Tutorial 3-solutions

Question 1
1-
a) Objective : Maximize monthly profit
b) Decision alternatives :
 Open Market
 Sell the product
 Survey

c) States of nature :
 Favorable (0.5)
 Unfavorable (0.5)
 « Favorable » (x)
 « Unfavorable » (1-x)
 Favorable/ « Favorable » (p)
 Unfavorable / « Favorable » (1-p)
 Favorable/ « Unfavorable » (q)
 Unfavorable/ « Unfavorable » (1-q)

Fav (0.5) Unf (0.5) 

« Fav » 0.8 0.2 0.4 0.1 0.5 0.8 0.2
« Unf » 0.2 0.8 0.1 0.4 0.5 0.2 0.8

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 Fav (0.5)
900 000
Open market

Unf (0.5)
290 000 (320 000)

Sell product
315 000

440 500 Fav/« Fav » (0.8)

855 000
Open market

Unf/« Fav » (0.2)

« Fav » (0.5) 611 000 -365 000

Survey Sell product

611 000 270 000

440 500
Fav/« Unf » (0.2)
855 000
Open market

« Unf » (0.5) Unf/« Unf» (0.8)

-121 000 -365 000

270 000 Sell product 270 000

The small company should opt for the survey as it yields the highest expected monthly profit of
440 500 TND. If “Fav”, the company should open the market. Else, it should opt for selling the
product to the large company.

2
 2-
No information
315 000

Open mark
900 000
« Fav » (0.5)
607 500 et
. Sell product
Perfect information
315 000
900 000

607 500 et
« Unf » (0.5) Open mark
-320 000
.
315 000 et product
Sell
315 000

EVPI = 607 500 – 315 000 = 292 500. et

In order to get perfect information, the small company is willing to pay up to 292 500 TND.

Question 2:
a) Objective: Maximize the profit.
b) Decision alternatives:
 No expert in which we have two other decisions:
 Produce
 Do not produce
 1 expert
st

 2nd expert
c) States of nature:
 Success
 Failure
1st expert

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 Success Failure  P.D
(0.6) (0.4)
“Success” 0.7 0.4 0.42 0.16 0.58 0.72 0.28
“Failure 0.3 0.6 0.18 0.24 0.42 0.43 0.57
2nd expert
Success (0.6) Failure (0.4)  P.D
“Success” 0.6 0.3 0.36 0.12 0.48 0.75 0.25
“Failure” 0.4 0.7 0.24 0.28 0.52 0.46 0.54
Success (0.6) 250 000

Produce
Failure (0.4)
No expert 90 000 -150 000
Do not produce
90 000 -50 000

90 000 Success/ « Success » (0.72)

Produce 242 000

« Success » (0.58) Failure/ « Success » (0.28)

130 000 -158 000

130 000 Do not produce

1st expert -58 000

Do not produce
81 280 -58 000
« Failure » (0.42)
Success/ « Failure » (0.43)
242 000
14 000
Produce Failure/ « Failure » (0.57)
-158 000
14 000

Success/ « Success » (0.75)

244 000

« Success » (0.48) Produce Failure/ « Success » (0.25)

2nd expert
-156 000
144 000
144 000
83 680 Do not produce
-56 000

Success/ « Failure » (0.46)

244 000
Produce
« Failure » (0.52) Failure/ « Failure » (0.54)
4 -156 000
28 000
28 000 Do not produce
-56 000
In order to maximize its profit, the company should not opt for any expert. This option will yield
the highest expected profit which is 90 000 TND. Actually, we must have 82,000 TND and
83,000 TND, when using experts 1 and 2 respectively. The difference with the values of 81 280
TND & 83 680 TND, respectively obtained above is due to the approximations made in the
posterior probability calculations. In fact, independently of the expert opinion, the decision-
maker must opt for producing. It follows that the information in both cases (from any expert) is
useless and hence EVII1=EVII2=0.

Question 3:
1-
a) Objective: Maximize the return.
b) Decision alternatives
 New method (NM)
 Existing method (EM)
 Subcontractor (SC)
 Other alternative
c) States of nature
o Win (W)
o Loose (L)
o Success (S)
o Moderate Success (MS)
o Failure (F)

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 The other alternative

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Loose (0.4)

-2
Bid
142 S (0.3)
NM 488
142 MS (0.6)
Win (0.6) 188
238 F (0.1) -212
238

S (0.5)
188
EM
MS (0.3)
88
90 F (0.2)
-152
SC
138

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In order to maximize its profit, the company should bid for the contract that yields an expected
profit of 142 million dinars. If it wins the contract, the company should adopt the new method.
2- Table
S (0.3) MS (0.6) F (0.1)  P.D
“S” 2/3 1/6 1/6 0.2 0.1 0.02 0.32 0.63 0.31 0.06
“MS” 1/6 2/3 1/6 0.05 0.4 0.02 0.47 0.11 0.85 0.04
“F” 1/6 1/6 2/3 0.05 0.1 0.06 0.21 0.24 0.48 0.28

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 141.46 —X

By using the additional information, the company can improve the current state of decision by an
average of 95.1 Million TND (i.e., 237.1-142). Hence, once the Company wins the bid, it may
negotiate the service of the information acquisition for an up of 95.1 Million TND. To conclude,
the optimal decision policy is as follows: Bid. If win, consult provided that X is within 95.1
million TND.

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Question 4:
1- Decision matrix
No strike Strike 1 week Strike 2 weeks

Produce 5 000 item 5000 * 15 * 3 = 5000 * 15 * 2 = 5000 * 15 = 75 000

225 000 150 000
Produce 10 000 (7 000*15) + (7000*15) + (7000*15) +
item (3 000*5) + (3000*5) = 120000 (3000*5) = 120 000
(5 000 * 15) =
195 000
Produce 15 000 (7000*15) + (7000*15) + (7000*15) +
item (8000*5) = 145 000 (8000*5) = 145 000 (8000*5) = 145 000

2- Payoff table
No strike Strike 1 week Strike 2 weeks EMV
(0.2) (0.4) (0.4)
Produce 5 000 225 000 150 000 75 000 135 000
item
Produce 10 000 195 000 195 000 120 000 165 000
item
Produce 15 000 145 000 145 000 145 000 145 000
item

Using the EMV criterion, the company should opt for producing 10 000 item for the first
week.
3- Decision tree

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 No information
165 000
Produce 5 000 item
225 000
« No strike » (0.2)
Produce 10 000 item
PI 195 000
225 000
Produce 15 000 item
145 000
181 000
Produce 5 000 item
« Strike 1 week» (0.4) 150 000
Produce 10 000 item
195 000
195 000 Produce 15 000 item
145 000
Produce 5 000 item
75 000
« Strike 2 weeks» (0.4)
Produce 10 000 item
120 000

145 000 Produce 15 000 item 145 000

EVPI = 181 000 – 165 000 = 16 000 TND.

In order to have accurate information, the company is willing to pay up to 16 000 TND.
4- New payoff table: SCnew = 40*1.05 = 42TND ; profitSCnew = 45 - 42 = 3TND
No strike Strike 1 week Strike 2 weeks
Produce 5 000 item 5 000*15*3 =225000 5 000*15*2=150 000 5 000*15=75 000
Produce 10 000 item (7 000*15)+(3 000*3)+ (7 000*15)+(3 000*3) (7 000*15) +
(5 000*15)= 189 000 + (5 000*15)=189 000 (3 000*3) = 114 000
Produce 15 000 item (7 000*15)+(8 000*3) = (7 000*15)+(8 000*3) (7 000*15)+(8 000*3)
129 000 = 129 000 = 129 000
Probability of no strike = probability of no strike and “tough” + probability of no strike and
“moderate” = 0*0.5 + 0.2*0.5 = 0 + 0.1 = 0.1
Probability of 1 week strike = probability of one week strike and “tough” + probability of one
week strike and “moderate” = 0.2*0.5 + 0.5*0.5 = 0.35
Probability of 2 weeks strike = probability of 2 weeks strike and “tough” + probability of 2 weeks
strike and “moderate” = 0.8*0.5 + 0.3*0.5 = 0.55

 P.D
“Tough” 0.5 0 0.2 0.8
“Moderate” 0.5 0.2 0.5 0.3
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 Do not wait
153 750

Produce 5 000 item S1W/« Tough » (0.2)

150 000
« Tough » (0.5)
153 750

90 000 S2W/« Tough » (0.8)

75 000
Wait 129 000
S1W/« Tough » (0.2)
Produce 10 000 item 189 000
147 750

129 000 S2W/« Tough » (0.8)

114 000
S1W/« Tough » (0.2)
Produce 15 000 item 129 000
S2W/« Tough » (0.8)
129 000 129 000

NS/«Moderate» (0.2)
225 000
Produce 5 000 item
S1W/«Moderate» (0.5)
150 000
« Moderate » (0.5) 142 500 S2W/«Moderate» (0.3)
75 000

166 500 NS/«Moderate» (0.2)

Produce 10 000 item 189 000
S1W/«Moderate» (0.5)
166 500 189 000
S2W/«Moderate» (0.3)
114 000

NS/«Moderate» (0.2)
Produce 15 000 item 129 000

S1W/«Moderate» (0.5)
129 000 129 000

S2W/«Moderate» (0.3)
129 000

The company should not wait for the statement and should directly opt for producing 10 000
item. This alternative yields the highest expected profit of 153 750 TND. Note that to determine
the EMV of 153 750 TND, it is the same as in the first payoff table except that the probabilities
of 0.2, 0.4, 0.4 are changed to 0.1, 0.35, and 0.55, respectively as shown in the decision tree
below.

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 No strike (0.1)
225 000
Produce 5 000 item
Strike 1 week (0.35)
116 250 150 000
Do not wait
Strike 2 weeks (0.55) 75 000
153 750

No strike (0.1)
Produce 10 000 item 195 000

Strike 1 week (0.35)

153 750 195 000

Strike 2 weeks (0.55)

120 000

No strike (0.1)
Produce 15 000 item 145 000

Strike 1 week (0.35)

145 000 145 000

Strike 2 weeks (0.55)

145 000

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