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OPERRES First Long Exam Reviewer. Show all solutions.

Round off final


answers to the nearest two decimal places and encircle/box them.

1. In the past few years, the traffic problems in Lynn McKells hometown have gotten worse.
Now, Broad Street is congested about half the time. The normal travel time to work for Lynn
is only 15 minutes when Broad Street is used and there is no congestion. With congestion,
however, it takes Lynn 40 minutes to get to work. If Lynn decides to take the expressway, it
will take 30 minutes regardless of the traffic conditions. Lynns utility for travel time is: U(15
minutes) = 0.9, U(30 minutes) = 0.7, and U(40 minutes) = 0.2.

a. Use a decision tree to determine which route would minimize Lynns travel time.
b. Use a decision tree to determine which route will maximize Lynns utility.
c. When it comes to travel time, is Lynn a risk seeker or a risk avoider? Be sure to
show your solution for this question.

2. Oilco must determine whether or not to drill for oil in the South China Sea. It costs $100,000,
and if oil is found, the value is estimated to be $600,000. At present, Oilco believes there is a
45% chance that the field contains oil. Before drilling, Oilco can hire (for $10,000) a
geologist to obtain more information about the likelihood that the field will contain oil. There
is a 65% chance that the geologist will issue a favorable report and a 35% chance of an
unfavorable report. Given a favorable report, there is an 75% chance that the field contains
oil. Given an unfavorable report, there is a 25% chance that the field contains oil.

a. What decision-making environment is Oilco facing?


b. Draw a decision tree for this problem and identify the best alternative.
c. Solve for the expected value of perfect information.

A
OPERRES First Long Exam Reviewer. Show all solutions. Round off final
answers to the nearest two decimal places and encircle/box them.

1. Pizza King and Noble Greek are two competing restaurants. Each must determine
simultaneously whether to undertake small, medium, or large advertising campaigns. Pizza
King believes that there is a 40% chance that Noble Greek will undertake a small advertising
campaign; a 35% chance for the medium advertising campaign; and a 25% for the large
advertising campaign. Given the actions chosen by each restaurant, Pizza Kings profits are
shown in the table below.

a. What decision-making environment does Pizza King face?


b. What is the expected value of perfect information?
c. Develop an opportunity loss table for this problem and recommend the best alternative.

Noble Greek Chooses


Pizza King
Chooses Small Medium Large
Small $6,000 $5,000 $2,000
Medium $5,000 $6,000 $1,000
Large $9,000 $6,000 $0

2. Jinza Buro is going to help his brother who wants to open a food store. Jinza initially believes
that there is a 50-50 chance that his brothers food store would be a success. Jinza is
considering doing a market research study. Based on historical data, there is a 0.8 probability
that the marketing research will be favorable given a successful food store. Moreover, there
is a 0.7 probability that the marketing research will be unfavorable given an unsuccessful
food store.

a. Draw a decision tree for this problem. Label all relevant elements except for the
conditional values and EMVs.
b. If the marketing research is favorable, what is Jinzas revised probability of a successful
food store for his brother?
c. What is the probability of a favorable market research? What is the probability of an
unfavorable market research?
B
OPERRES First Long Exam Reviewer. Show all solutions. Round off final
answers to the nearest two decimal places and encircle/box them.

1. Farm Grown, Inc., produces cases of perishable food products. Each case contains an
assortment of vegetables and other farm products. Each case costs $5 and sells for $15. If
there are any cases not sold by the end of the day, they are sold to a large food processing
company for $3 a case. The probability that the daily demand will be 100 cases is 0.3, the
probability that daily demand will be 200 cases is 0.4, and the probability that daily demand
will be 300 cases is 0.3. Farm Grown has a policy of always satisfying customer demands. If
its own supply of cases is less than the demand, it buys the necessary vegetables from a
competitor. The estimated cost of doing this is $16 per case.

a. What decision-making environment if Farm Grown, Inc. facing?


b. Develop a decision table for this problem and recommend the best alternative.
c. Solve for the EVPI.

2. The payoff table below applies to a group of medical professionals that is considering the
construction of a private clinic.

Alternatives Favorable Market Unfavorable Market


Construct Clinic $100,000 -$40,000
Do not Construct Clinic $0 $0
Probability 0.65 0.35

a. What decision-making environment are the medical professionals facing?


b. Use a decision tree to determine the best alternative.
c. Determine the ranges of probabilities at which: constructing the clinic is the best
alternative and not constructing a clinic is the best alternative.
d. Develop an opportunity loss table for this table and recommend the best alternative.
C
OPERRES First Long Exam Reviewer. Show all solutions. Round off final
answers to the nearest two decimal places and encircle/box them.

1. Two states of nature exist for a particular situation: a good economy and a poor economy. An
economic study may be performed to obtain more information about which of these will
actually occur in the coming year. The study may forecast either a good economy or a poor
economy. Currently, there is a 60% chance that the economy will be good and a 40% chance
that the economy will be poor. In the past, whenever the economy was good, the economic
study predicted it would be good 80% of the time. (The other 20% of the time the prediction
was wrong). In the past, whenever the economy was poor, the economic study predicted it
would be poor 90% of the time. (The other 10% of the time the prediction was wrong). Use
Bayes theorem or the the table format in page 3 and find the P(good economy | prediction of
good economy) and P(good economy | prediction of poor economy).

2. Buzzy-B Toys must decide the course of action to follow in promoting a new whistling yo-
yo. Initially, management must decide whether to market the yo-yo or conduct a test
marketing program. After test marketing the yo-yo, management must decide whether to
abandon it or nationally distribute it.

A national success will increase profits by $500,000, and a failure will reduce profits by
$100,000. Abandoning the product will not affect profits. The test marketing will cost Buzzy-
B a further $10,000.

If no test marketing is conducted, the probability for a national success is judged to be 0.45.
The assumed probability for a favorable test marketing result is 0.50. The conditional
probability for national success given favorable test marketing is 0.80, for national success
given unfavorable test results, it is 0.10.

a. Use a decision tree to determine the best alternative for Buzzy-B Toys.
b. Compute for the EVPI.
c. Compute for the EVSI