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IEOR 166 Spring 2012 Problem Set #6

Professor Shmuel S. Oren

Problem 1 Continuation of the Banana Bowl problem from set #3 (For those who don't save their homework here it is again) The football team of Central state University (CSU) has just received a bid to play in the Banana Bowl. CSU estimates that after paying expenses, its profit from playing in the Banana Bowl would be $200,000. Although CSU finds the Banana Bowl appealing, it cannot decide whether to accept the bid. The reason is that CSU might also get invited to a more profitable bowl, the Berry Bowl. Whether CSU receives a bid to play in the Berry Bowl depends on the result of an upcoming game between two other teams, North State University (NSU) and South State University (SSU). If NSU wins or ties, CSU will receive a Berry Bowl bid; however, if NSU loses, CSU will not receive a Berry Bowl bid. CSU estimates that after paying expenses, its profit from playing in the Berry Bowl would be $900,000. Although CSU would prefer to play in the Berry Bowl, it unfortunately must accept or reject the banana Bowl bid before the game between NSU and SSU. CSU feels certain that if it rejects the Banana Bowl bid and it does not get invited to the Berry Bowl, it will not receive any other bowl bid. CSU estimates that the probability NSU will beat SSU is .25 and the probability NSU ties is 0.05. (d) Assume that for a fee of $15,000, CSU can obtain a prediction from Pete the Prognosticator about who will win the game between NSU and SSU. Pete will predict that either NSU will win the game or NSU will lose the game. (He never predicts a tie.) After reviewing Pete's past predictions, CSU has compiled the following data: When a team has won, Pete had correctly predicted the win 70% of the time. When a team has tied, Pete had incorrectly predicted a win 50% of the time. When a team has lost, Pete had correctly predicted the loss 70% of the time. i) draw the "Nature's" tree and obtain the "Information" tree showing the probabilities for Pete's predictions ("Win" or "Lose") and the conditional probabilities of a win, tie or lose, given Pete's prediction. ii) Draw CSU's Influence Diagram and decision tree for analyzing the decision whether to hire Pete and whether to accept the invitation to the Banana Bowl. The tree should show all the decision nodes probabilities and outcomes. e) Assume that Woody Haze, the person responsible for making the decisions for CSU is an expected value decision maker, determine Woody's best decision with regard to hiring Pete and accepting the invitation to the Banana Bowl. (If the best decision is to hire Pete than the decision regarding the invitation may depend on Pete's prediction.) Problem 2 Herman's porch light has burned out so he wanders into a hardware store to buy a replacement. He wants to minimize the expected cost of keeping his porch lighted for one year since he plans to move away after that length of time. In the store he finds two boxes of light bulbs. In Box I are bulbs that are guaranteed to last one year selling for $3 each. In Box II are bulbs with no guarantee selling for $1 each. The store owner explains that Box II came to him unlabelled. He knows that all of the bulbs in Box II are of one type and declares that it is equally likely they are of Type A or Type B. The lifetime of a Type A bulb is a random variable x having a uniform distribution between 0 and 2 years. Similarly, the lifetime of Type B bulbs is a random variable y with uniform distribution between 0 and 4/3 years. The store owner intends to dispose of Box II in the near future. Hence, if Herman buys a bulb from Box II and it burns out during the year, e must return and buy a bulb from Box I to light his porch for the remainder of the year; in that case, it will cost him $4 to keep his porch lighted. a) Should he buy a bulb from Box I or one from Box II? As Herman ponders his decision, he remembers an article he read in Consumers Report describing a simple test one can perform to distinguish between Type A and Type B bulbs.: a Type A bulb if rapped solidly with a finger will break with probability 1/5, while a Type B bulb will break with probability 3/5 if so rapped. b) Should Herman conduct the test on one of the bulbs in Box II, assuming that he must pay for the bulb if he breaks it? While he is thinking about this, another customer comes up to Box II, picks up a bulb and raps it solidly with his finger. The Bulb does not break. c) Should Herman now conduct the test on another of the bulbs from Box II? The store owner notices Herman's indecision and suggests that he buy two bulbs from Box II for $2 since it is "highly probable" that, used one after the other, the two will keep his porch lighted for one year. d) Should Herman do this, assessing again that he must pay $3 more for a Box I bulb if the two bulbs both fail before the year is up? (assume that even if he does not need to use the second Box II bulb its salvage value is 0. Also assume that he has already observed the test performed by the other customer when he makes this decision.)