3. Consider an experiment that consists of counting the number of α-particles given off in a
one-second interval by one gram of radioactive material. If we know from past experience
that, on the average, 3.2 such α-particles are given off, what is a good approximation to the
probability that no more than two α-particles will appear?

4. The number of telephone calls that arrive at a phone exchange is often modeled as a
Poisson random variable. Assume that on the average there are 10 calls per hour.

(a) What is the probability that there are exactly 5 calls in one hour?

(b) What is the probability that there are 3 or fewer calls in one hour?

(c) What is the probability that there are exactly 15 calls in two hours?

(d) What is the probability that there are exactly 5 calls in 30 minutes?

5. The time between arrivals of taxis at a busy inter-section is exponentially distributed

with a mean of 10 minutes.

(a) What is the probability that you wait longer than one hour for a taxi?

(b) Suppose that you have already been waiting for one hour for a taxi. What is the
probability that one arrives within the next 10 minutes?

(c) Determine x such that the probability that you wait more than x minutes is 0.10.

(d) Determine x such that the probability that you wait less than x minutes is 0.90.

(e) Determine x such that the probability that you wait less than x minutes is 0.50.

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6. The lifetime of a mechanical assembly in a vibration test is exponentially distributed with
a mean of 400 hours.

(a) What is the probability that an assembly on test fails in less than 100 hours?

(b) What is the probability that an assembly operates for more than 500 hours
before failure?

(c) If an assembly has been on test for 400 hours without a failure, what is the
probability of a failure in the next 100 hours?

7. Consider a Poisson process with parameter λ=0.8.

(a) What is the probability that the time between two adjacent events is longer than
1.5?

(b) What is the probability that there will be at least three events in a period of
length 2?

8. For each of the following chains, determine whether the Markov chain is ergodic. Also,
for each chain, determine the recurrent, transient, and absorbing states.

9. Consider a system with two components. We observe the state of the system every hour.
A given component operating at time n has probability p of failing before the next
observation at time n + 1. A component that was in a failed condition at time n has a
probability r of being repaired by time n + 1, independent of how long the component has
been in a failed state. The component failures and repairs are mutually independent events.
Let Xn be the number of components in operation at time n.

a) Determine its transition probability matrix, and draw the state diagram.

b) Obtain the steady state probability vector, if it exists.

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10. A computer device can be either in a busy mode (state 1) processing a task, or in an idle
mode (state 2), when there are no tasks to process. Being in a busy mode, it can finish a
task and enter an idle mode any minute with the probability 0.2. Thus, with the probability
0.8 it stays another minute in a busy mode. Being in an idle mode, it receives a new task any
minute with the probability 0.1 and enters a busy mode. Thus, it stays another minute in an
idle mode with the probability 0.9. The initial state is idle. Let Xn be the state of the device
after n minutes.

a) Find the distribution of X2.

b) Find the steady-state distribution of Xn.

11. A certain machine is in one of four possible states: 0 =working without a problem; 1=
working but in need of minor repair; 2 = working but in need of major repair; 3 = out-of-
order. The corresponding transition probability matrix is:

a) Verify that it is an ergodic Markov chain.

b) Find the steady-state distribution.

c) Determine the average time the machine will spent in each state i (i.e. if initially
at i) before moving to other state j. Do this for all states (i.e. Mean first passage time
starting in 0, 1, 2 and 3).

d) Determine the mean recurrence time for all states (i.e. once move out of i, mean
time to spent somewhere else before returning to i.)

12. Assume that in question number 11 above, the revenue from machines working
without a problem is $200, from machines working with minor repair is $150, from
machines with major repair is $50 and a loss of $50 from machines out of order each day.

a) Determine the expected revenue on any day from this machine.

b) If there is a preventive maintenance plan that will reduce the chance of a

properly working machine to need a minor repair by 30%, the need of major repair
by 50% and being out of order by 50% at an expense of $100 per day, do you think
this plan is acceptable? Why?

c) Determine the expected revenue for part b above.

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 Decision and Game theory
1. Given the following decision table:

States of nature
Alternatives S1 S2 S3 S4
A1 170 45 -60 100
A2 30 190 175 -65
A3 145 -50 120 110
A4 -40 80 10 70

a. Use the maximax criterion to determine which decision alternative to select.

b. Use the maximin criterion to determine which decision alternative to select.

c. Use the minimax regret to determine which decision alternative to select.

2. The probabilities assessed with the states of nature in the previous question (1) are:
P(S1) = 0.1, P(S2) = 0.2, P(S3) = 0.4, and P(S4) = 0.3. Using these probabilities, determine
which alternative to select using the expected-value criterion.

3. ABC Enterprises is considering bidding on one or all of the first five franchises offered by
a popular fast-food operation. Each franchise requires a yearly $100,000 payment and the
construction of a building at an average cost of $250,000. ABC plans to keep the franchises
for a year and, if the businesses are successful, it should be able to sell them for $600,000
each, including the buildings. If the operations are not successful, ABC will close them down
and sell the buildings for $150,000.

a. Use the maximax decision criterion to determine how many franchises ABC
should purchase and the associated profit.

b. How many franchises should ABC purchase if the maximin decision criterion is
used? Determine the accompanying profit for this decision criterion as well.

c. Suppose ABC Enterprises has three options for constructing the buildings for its
franchises. One option is to construct the buildings as originally planned, at a cost of
$250,000 each. A second option is to build smaller facilities in established malls,
with building expenses totaling $150,000 each. If the mall operations are not
successful, ABC can recover $100,000 of the $150,000 building cost; and if they are
successful, they can be sold for $500,000 each. A third option is to construct larger
buildings, at a cost of $400,000 each. If successful, these operations can be sold for
$1,000,000 each; and if they are not successful, the buildings can be sold for

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 $200,000 each. Construct a payoff table describing these new alternatives for ABC
Enterprises.

d. Determine how many franchises ABC should acquire under each building cost
option described in part c, and determine the associated profit. Provide separate
answers using the maximin and maximax decision criteria.

4. OilLibya is considering making a bid for oil development contract to be awarded by the
federal government. The company has decided to bid $110 million. The company estimates
that it has a 60% chance of winning the contract with this bid. If the firm wins the contract,
it can choose one of three methods for getting the oil. It can develop a new method for oil
extraction, use an existing (inefficient) process, or subcontract the processing to a number
of smaller companies once the area has been excavated. The results from these alternatives
are as follows:

Develop new process:

Outcomes Probability Profit ($ in millions)

Great success .30 600
Moderate success .60 300
Failure .10 -100

Use present process:

Outcomes Probability Profit ($ in millions)

Great success .50 300
Moderate success .30 200
Failure .20 -40

Subcontract:

Outcome Probability Profit ($ in millions)

Moderate success 1.00 250

The cost of preparing the contract proposal is $2 million. If the company does not make a
bid, it will invest in an alternative venture with a guaranteed profit of $30 million.
Construct a decision tree for this decision situation and determine whether the company
should make a bid or not and justify your answer.