University of Tunis Fall 2020

Tunis Business School

Decision & Game theory

Tutorial 3

Question 1
A small Company can market its new product in one of 3 ways. It can choose its option every
month. The first option is to try directly the open market where the chance of a favorable
market is only of 50%. In this case, the Co. could make a monthly profit of 900,000 TND.
Otherwise; the Co. will incur a monthly loss of 320,000 TND. The second option is to sell the
whole product to a larger Co which will take in charge its marketing. This will generate a sure
monthly profit to the small Co. of 315,000 TND. The third option would be first to survey the
ever-changing market every month at a cost of 45,000TND and then make a decision.
Experience shows that a Market survey is 80% reliable.
1. What is the best option for the small Co.?
2. What is the expected value of perfect information of the state of the market?

Question 2
A company considers the introduction of a new product in the market. The company believes
that the product has 60% of chance to be accepted by customers. Possible profits are given
below:
Success Failure
Produce 250000 -150000
Not to produce -50000 -50000

The company may use the service of an expert to obtain additional information concerning
the possible attitude of potential customers towards this product. Two experts have been
selected. Historically, the 1st expert predicts correctly 70% of the success cases and 60% of
the failure cases. However, the 2nd expert predicts without error 60% of the success cases and
70% of the failure cases. If the 1st expert requires 8,000 TD and the 2nd request 6,000 TD, for
fees which one should the company choose?

Question 3
A government is bidding for the exploitation of an oil field. A company plans to make an
offer of 110 million TD. The company estimates that it has a 60% chance of winning the
contract. If it wins the contract it will have the choice between three alternatives for the
exploitation of the field. It may use a new method (NM), or use the existing method (EM), or
use a subcontractor (SC). The results depend on the adopted method as shown below.
The cost of preparing the contract proposal is 2 million TD. If the company does not bid, it
can invest in another alternative that guarantees 30 million TD.
1. Build a decision tree and determine the company's optimal strategy.
2. To obtain additional information on the NM, the company may consult a specialized
firm that is 2/3 likely to predict the true situation and 1/6 chance to be wrong. Assume
that the consulting firm requires an amount X for its services and determine the
optimal strategy that the company should adopt.
 Probability Profit
Success 0.3 600
NM Moderate
0.6 300
Success
Failure 0.1 -100

Success 0.5 300

Moderate
EM 0.3 200
Success
Failure 0.2 -40

Probability Profit
SC Moderate
1 250
Success

Question 4
A company manufacturing toys faces a risk of road haulers strike during next weeks. The
company has a manufacturing and shipment plan of 5,000 items per week that exactly
matches the weekly demand from the distributors. An item costs 30 TD and is sold at 45 TD.
The strike, if it takes place, will begin in a week and can last one or two weeks. Since the
company does not have any storage capacity, in case of a strike the production cannot take
place. In such situation, the company loses all of its sales if the distributors are not previously
delivered since their shelves are empty.
To decide the production level for the first week, the company can either produce and ship
just the need of the first week, or produce and ship the need for the first two weeks, or
produce and ship the need of the three weeks. The production capacity of the company is
7000 items per week. Beyond this limit, the company outsources its production with a unit
cost of 40 TD. The company is seeking to maximize its profit over the three-week period.
1. Develop the decision matrix of the company.
2. The executive board of the company believes that there is a probability of 0.2 of not
having a strike, a probability of 0.4 of having a week of strike, and a probability of 0.4 of
having two weeks of strike. What should be the the production level for the first week?
3. If the Executive Board could acquire accurate information on the duration of the strike,
what maximum price would it be willing to pay?
4. We learn that the general secretary of the hauler syndicate will make a statement next
Wednesday. Currently, it is estimated that there is a 50-50 chance that the position of the
secretary will be tough or moderate. If his position is tough, there is a probability of 0.8
of having a two-weeks strike and a 0.2 chance of having a week of strike. Nevertheless, if
his position is moderate, there is a probability of 0.2 that the strike will be avoided, 0.5
that it will last one week and 0.3 that it will last two weeks. To decide the production
level of the company, the Executive Board can choose to wait until Wednesday; however,
the cost of the subcontractor will increase by 5%. Find the best decision.