Answers

1.
State of Nature
Decision S S S
d 10 8 6
d 14 15 2
d 7 8 9

a) The optimistic decision maker should go with decision d , since it provide the best payoff
b) The conservative decision maker should go with decision d , since it provide the lowest payoff
c) A three way tie
d) EV(d) = 7.6
EV(d) = 9.6 (the best)
EV(d) = 8.2
e) EVPI = 12.4 - 9.6 = 2.8

f)
ide the best payoff
rovide the lowest payoff
Answers

2.

States of Prior
Sample result Conditional Probabilities
Nature Probabilities
Positive good 0.7 P(positive | good) = 0.8
poor 0.3 P(positive | poor) = 0.1
Negative good 0.7 P(negative | good) = 0.2
poor 0.3 P(negative | poor) = 0.9
 Joint Posterior
Probabilities Probabilities
0.56 0.64
0.03 0.01
0.14 0.04
0.27 0.81
Answers

3.
Forecast 3-month Forecast Squared
Month Demand moving average error Forecast error
1 20
2 25
3 40
4 30 28.33 1.67 2.78
5 50 31.67 18.33 336.11
6 58 40.00 18.00 324.00
7 65 46.00 19.00 361.00
1023.89

Forecast demand for month 8 by three-month moving average:

(50+58+65) / 3 = 57,66

MSE:
1,023.89 / 7 = 146.27

Exponential smoothing (constant .4)

Total Forecast
Month Demand Constant .4 Variable .6 Exponential error
1 20 20
2 25 10 12.00 22.00 5
3 40 16 13.20 29.20 -18.00
4 30 12 17.52 29.52 -0.80
5 50 20 17.71 37.71 -20.48
6 58 23.20 22.63 45.83 -20.29
7 65 26 27.50 53.50 -19.17

Forecast demand for month 8 is just the average for month 7 = 53.50

MSE:
1,548.27 / 7 = 221.18

Overall then we see that moving average appears to give the best one month ahead forecasts
 Squared
Forecast error

25.00
324.00
0.64
419.43
411.60
367.60
1548.27

onth ahead forecasts as it has a lower MSE. Hence we prefer the forecast of 57.66 that has been produced by movin
has been produced by moving average
 Answers

4.

a) EV(d) = $3,250 and EV(d) = $10,750, so d is the best option to choose

b) Payoff Probability Utility

10000 0.85 8500
1000 0.60 600
-2000 0.63 -1260
-5000 0.50 -2500

c) EU(d) = 6.73 and EU (d) = 6.15, then d is the option to choose

 Answers

5.

a) C(x) = $6,000 + 25(30)x This is monthly basis cost equation

b) R(x) = 75(30)x This is monthly basis revenue equation
c) Break-even occupancy
$6,000 + 25(30)x = 75(30)x
x = 6000 / (75(30) - 25(30)
x = 4; then it is needed only 4 occupied rooms to achieved the break-even piont, which is 25%
ak-even piont, which is 25% occupation rate