MAT1005 - Assingment 1. Week 5, 09/03/2023 - Due date, 23/03/2023.

Name/ Student ID:

1. 3 pts
Hemmingway, Inc., is considering a $5 million research and development (R&D) project. Hemmingway’s
president is concerned because the probability that the R&D project will be successful is only 0.50.
Furthermore, even if the project is successful, it will require that the company build a new production
facility at a cost of $20 million in order to manufacture the product.
Another option is that if the R&D project is successful, the company could sell the rights to the
product for an estimated $25 million. Under this option, the company would not build the $20
million production facility

Fig. 1.1

The decision tree is shown in Figure 1.1. The profit projection for each outcome is shown at the end
of the branches. For example, the revenue projection for the high demand outcome is $59 million.
However, the cost of the R&D project ($5 million) and the cost of the production facility ($20
million) show the profit of this outcome to be $34 million.

(a) If the R&D project will be successful and the decision maker knows nothing about the probabilities [1]
of the three states of nature (fig.1.2), what is the recommended decision using the optimistic,

Fig. 1.2

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 Quantitative methods in business - Writing Assignment

conservative, and minimax regret approaches.

(b) i. Analyze the decision tree to determine whether the company should undertake the R&D [2]
project. If it does, and if the R&D project is successful, what should the company do with
the branch probabilities are given for the chance events? What is the expected value of your
strategy.
ii. Develop the risk profile for the optimal decision strategy.

[Solution:]

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 Quantitative methods in business - Writing Assignment

2. 2 pts
A new product has the following profit projections and associated probabilities:

Fig. 2.1
[Questions:]
(a) Assume that the following indifference probabilities are assigned. Do the utilities reflect the [1]
behavior of a risk taker or a risk avoider?? .
(b) Use expected utility to make a recommended decision. [1]

[Solution:]

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 Quantitative methods in business - Writing Assignment

3. 2 pts
Two Indiana state senate candidates must decide which city to visit the day before the Midterm
election. The same four cities—Indianapolis, Evansville, and Fort Wayne—are available for both
candidates. These cities are listed as strategies 1 to 3 for each candidate. The candidates must
decide which city to visit prior to knowing the other candidate’s plans. Values in the following table
show thousands of voters for the Republican candidate based on the strategies selected by the two
candidates.

Fig. 3.1
[Questions:]
(a) Can you simplify the game further by applying the dominated strategies? [1]
(b) Which city should the each candidate visit? What is the value of the game? [1]
[Solution:]

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 Quantitative methods in business - Writing Assignment

4. 3 pts
The quarterly sales data (number of copies sold) for a college textbook over the past three years
follow

Fig. 4.1
[Questions:]
(a) Construct a time series plot. What type of pattern exists in the data? [1]

(b) Compare a three-quarter moving average forecast with an exponential smoothing forecast for [1]
of the optimal value of α. Which provides the better forecasts using MSE as the measure of
model accuracy?

(c) Using the dummy variables and time period t (quarters), develop an equation to account for [1]
seasonal effects and any linear trend in the time series. Based upon the seasonal effects in the
data and linear trend, compute the quarterly forecasts for next year.

[Solution:]

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