Q1.

Anabelle Lee, the director of social services of Down County, has just learned of additional information
requirements mandated by the state .This will place an additional burden on the agency .The director has
identified three acceptable alternatives to handle the increased workload. One is to reassign present staff
members, another is to hire and train two new workers, and the third is to redesign current practice so
that workers can readily collect the information with little additional effort. An unknown factor is the
caseload for the coming year, during which time the new data will be collected on a trial basis. The
estimated costs for various options and caseloads are shown in the table that follows:
Cost Table
Caseload
Reassign Staff
New Staff
Redesign
collection
*cost in thousands

Moderate
$50*
60
40

High
60
60
50

Very High
85
60
90

Assuming that probabilities of various caseloads are unreliable, based on past experience, what decision
would be appropriate using each of the following criteria?
a.
b.
c.
d.
e.

Minimax
Minimin
Minimax regret
Equal likelihood
The Hurwicz criterion using =.20.

Q2.
Stevess Mountain Bicycle Shop is considering three options for its facility next year. Steve can expand his
current shop, move to a larger facility, or make no change. With a good market, the annual payoff would
be $76,000 if he expands, $90,000 if he moves, and $40000 if he does nothing. With an average market,
his payoffs will be $30,000 $41,000 and $15,000, respectively. With a poor market, his payoff will be $17,000, -$28,000, and $4,000, respectively.
a) Which option should Steve choose if he uses the maximax criterion?
b) Which option should Steve choose if he uses the maximin criterion?
c) Which option should Steve choose if he uses the equally likely criterion?
d) Which option should Steve choose if he uses the criterion of realism with =0.4?
e) Which option should Steve choose if he uses the minimax regret criterion?

Q3. Debbie Gibson is considering three investment options for a small inheritance that she has just
received- stocks, bonds, and money market. The return on her investment will depend on the
performance of the economy, which can be strong, average, or weak. The returns for each possible
combination are shown in the following table.
INVESTMENT
STRONG
AVERAGE
WEAK
Stocks
12%
6%
-10%
Bonds
7%
4%
1%
Money market
4%
3%
2%
Assume that Debbie will choose only one of the investment options.
a) Which investment should Debbie choose if she uses the maximax criterion?
b) Which investment should Debbie choose ifs he uses the maximin criterion?
c) Which investment should Debbie choose if she uses the equally likely criterion?
d) Which investment should Debbie choose if she uses the criterion of realism with =0.4?
e) Which investment should Debbie choose if she uses the minimax regret criterion?
Q4. A hospital administrator in Poland is trying to determine whether to build a large wing onto the
existing hospital, a small wing, or no wing at all. If the population of Portland continued to grow, a large
wing could run $225,000 to the hospital each year. If the small wing were built, it would return $90,000
to the hospital each year if the population continued to grow. If the population of Portland remained the
same, the hospital would encounter a loss of $125,000 if the large wing were built. Furthermore, a loss of
$65,000 would be realized if the small wing were constructed and the population remained the same. It
is unknown whether Portlands population will grow in the near future.
a) Construct a decision table.
b) Using the equally likely criterion, determine the best alternative.
c) The chairman of the hospitals board has advised using a coefficient of realism of 0.7 in determining the
best alternative. What is the best decision according to this criterion?
Q5. A souvenir retailer has an opportunity to establish a new location inside a large airport. The annual
returns will depend primarily on the size of the space she rents and if the economy will be favorable. The
retailer has worked with the airport concession commission, and has projected the following possible
annual earnings associated with renting a small, medium, large, or very large space:
SIZE
GOOD ECONOMY
FAIR ECONOMY
POOR ECONOMY
Small
$ 70,000
$ 28,000
-$ 14,000
Medium
$ 112,000
$ 42,000
-$ 28,000
Large
$ 140,000
$ 42,000
-$ 56,000
Very Large
$ 420,000
$ 35,000
-$ 224,000

a. What is the souvenir retailers maximax decision?

b. What is her maximin decision?
c. What is her equally likely decision?
d. What is her criterion of realism decision ,using =0.8?

e. What is her minimax regret decision?

Q6. A manufacturer produces and sells chilled, ready to eat pasta salad in round lots of 50 serving units
each. These items have a very limited shelf life; therefore, if items are made not sold they have no value.
Conversely if demand exceeds supply during the week (regular production runs are made on Friday of
each week for sales the following week), an extra production run can be made. The cost per unit for a
regular run is $5 per unit, whereas the cost of an extra production run is $7 per unit. All items are sold for
$10 per unit regardless of production cost. Historically, demand has been for 50, 100, or 150 units each
week, so the company makes one of those run sizes. The past, the manager of the department has made
100 units per week for regular production.
a. Prepare a payoff table showing profits for each of the lot sizes.
b. If probability of demand for 50 units is 0.40, probability of demand of 100 units is .50, and probability
of demand for 150 units is .10, what lot size would you recommend if the goal is to maximize expected
profit?
c. What is the EVPI?
d. Answer question a, b, and c given this additional consideration: Suppose that disposal cost for unsold
items is $1 per unit.

Q7. A group of medical professionals is considering constructing a private clinic. If patient demand for the
clinic is high, the physicians could realize a net profit of $100,000. If the demand is low, they could lose
$40,000.Of course, they dont have to proceed at all, in which case there is no cost. In the absence of any
market data, the bets the physicians can guess is that there is a 50-50 chance that demand will be good.
a) Construct a decision tree to help analyze this problem. What should the medical professionals do?
b) The physicians have been approached by a market research firm that offers to perform a study of the
market at a fee of $5,000. The market researchers claim that their experience enables them to use Bayes
theorem to make the following statements of probability.
Probability of high demand given a positive study result= 0.82
Probability of low demand given a positive study result= 0.18
Probability of high demand given a negative study result= 0.11
Probability of low demand given a negative study result= 0.89
Probability of a positive study result= 0.55
Probability of a negative study result= 0.45

Expand the decision tree in part (a) to reflect the options now open with the market .What should the
medical professionals do now?
c) What is the maximum amount the physicians would be willing to pay for the market study?
d) What is the efficiency of the market studys information?
Q8. You have been hired by the No Flight Golf Company, and your first task is to decide whether to market
a new golf ball utilizing breakthrough technology and, if so, determine the price. The payoff of your
decision will be affected by whether your competitor will market similar balls and the price of their golf

balls after you go to market. The cost to market the golf balls is $80,000, and the probability that your
competitor will enter the market is 0.75. The following table describes the payoff of each pricing
combination, assuming that No Flight will have competition:
COMPETITORS PRICE
OUR PRICE
HIGH
MEDIUM
LOW
High
$400,000
$250,000
$25,000
Medium
$475,000
$325,000
$175,000
Low
$350,000
$250,000
$125,000
If No Flight sets its price high, the probability that the competition will set its price high, medium, and low
is 0.3, 0.55 and 0.15, respectively. If No Flight sets its price medium, the probability that the competition
will set its price high, medium, and low is 0.2, 0.7, and 0.1, respectively. Finally, if No Flight sets its price
low, the probability that the competition will set its price high, medium, and low is 0.15, 0.25, and 0.6,
respectively.
If No Flight has no competition for its new golf balls, its expected payoff for setting the price high,
medium, and low is $600,000, $500,000 and $400,000, respectively, excluding marketing costs. Do you
recommend marketing the new golf balls? If so, what is your pricing recommendation?

Q9. Shamrock Oil owns a parcel of land that has the potential to be an underground oil field. It will cost
$500,000 to drill for oil field. If oil does exist on the land, Shamrock will realize a payoff of $4,000,000(not
including drilling costs). With current information, Shamrock estimates that there is a 0.2 probability that
oil is present on the site. Shamrock also has the option of selling the land as is for $400, 000, without
further information about the likelihood of oil being present. A third option is to perform geological tests
at the site, which would cost $100,000. There is a 30% chance that the test results will be positive, after
which Shamrock can sell the land for $650,000 or drill the land, with a 0.05 probability that oil exists. Using
a decision tree, recommend a course of action for Shamrock Oil.
Q10. Jason Scott has applied for a mortgage to purchase a house, and he will go to settlement in two
months. His loan can be locked in now at the current market interest rate of 7% and a cost of $1,000. He
also has the option of waiting one month and locking in the rate available at that time at a cost of $500.
Finally he can choose to accept the market rate available at settlement in two months at no cost. Assume
that interest rates will either increase by 0.5% (0.3 probability), remain unchanged (0.5 probability) or
decrease by 0.5% (0.2 probability) at the end one month.
Rates can also increase, remain unchanged, or decrease by another 0.5% at the end on the second
month. If rates increase after one month, the probability that they will increase, remain unchanged, and
decrease at the end of the second month is 0.5, 0.25, and 0.25, respectively. If rates remain unchanged
after one month, the probability that they will increase, remain unchanged, and decrease at the end of
the second month is 0.25, 0.25, and 0.5, respectively. If rates decrease after one month, the probability
that they will increase, remain unchanged, and decrease at the end of the second month is 0.25, 0.25, and
0.5, respectively.

Assuming that Jason will stay in the house for 5 years, each 0.5% increase in the interest rate of
his mortgage will cost him $2,400.Each 0.5% decrease in the rate will likewise save him $2,400.What
strategy would you recommend?
Q11. A manager must decide how many machines of a certain type to buy. The manager has narrowed
the decision to two alternatives: (1) buy one machine or (2) buy two machines. If only one machine is
purchased and demand is more than the company can handle, then a second machine will be purchased
at a later date. However, the cost per machine would be lower if the two machines were to be purchased
at the same time. The initial purchase of two machines has a net value of $75,000 if demand is low and
$140,000 if demand is high. The probability of low demand is .45. The initial purchase of one machine has
a net value of $85,000 if demand is low. If demand is high, and the company decides to purchase one
machine initially, the manager has three options. The first option is to do nothing with a net value of
$85,000.The second option is to subcontract .If the firm decides to subcontract, there is a 65 percent
chance of using vendor X with a net return of $100,000, There is a 35 percent chance of using vendor Y
with a net return of $135,000. The third option is to purchase a second machine with a net value of
$115,000.How many machines should the firm purchase initially and why? Use a decision tree to analyze
the problem.
Q12. Jo-Jo Inc is a manufacturing firm that produces soap. The company is owned by two brothers, Donald
and David Schroeder, and has one plant. The company has experienced significant growth in demand, and
the current plant does not appear to have sufficient capacity to meet demand. The company has decided
to build a new plant to meet the additional capacity .However, the brothers must decide whether to
construct a small, medium, or large plant. The brothers hired a forecasting consultant to predict demand.
The consultants report indicates that there is a 25 percent chance that the demand will be low and a 75
percent chance that the demand will be high. If Jo-Jo Inc. builds a small facility and the demand indeed
turns out to be low, the consultant expects net profit of $40 million. If the firm builds a small plant and
the demand turns out to be high, then the firm has two options: (1) subcontract or (2) expand the facility.
If Jo-Jo Inc. decides to subcontract, the expected net return will be $44 million. If the firm expands the
new facility, there is a 40 percent chance that the net return will be $42 million and a 60 percent chance
that the net return will be $48 million. If the medium-size facility is constructed and the demand turns out
to be low, the net return is estimated at $28 million. However, if the medium size facility is built and the
demand turns out to be high, Jo-Jo Inc. has two options: (1) do nothing, for an expected net return of $48
million, or (2) expand. If the firm decides to expand, there is a 35 percent chance that it will earn a net
return of $44 million and a 65 percent chance that it will earn a net return of $54 million. If the firm
decides to build a large facility and demand turns out to be low, the net return will be $10 million.
However, if the firm decides to build a large plant and the demand turns out to be high, the expected net
return is $58 million. Use decision tree analysis and determine the best option for Jo-Jo Inc.