For more practice problems for decision theory, refer to the problem sets at the end of the handout

sections.

1. Is anything wrong with the following argument? 20% of the Indians are senior citizens, 45% of the
Indians are women. So the proportion of women senior citizens is 45% of 20% = 9%.
2. Two fair dice are thrown n times in succession. What is the probability of obtaining double six at
least once?

3. If n accidents have taken place in Jamshedpur during the first N days of the year 2020, what is
the probability that on January 1st, exactly b accidents took place in Jamshedpur?

4. A locality has been divided in k regions containing n houses each, labeled from 1 to n. One house
is randomly selected from each region. What is the probability that m is the greatest label drawn?

5. In a psychology experiment, each subject is presented 3 ordinary cards, face down. The subject
takes one of those cards. The subject also takes one card at random from a separate, full, deck of 52
cards. If the two cards are from the same suit (Heart/Diamond/Club/Spade), the subject wins a prize.
What is the chance of winning?

6. If A and B are two events such that A and B are mutually exclusive, P(A) > 0, P(B) >0, then can A
and B be independent? Justify your answer.

7. If A, B and C are three events such that P(A|B) = P(A) and P(A|C) = P(A) where P(A) > 0, then
are A, B and C mutually independent of each other? Justify your answer.

8. Consider families with two children. If one child of a family is a boy, what is the probability that
the other child is a girl?

9. A startup sells coffee frothers through online as well as offline channels. In the last three months
they have sold to a customers online and b customers offline. Assume that all customers are distinct.
If m + n customers are chosen at random, find the probability that m of them are online customers
and n of them are offline customers.

10. From a class of m boys and n girls, k (< m+n) students are randomly selected to volunteer for
school sports. We do not know their gender. Now one more student from the remaining students in
the class is randomly selected. Find the probability that it is a girl.

1
11. According to a research study, the incidence rate of HIV in India is 0.4% for a certain section of
the population. A Clinical test in India is 95% accurate in detecting HIV. i.e., if there is actually HIV,
the test will be correctly detect it 95% of the times. If there is no HIV, the test will again be correct
in 95% of cases. A person from this section of the population undergoes a test and the test says he
has HIV.

a) What is the probability that he really has the disease?

b) A second independent test that has similar accuracy also comes out positive. Now, what is the
probability that he has disease? (Such an update of probability based on additional information is
referred to as "Bayesian Update")

12. Three dies are thrown. Work out the following probabilities assuming I) the dies are fair, II) the
dies are biased with P(1) = 0.25, P(2) = P(3) = P(4) = P(5) = P (6) = 0.15:
a) the sum of the numbers shown on the three dice is even
b) the product of the numbers shown on the three dice is divisible by 4
c) the sum of the numbers shown on the three dice is even, given that their product is divisible by 4

13. In a factory, Machines A, B and C manufacture 25, 35 and 40 percent of total production
respectively. Of their output 5, 4 and 2 percent are defective respectively. A product is drawn at
random from the produce and is found to be defective. What is the probability that it was
manufactured by Machine A?

14. A production process involves three machines A, B and C, which produce 50%, 30% and 20%
respectively of the total output. Out of the items produced by Machine A, 10% fail in a quality control
test. The corresponding figures for Machines B and C are 20% and 30% respectively. All items
passing the quality control test are directly acceptable. On the other hand, items failing in the quality
control test are further processed and thus 40%, 50% and 60% of them turn out to be marginally
acceptable, depending on whether they came from Machines A, B and C respectively. For example,
out of the items that are produced by Machine A and that fail in the quality control test, 40%
eventually turn out to be marginally acceptable, and so on.
a) Find the probability that a randomly chosen item from the production process is found to be
directly acceptable.
b) Find the probability that a randomly chosen item from the production process turns out to be
marginally acceptable.
c) Given that a randomly chosen item from the production process has failed in the quality control
test, what is the conditional probability that it turns out to be marginally acceptable?
d) Given that a randomly chosen item from the production process has turned out to be marginally
acceptable, what is the conditional probability that it was produced by Machine A?
e) Given that a randomly chosen item was not produced by Machine B, what is the conditional
probability that it turns out to be marginally acceptable?

2
15. Scott Myers is a security analyst for a telecommunications firm called Webtalk. Although he is
optimistic about the firm’s future, he is concerned that its stock price will be hugely affected by the
condition of credit flow in the economy. He believes that the probability is 0.2 that credit flow will
improve significantly, 0.5 that it will improve only marginally and 0.3 that it would not improve at
all. He also estimates that the probability that the stock price of Webtalk will go up by at least 20%
is 0.9 with significant improvement in credit flow, 0.4 with marginal improvement in credit flow and
0.1 with no improvement in credit flow.
a) What is the unconditional probability that the stock price of Webtalk goes up by at least 20%?
b) Given that the stock price of Webtalk has not gone up by more than 20%, what is the probability
that there was no improvement in credit flow?

16. Mektek, a new company, is thinking about developing a smartphone. However, before they start
developing the smartphone, they want to make sure that it will make sense to invest on this. They
are planning to employ a market survey farm to sense the market. The following are the
considerations:

The market survey can predict 3 scenarios: high, medium or low demand. In a high demand
situation, Mektek makes a profit of Rs. 10,00,00,000 (10 Crores). In case of medium demand, they
make a profit of Rs. 1,00,00,000 (1 Crore), and in case of a low demand, they lose Rs. 2,00,00,000 (2
Crores).

The probabilities with which the market survey will predict high, medium or low demand are 40%,
20% and 40% respectively. The problem is that historically when such a survey had predicted high
demands, 40% of the time it were wrong, half of such cases in fact being that of low demand, and
rest of medium demand. Similarly, when such a survey predicted medium demand, it was correct
only 70% of the times, with rest of the cases being split equally between high and low demand. The
survey, however, has worked well in case when a low demand scenario was predicted; it was correct
90% of the times in such a case, the rest of the cases all being of medium demand.
a) What is the probability that Mektek will make a profit given that the market survey has predicted
a low demand scenario?
b) What is the (unconditional) probability that Mektek will make a loss?
c) What is the probability that Mektek will make a loss given that the market survey has not
predicted a low demand scenario?
d) If MekTek is risk-neutral, what should they do in case the predicted demand is i) high, ii) medium
or iii) low? What would have their optimal strategy been if the survey was not done?

3
17. Suppose A, B and C are mutually independent events and that P(A) = 0.5, P(B) = 0.8 and P(C) =
0.9. Find the probabilities that
a) All three events occur.
b) Exactly two of three events occur.
c) None of the events occurs.

18. Two six faced fair dice are thrown. Let Event A = Die 1 shows six, Event B = Die 2 shows six and
Event C = Both dice show the same face. Show that A, B, C are pairwise independent but not
mutually independent.

19. Consider families with 3 children. Let B denote boy and G denote girl. Assume that all 8
possibilities for the three children in order have equal probabilities. Define events A B and C as
follows: A= at least 2 boys, B= 1st child is a girl, C= 2nd child is a boy. Show that P(A ∩ B ∩ C) =
P(A) × P(B) × P(C) but A, B, C are not pairwise independent.

20. A machine has n components. It functions only if at least one component functions. All
components function independently and probability of any one component not functioning is p. What
is the probability that all components are functioning given that the machine is functioning?

21. A system has two components: A and B. The system functions as long as at least one component
functions. If both A and B are functional at the start of the day, then they fail independently during
the day with probability of failure for each component being 0.2. If exactly one of A and B is functional
at the start of the day, then the functional component fails during the day with probability 0. 4.
Answer the following questions assuming that both A and B were functional at the start of Monday.
a) What is the probability that the system is functional at the start of the day on Tuesday?
b) What is the probability that the system is functional at the start of the day on Wednesday?
c) What is the probability that the system is functional at the start of the day on Thursday given
that the system is functional at the start of day on Tuesday?

22. Consider the following system where gas is supposed to flow from A to B:

There are three valves in the system: V1, V2 and V3, each of which may develop faults, and hence
stop working, independently with probability p. Gas will flow from A to B if either both valves in the
pair (V1, V2) or the valve V3 or all three valves are functional.
a) What is the probability that gas is flowing from A to B?
b) Given that gas is flowing from A to B, what is the probability that V1 has developed a fault?
c) Given that gas is not flowing from A to B, what is the probability that V1 has not developed a
fault?

4
23. From an urn containing 3 white and 5 black balls, 4 balls are transferred into an empty urn. If
it is known that at least 2 transferred balls are white, what is the probability that a ball taken from
the second urn will be white?

24. An urn has 3 black balls and 5 white balls. Each time I draw a ball. If it is black, I add 1 black
ball and 2 white balls. If it is white, I add 2 black balls and 1 white ball. Assume that the ball that
is originally drawn is also replaced along with the additional balls. What is the probability of getting
a Black-White-Black-White in four successive draws?

25. Simpson's paradox, or the Yule–Simpson effect, is a paradox in which a trend that appears in
different groups of data disappears when these groups are combined, and the reverse trend appears
for the aggregate data. Consider the following example:

Abracadabra University has got a lot of bad press for its apparent bias against women. Last year
3000 applicants applied to join the undergraduate programme of the university, among them 2000
were men and 1000 women. 100 women were shortlisted (10%), along with 300 men (15%). A clear
case of sexual bias is apparent. In fact, that has been the trend for years.

What, however, baffles the university authority is that they gave clear instruction to both of its two
schools, Arts and Science, to try to admit more women, and they did try to oblige. So, what happened?
Let’s examine the admission offers last year:

Men Women
Arts 295 accepted/1900 applied 10 accepted/50 applied
Science 5 accepted/100 applied 90 accepted/950 applied

Compute and compare the proportion of men and women admitted to the Schools of Arts and Science:
i.e. compute
a) What is the probability that a random male applicant gets selected in the School of Arts?
b) What is the probability that a random female applicant gets selected in the School of Arts?
c) What is the probability that a random applicant gets selected in the School of Arts?
d) What is the probability that a random male applicant gets selected in the School of Science?
e) What is the probability that a random female applicant gets selected in the School of Science?
f) What is the probability that a random applicant gets selected in the School of Science?
Based on a)-f) above, can you explain what is going on? Is the criticism towards the university
justifiable? What is your take on this analysis?

5
26. Consider a random variable X with the following distribution:
X -3 -1 0 1 2 3 5 8
P(X = x) 0.1 0.2 0.15 0.2 0.1 0.15 0.05 0.05
a) P(X > 0),
b) P(X is even),
c) P(1 ≤ X ≤ 8),
d) P(X = -3 | X ≤ 0),
e) P(X ≥ 3 | X > 0),
f) E[X],
g) V[X].

27. Suppose that a school has 20 classes: 16 with 25 students in each, three with 100 students in
each and one with 300 students for a total of 1000 students.
a) What is the average class size?
b) Suppose a student is picked at random from the 1000 students. Let X= size of the class to which
(s)he belongs. What is the p.m.f of X?
c) What is E[X]?
d) Is it surprising that a) and c) are not equal? Can you define a random variable Y such that E[Y]
will give the answer in a)?

28. A gambling guide recommends the following ``winning strategyʹʹ to make money in the game of
roulette. It recommends that a gambler bet Rs.100 on red. If red appears, then the gambler should
take the money and quit. If he loses, then he should bet Rs.100 on red for the next two spins and
then quit. Note that P(red) = 9/19. Note that if betting Rs.100 means that you pay the casino Rs.100
to play; if you win you get back your Rs.100 plus another Rs.100, but if you lose then the casino keeps
your payment. Let X be the gambler’s winnings when he quits. Find P(X>0) and E(X) and comment
on the strategy.

29. According to a study conducted on eating habits of an adult population in a country, it is found
that 25% of males and 20% of females never eat breakfast. Suppose a sample of 5 men and 5 women
are chosen. Compute the probability that
a) At least 2 of the 10 never eat breakfast.
b) The number of women who eat breakfast is at least as much as the number of men who eat
breakfast.
c) What would have been the answer to (a) if both the percentage of men and women who did not eat
breakfast were equal to 20%?

6
30. Probability of hitting a target is 0.2 and 10 shots are fired independently.
a) What is the probability of never hitting the target in the ten attempts?
b) What is the probability of hitting the target in the 7th attempt for the first time? What about the
second time?
c) What is the probability of hitting the target at least twice in 10 attempts?
d) What is the probability that the target was hit at least twice in 10 attempts, given that it had
been hit at least once in 10 attempts?
e) Five more shots are fired, independently among themselves and independent of the previous
shots. What is the probability of at least two hits to the target in these 15 shots if i) the probability
of hitting remains 0.2 for these five shots, and ii) the probability of hitting the target in the last 5
shots is revised to 0.5 for the last five shots?

31. An airline always overbooks if there is demand. A particular plane has 180 seats and each ticket
cost Rs. 4000. The airline has sold 190 such tickets.
a) If the probability of an individual not showing up is 0.05, assuming independence, what is the
probability that the airline can accommodate all who show up? (Hint: Define r.v X = number of people
who show up out of 190. Express the probability in terms of X and compute.)
b) If the airline must return the ticket price, plus pay a penalty of Rs. 5000 to all who show up but
cannot be accommodated, what is the expected total penalty that the airline will have to pay? (Hint:
Create a new r.v. Y= penalty paid by airline. Express Y in terms of X. Since we know the distribution
of X, find the distribution of Y. i.e. identify the possible values of Y and the corresponding
probabilities.)

32. In a certain shop floor, a certain machine has 1% rate of producing defective items. The items are
packed in lots of 50. A customer will not accept a lot if it contains 3 or more defectives.
a) If it is known that a lot is not defective free, find the probability that it will be rejected by the
customer.
b) Find the probability that out of 10 lots, exactly 2 are rejected by the customer.

33. A graduating student keeps applying for a job until she gets an offer. Assume that she applies
for one job at a given time, waits for the result and then applies for the next job. The probability of
getting a job offer on an application is p.
a) If p = 0.25, what is the expected value and variance of the number of applications?
b) Let p = 0.25. Suppose she only has time to apply for at most four jobs. What is the probability that
she will get at least one job offer?
c) Suppose she only has time to apply for at most four jobs. What would be the minimum value of p
that would ensure at least a 95% chance of getting at least one job offer?

7
34. The number of breakdowns of a computer system in a month is believed to follow a Poisson
distribution. It has been consistently observed in the past that the average number of monthly break
downs is 1. Find the probability that this computer will work for 3 months (a) without any break
down (b) with exactly one break down.

35. Colour blindness occurs in 1% of a population. How large a random sample (with replacement)
should one draw from the population if the probability of it containing at least 1 colour blind person
is 95% or more? Use both the binomial and Poisson distributions to derive the required sample sizes.

36. A purchaser of electrical components buys them in lots of size 10. It is his policy to inspect three
components randomly chosen from the lot and to accept the lot only if all three are non-defective. If
30% of the lots have four defective components and 70% have only one, what proportion of lots will
the purchaser reject?

37. A random sample of size 3 is drawn without replacement from a lot of size 10, which contains 4
defective items. What is the probability that at least 1 of the 3 items drawn are defective?

38. The impact of Covid-19 on the primary education has been devastating. To understand its
impact, two studies are planned. You take the roaster from a school from before the pandemic
started and design two sampling plans:
i. Draw a random sample of size 10 of names with replacement from the roaster. Then look them up
in the school to see how many of them have left school.
ii. Keep drawing a random name sequentially, with replacement, from the roaster and check
whether the student has left school or not. Once you encounter two missing students, you stop the
sampling. If the true proportion of missing students is 0.3,
a) What are the expected number of students you will check in the two schemes?
b) What is the probability that you encounter no missing student in the first sampling scheme?
c) What is the probability that you will sample more than 10 students in the second sampling
scheme?
d) Now repeat the calculations for the case when the true proportion of missing students is 0.6. How
can the data tell you whether the true proportion is more likely to be 0.3 or 0.6?

39. Suppose a 6 faced die has 2 faces numbered 1, 3 faces numbered 2 and 1 face numbered 3. Suppose
the die is thrown independently 10 times and in each throw each face has an equal chance of showing
up.
a) What is the joint distribution of (X1, X2, X3) where Xi = number of times face i shows up?
b) What is the distribution of (X1 + X2)?

8
40. X and Y are random variables with the joint distribution as given in the table below:
X Values
Y values↓ -1 0 2 6
-2 1/9 1/27 1/27 1/9
1 2/9 0 1/9 1/9
3 0 0 1/9 4/27
a) Obtain the marginal distributions of X and Y.
b) Are X and Y independent?
c) Compute P(Y is even).
d) Compute P(XY is odd).
e) Compute E(X) and V(X).
f) Compute E(Y) and V(Y).
g) Compute Cov(X,Y) and Cor(X,Y).
h) Compute E(X|Y = j) for j = -2, 1, 3.
i) Let g(Y) = E(X|Y). Verify that E(E(X|Y)) = E(X).

41. Let X~Poisson(λ1) and Y~Poisson(λ2) be independent. Obtain the conditional distribution of
X|X+Y=n.

42. The number of customers arriving at a bank has a Poisson distribution with rate 10 per hour.
Each customer arrives independently of each other and is either male with probability 0.6 or female
with probability 0.4. Let X = number of male customers arriving in an hour and Y = number of female
customers arriving at the same hour.
a) What is the joint distribution of (X,Y)?
b) Are X and Y independent?
c) What are the marginal distributions of X and Y?

43. A middle level executive of a multinational company in Mumbai receives several telephone calls
on his cell phone. According to him the calls arrive independently and are governed by a Poisson
distribution with an average of 8 calls per day. The calls originate either from known acquaintances
or from complete strangers in the ratio of 3:1 respectively. Answer the following questions.
a) What is the probability that the number of calls in a day is exactly 5?
b) What is the expected number of calls from strangers on any given day?
c) Given that there were 5 calls on a day, what is the chance that 4 of them were from strangers?
d)What is the probability that on a given day, he receives 2 calls from strangers and 3 calls from
acquaintances?
e) What is the probability that on a given day all calls he receives are from strangers?

44. If X has p.d.f. f (x) = 4x3, 0 < x < 1 then

a) Find the c.d.f. of X.
b) Compute the median of X.
c) Find the c.d.f. of Y = X2.
d) Find the p.d.f. of Y.
e) Compute the 90th percentile of Y.

9
45. Trains headed to a destination A arrive at station at 15-minute intervals starting at 7:10 A.M.,
whereas trains headed to destination B arrive at 15-minute intervals starting at 7 A.M. If a certain
passenger arrives at the station at a time that is uniformly distributed between 7 and 8 A.M, and
then gets on the first train that arrives what is the probability that the passenger travels to A?

46. You arrive at a bus stop at 10 A.M, knowing that the waiting time for the buses have an
exponential distribution with a mean of 30 minutes.
a) What is the probability that you will wait more than 10 minutes?
b) If at 10:15 am the bus has still not arrived, what is the probability that you will wait for at least
10 more minutes?
c) What is the probability of exactly two buses arriving during 10am-11am?

47. An average CFL bulb is supposed to last for 1 year. Assume the lifetime is distributed
exponentially. Find the probability that
a) A CFL bulb last for 2 years or more.
b) Among the 5 CFL bulbs I have in my house, at least 4 last for 2 years or more.
c) On average, the 5 CFL bulbs in my house last for 2 years or more.

48. The annual net margins of a hundred-year-old company are known to be approximately normally
distributed. It has been observed that in 20 of the 100 years the net margins have fallen below 0 and
in 10 of the 100 years the margins have exceeded 5 crores. What can we say about the expected value
and the standard deviation of net margins?

49. A manufacturer makes shafts for electric motors. The external diameter is normally distributed
with mean 1 inch and SD 0.001 inch. The manufacturer purchases bushings which the shaft passes
through. The internal diameter of the hole in the bushing is normally distributed with mean 1.002
inch and SD 0.001 inch. When the shaft is put in the bushing the clearance is the diameter of the
hole in the bushing minus the diameter of the shaft. Negative clearance means the shaft does not
fit.
a) For a shaft and bushing selected at random, what is the probability that the shaft does not fit?
b) To operate properly the clearance should be between 0.0016 and 0.0048 inch. What fraction of the
assembled units will be in this range?

50. A food processor packages instant coffee in small jars. The weights of the jars are normally
distributed with a standard deviation of 3 grams. If 5% of the jars weigh more than 124.92 grams,
then what is the mean weight of the jars?

10
51. A project has four phases viz. 1,2,3,4. A phase cannot start until the previous phase is completed.
The time to completion for each phase is believed to be normally distributed with means 6, 12, 4 and
8 weeks respectively and standard deviations 1,3,1 and 2 weeks respectively. Completion times of
the different stages are independent of each other.
a) What is the expected total time and SD of total time for completion of the project?
b) What is the probability that phase 3 can be started no later than 20 weeks from start?
c) If the project is scheduled to be completed in 32 weeks, what is the probability that it will be
completed in time?
d) What should be the planned duration if a probability of 80% is specified for in time completion of
the project?

52. There are three lunch specials in a restaurant: A, B and C, which cost Rs.100, Rs. 140 and Rs.
150 respectively. A student, who lunches in that restaurant every day, chooses these three specials
with probabilities 60%, 20% and 20% respectively. He chooses one lunch special every day
independently of his previous decisions.
a) Obtain the distribution of the student’s daily expenditure on lunch.
b) Obtain the distribution of the student’s average expenditure on lunch over two days.
c) Obtain the distribution of the student’s average expenditure on lunch over 50 days.

53. You manage a sales organisation consisting of 100 people. Each salesperson is capable of selling
on an average 4 items per month. Based on your experience you have observed that the standard
deviation of sales made is 1.
a) What is the expected sales made by the organization in a month?
b) What is the probability that the total sales in the month exceeds 410 items? (State your
assumptions clearly.)

54. A volunteer tourist guide at a heritage site in India does not charge a fee for her services.
However, she accepts tips provided by the tourists. For every tourist she guides she receives either
a tip of 0 or 100 or 200 rupees with equal probabilities (i.e., = 1/3). Assume that this is her only source
of income. For questions a,b,c, assume that in a year she guides 5000 tourists.
a) What is her expected annual income?
b) What is the standard deviation of the annual income?
c) What is the probability that her income during the year will exceed Rs. 6,00,000?
d) Suppose that she wants to target an annual income of at least 600,000 in the sense that the
probability of her income falling below 600,000 should be less than 5%, then at least how many
tourists should she target to guide during the year?

55. According to a job website, every month around 20,000 people register in their website, and about
60% of them get placed within two weeks. If each person gets placed independently with probability
0.6 within two weeks, what is the probability that at least 13,000 people get placed within two weeks?
What about 15,000?

11
56. A production process has a long-term defective item production rate of 5%. The produced items
are sent to a retailer in lots of size 100, who inspects 10 items selected from the lot at random, and
rejects the lot if he finds two or more defectives among the inspected items.

a) What is the probability that a random lot contains more than 10 defective items?
b) What is the probability that a randomly chosen lot is rejected during inspection?
c) What is the probability that among 100 randomly chosen lots, at least 5 are rejected?
d) Given a lot is rejected, what is the expected number of defective items in the lot?
e) Given a lot is accepted, what is the expected number of defective items in the lot?

57. You are given the following payoff table (in crores of rupees) for a decision analysis problem:

Demand Scenarios

Decision Alternatives↓ High Medium Low

No investment 6 2 4

Minimal investment 3 4 2

High investment 8 1 5

a. What is the maximin payoff decision alternative? What is the maximin payoff amount (in Rs.
crores)?

b. Obtain the regret table. What is the minmax regret decision alternative?

c. If the high, medium and low demand scenarios have respective probabilities 0.4, 0.4 and 0.2, what
is the optimal decision alternative based on the maximum expected value decision criterion?

d. If the high, medium and low demand scenarios have respective probabilities p, p and 1-2p (only
possible values of p are 0≤p≤0.5) and the optimal decision alternative is chosen based on the
maximum expected value decision criterion, for what values of p is “High investment” the best
decision alternative?

e. What is the expected value of perfect information for this problem (in Rs. crores)?

12
58. Amrish is taking an examination. The paper is worth 40 marks and has two questions. The first
question, worth 20 marks, has no subparts. The second question has two subparts: Part A and Part
B, worth 10 marks each. One must get Part A right to be able to solve Part B correctly (but can still
get Part B wrong). There is no partial credit: one either gets 0 or 20 in the first question, and either
gets 0 or 10 in each subpart of the second question.

Amrish has attempted the first question. He thinks the probability that he got the first question
correct is 0.8, where the value of pr is obtained from the table above.

Amrish is stuck with the second question and has decided to explore the option to cheat. His friend
Pran had agreed to help him, if needed. Amrish’s options regarding the second question are:

Option 1: Attempt the second question by himself: probability of him being able to solve Part A
correctly is 0.3; and then, if he got Part A right, the probability of solving Part B correctly is 0.5.

Option 2: Cheat: Pran has sent some answer to the second question through chat that Amrish can
copy; the probability that Pran has solved Part A correctly is 0.4; and then, if Pran has got Part A
right, the probability that he has solved Part B correctly is 0.3.

Amrish estimates that he will get caught for cheating with probability pr if he copies Pran’s solution,
where the value of pr is obtained from the table above. If Amrish is caught cheating, he will get 0 in
the entire paper of 40 marks irrespective of whether any of the solutions is correct or wrong.

Option 3: Skip the second question and concentrate on the first question: Amrish believes that he
can make it sure that he gets the first question correct if he concentrates only on that question, (i.e.,
the probability of the first question being correct will increase from 0.8 to 1 if this option is exercised.)

a. Produce a suitable decision tree for Amrish. Which option should Amrish choose if he wants to
maximise his expected marks in the examination, and why?

b. If Amrish is uncertain about the probability of getting caught (in Option 2), for what range of
values of this probability will his decision from (a) remain unchanged, and why?

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59. Microvehicles is a new company which sells electric scooters. They are weighing their options to
enter the market in Jamshedpur. If they enter the market, they have two options, either of a limited
franchisee, or of a full dedicated presence. They may, of course, also not enter the market at all. A
limited franchisee will cost them Rs.2 crores, while a full dedicated presence will cost them Rs.5
crores. They believe that there are three possibilities: either the customer response will be highly
favourable, or moderately favourable, or unfavourable. They have computed the probabilities of these
three states to be 0.3, 0.4 and 0.3, respectively. In case they open a limited franchisee, they expect
revenues of Rs.4 crores if the market is highly favourable, Rs.2 crores if the market is moderately
favourable and Rs.1 crore if the market is unfavourable. For a full dedicated presence, the expected
revenues are Rs.10 crores, Rs.7 crores and Rs.1 crore respectively in the same scenarios.

a. Using either a decision tree or a payoff table, evaluate the best decision alternative for
Microvehicles in terms of maximum expected profit.

b. Assume that Microvehicles is sure that the probability of market being unfavourable is 0.3, but is
not sure about the other two probabilities. For what range of values of the probability of highly
favourable market would their decision from part (a) remain unchanged?

c. How can Microvehicles perform the analysis for part (b) if they are not sure about any of the
probabilities?

d. Microvehicles has hired a survey organisation to assess the customer response through a survey.
However, the survey organisation is only going to report the result of the survey as one of the
following two alternatives: good response or bad response.

Following table gives the conditional probabilities of the survey organisation reporting good or bad
response in the three true customer response scenarios mentioned earlier. Remember that at the
time the survey report is produced/presented, true customer response is not known to anyone.

Customer Response↓ Survey reports good Survey reports bad

response response
Highly Favourable 0.9 0.1
Moderately Favourable 0.6 0.4
Unfavourable 0.3 0.7

i. What decision should Microvehicles take if the survey reports a good response, and why? What
decision should they take if the survey reports a bad response, and why?

ii. Compute the maximum amount that Microvehicles can pay for this survey.

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