1

Review problems for Test #2

note: The take-home portion will involve using Excel for applying and assessing time-series
forecasting methods, so you will likely want to review HWK 2.5 Excel portion.
1. An Alabama farmer wants to choose one of three planting alternatives for the next growing season. As
shown in the table below, the profit (in $1000s) of each alternative will depend on the amount of rainfall
his farm receives over the growing season.
Profit (in $1000s)
Planting
Alternatives
Corn & cotton
Peanuts
Squash & beans

States of nature
(amount of rainfall)
Small
Moderate Large
amount
amount
amount
400
500
700
550
550
550
150
600
800

(a) By the pessimistic criterion, what planting alternative would be chosen?

(b) By the Hurwicz criterion with = .8, what planting alternative would be chosen?
(c) By the minimax regret criterion, what planting alternative would be chosen?
2. With respect to problem 1 above, the farmer estimates that the probability of a small amount of rain is .50, of
a moderate amount of rain is .40, and of a large amount of rain is .10.
(a) What planting alternative has the best expected profit? What is its expected profit?
(b) Determine the expected value of perfect information (EVPI).
3. In the scenario below, the company seeks the decision strategy with the highest expected net profit.
scenario: A company that specializes in pattern recognition software wants to decide which of two new
products to develop over the next three months, a motion detector or a smoke detector. If it chooses to develop
the motion detector, it estimates that it has a probability of .7 of success (in developing the detector), in which
case its net profit will be $390,000, and a probability of .3 of failure, in which case its net profit will be
-$10,000. If it chooses to develop the smoke detector, it estimates it has a probability of .5 of success (in
developing the detector) and a probability of .5 of failure; if it fails, its net profit will be -$30,000. If the
company is successful in developing the smoke detector, it will want to decide whether or not to seek safety
certification from United Laboratories. If it chooses to seek certification, it estimates a .30 probability of getting
a commercial grade certification for a net profit of $895,000, a .60 probability of getting a residential
certification for a net profit of $695,000, and a .10 probability of being denied certification for a net profit of
-$35,000; it if chooses to not seek certification, its net profit will be -$30,000. [Source: adapted from Olivas,
2007]
(a) For the above scenario, set up and solve the associated decision tree so as to portray the decision strategy
with the highest expected net profit.
(b) State the decision strategy with the highest expected net profit and state its expected net profit.
(c) Provide the risk profile of the strategy you specified in (b).

4. A large police department in a metropolitan area is considering changing from full-size to mid-size cars, with
three different mid-size car models under consideration. Several cars of each model are loaned to the
department by the respective manufacturers. Each car was randomly assigned to a different police officer
and--subsequent to being driven for 5,000 miles--the operating cost per mile (in cents) for each car was
determined. The sample data and the results of a one-way ANOVA generated using Excel are given below.
(note: The one-way ANOVA assumptions are deemed adequately met.) Let 1, 2, and 3 denote the mean
operating cost per mile of all model 1 cars, all model 2 cars, and all model 3 cars, respectively.
A
B
C
D
E
F
1 Model 1
Model 2
Model 3
Anova: Single Factor
2
38.2
32
41.4
3
40.5
33.5
43.1
SUMMARY
4
37.6
30.3
42.7
Groups
Count
5
36.1
32.6
42.5
Model 1
8
6
38
32.4
46
Model 2
6
7
39.4
33.2
44
Model 3
7
8
39.2
43.8
9
37.8
10
ANOVA
11
Source of Variation
SS
12
Between Groups 392.6495
13
Within Groups
31.61048
14
15
Total
424.26

Sum
Average
306.8
38.35
194 32.33333
303.5 43.35714

df

Variance
1.788571
1.286667
2.109524

MS
F
2 196.3248 111.7935
18 1.756138

P-value
F crit
7.07604E-11 3.554561

20

(a) Show the major steps in applying the p-value approach to hypothesis testing to test
H0: 1 = 2 = 3
(b) Using a family confidence level of at least 95%, get and interpret in the context of the problem a
Bonferroni family of confidence intervals for 1 - 2, 1 - 3, and 2 - 3.
5. Below are the sales of storage sheds by Rupert Home & Garden Supply Company over the past 7 months.
Month
1
2
3
4
5
6
7

Sales (# of
storage sheds)
19
23
18
22
24
20
17

Note: 3 decimal places for intermediate calculations are sufficient.

(a) Apply each of the following forecasting methods to forecast the sales for month 8.
(1) 3-month moving average
(2) 3-month weighted moving average with weights (going back in time) of .5, .28, and .22
(3) exponential smoothing with = .3
(b) Determine the MSE and MAPE had the exponential smoothing method with = .3 been used to forecast
sales for months 2 through 7.

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6. Below are the student enrollments in Business Statistics at a public university for the past 5 fall, spring, and
summer terms. The linear trend in the annual enrollments is Trend t = 92.3t + 762.1

Spring term
Summer term
Fall term
total

2010
324
169
354
847

2011
376
194
387
957

2012
398
211
428
1037

2013
421
238
475
1134

2014
460
250
510
1220

total
1979
1062
2154

(a) Rely on the linear trend line to forecast the student enrollment for 2015.
(b) Determine and apply seasonal factors to subside the forecast for 2015 into forecasts of student enrollment for
the spring, summer, and fall terms of 2015.
7. What component of an annual time series is reflected in a line graph by consecutive upward and downward
swings, each over a multi-year time period?
8. What are the assumptions of a one-way ANOVA?
Answers:
1.
Regret (in $1000s)
Planting
Alternatives
Corn & cotton
Peanuts
Squash & beans

Profit (in $1000s)

Planting
Alternatives
Corn & cotton
Peanuts
Squash & beans

States of nature
(amount of rainfall)
Small
Moderate Large
amount
amount
amount
400
550
150

500
550
600

700
550
800

States of nature
(amount of rainfall)
Small
Moderate Large
amount
amount
amount
150
100
100
0
50
250
400
0
0

Worst
possible
profit
400
550 (best)
150

Hurwicz
weighted
value(=.8)
640
550
670 (best)

Maximum
possible
regret
150 (min)
250
400

(a) peanuts
(b) squash & beans
(c) corn & cotton
2.(a) peanuts, with an expected profit of $550 K
Calculations: EV(Corn & cotton) = (.50)(400) + (.40)(500) + (.10)(700) = $470 K
EV(Peanuts) = (.50)(550) + (.40)(550) + (.10)(550) = $550 K
EV(Squash & beans) = (.50)(150) + (.40)(600) + (.10)(800) = $395 K
(b) EV with PI = (.50)(550) + (.40)(600) + (.10)(800) = $595 K
EVPI = $595 K - $550 K = $45 K

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3(a).
note: unit on tree is $1000
success (.7)

390

270
failure (.3)

895
-10

develop motion detector

commercial cert.(.30)

326

682 residential cert. (.60)

695
denied cert. (.10)
develop smoke detector

682

seek cert.
-35

326

success (.5)

don't seek cert.

failure (.5)

-30
-30

(b) Develop the smoke detector; if successful, seek certification. That strategy has an expected net profit of
$326,000.
(c) The risk profile of the strategy in (b) is:
Possible net profit probability
(in $1000)
-35
.05 [(.5)(.10)]
-30
.50
695
.30 [(.5)(.60)
895
.15 [(.5)(.30)]
4(a) H0: 1 = 2 = 3

H1: 1, 2 , and 3 are not all the same

F

MSTr
= 111.79
MSE

p = P(F 111.79) = 7.08E-11 0.

Very strong evidence that 1, 2 , and 3 (i.e., the mean operating costs per mile of the three
models) are not all the same.
(b) To determine t ( f / m ) / 2 to use in each confidence interval:
df = n k = 21 3 = 18 and right-tail area = ( f / m) / 2 (.05 / 3) / 2 .0083 t = 2.641.
j h

1 - 2
1 - 3
2 - 3

CI for j h = x j x h t (

/ m) / 2

MSE / n j MSE / nh

= 6.02 1.89 = (4.1,7.9)

1.756 / 8 1.756 / 7 = -5.01 1.81 = (-6.8, -3.2)
1.756 / 6 1.756 / 7 = -11.03 1.95 = (-13.0,

(38.35 32.33) 2.641 1.756 / 8 1.756 / 6

(38.35 43.36) 2.641

(32.33 43.36) 2.641

-9.1)
We are at least 95% confident that the mean operating cost per mile is: between 4.1 and 7.9 cents lower for
model 2 than for model 1 cars; between 3.2 and 6.8 cents lower for model 1 than for model 3 cars; and between
9.1 and 13.0 cents lower for model 2 than for model 3 cars. (So we conclude that, from an operating cost per
mile standpoint, and on average, model 2 cars are the best, model 1 cars are second best, and model 3 cars are
the worst.)

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24 20 17
20.3 20 storage sheds
3
(a)(2) (.5)(17) + (.28)(20) + (.22)(24) = 19.38 19 storage sheds

5. (a)(1)

(a)(3) 20 storage sheds

based on table below
(b) MSE 9.8
MAPE 14.4%
Sales (# of
storage sheds)
1
19
2
23
3
18
4
22
5
24
6
20
7
17
Forecast for month 8
MSE
MAPE
Month

ES forecast
( = .3)
19
20.2
19.54
20.278
21.395
20.977
19.784

Squared
error
16
4.84
6.052
13.853
1.946
15.817

Absolute
% error
17.391%
12.222%
11.182%
15.508%
6.975%
23.394%

9.751
14.445%

6. (a) Trend forecast of enrollment in 2015 (t = 6) = 92.3(6) + 762.1 = 1315.9 1316 students
1979
(1315.9) 501 students
5195
1062
(1315.9) 269 students
Forecast for summer term of 2015 =
5195
2154
(1315.9) 546 students
Forecast for fall term of 2015 =
5195
7. cyclical
(b) Forecast for spring term of 2015 =

8. Each population is normally distributed.

The populations have the same variances.
Independent random samples are drawn from the populations.