Quantitative Techniques III: Quiz 1 (Sections C & D)

Duration: 25 Minutes
Maximum Marks: 20
Open Notes, Open Case Material, Closed Laptop Exam (Calculators
allowed)

NAME_______________________________Roll No:_______________ Sec:____Sign:_____

Unnati, a students club at IIM Indore, is planning to run a cake counter at

the upcoming one-day Management Festival ( iLove) to be organized at
the institute on the 14th February, 2015. Unnati plans to buy the cakes
from a local cake bakery in Indore named Monginice. The cost of buying
one cake from Monginice is 30 Rs. The cost of transportation from
Monginice to IIM Indore can be neglected since Unnati will be using the
institutes vehicle for bringing the cakes to the campus. The cakes will be
bought in lump sum from the bakery at the start of the day (8 AM) of the
festival. The festival will begin from 10 AM and last till 8 PM. It can be
safely assumed that the cakes bought at the start of the day will retain
their freshness till the end of the festival.
Unnati needs to decide how many cakes it should buy. Clearly the number
of cakes to buy depends upon how much demand Unnati expects during
the festival. The demand of cakes during the festival is uncertain. Further,
the probability distribution of the demand for cakes during the festival
depends upon the price at which the cakes are sold. Unnati is considering
two possible prices: 40 Rs./cake and 50 Rs./cake. The probability
distributions of the demand of cakes during the festival for the two prices
are given below:
Selling Price = 40 Rs./cake
Demand*
Probability
(d)
P(d)
20
0.4
30
0.6

Selling Price = 50
Rs./cake
Demand*
Probability
(d)
P(d)
15
0.6
25
0.4

*Demand is represented in terms of number of cakes.

Assume that the shelf-life of the cake is one day. Hence all the unsold
cakes, if any, at the end of the festival will have to be consumed by the
members thus fetching no money to Unnati.
(Make suitable assumptions wherever necessary to answer the following 4
questions. Also assume that decisions are made based on maximizing the
expected monetary value):
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a) Develop and draw the decision tree that describes the decision
problem that Unnati is facing. (Please ensure that the reader is clear
about all the decisions and outcomes that you intend to show. You
may make the tree in pencil but write the final payoffs using an
ink/ball point pen.)
(10
Marks)

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b) How many cakes should Unnati buy and what should be the selling
price based on the decision tree?
(4 Marks)

c) Determine the Expected Value of Perfect Information (EVPI) if the

cakes are sold at 40 Rs./cake.
(3 Marks)

d) Determine the Expected Value of Perfect Information (EVPI) if the

cakes are sold at 50 Rs./cake.
(3 Marks)

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Space for Rough/Additional Work

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