IE 405

IE 405
Problem Set #4 Solutions

Question 2.

a-

Weather Day Days

Salary Weather Days Utility EU
Prob Prob. Available
60 0.3 30 79.00
Good
0.4 70 0.3 35 84.00
(Days/2)
80 0.4 40 89.00
Offer 1 $49,000 77.4
60 0.3 20 69.00
Bad
0.6 70 0.3 23.33 72.33
(Days/3)
80 0.4 26.67 75.67
50 0.6 25 81.00
Good
0.4 60 0.3 30 86.00
(Days/2)
70 0.1 35 91.00
Offer 2 $64,000 78
50 0.6 16.67 72.67
Bad
0.6 60 0.3 20 76.00
(Days/3)
70 0.1 23.33 79.33

“Choose Offer 2”

IE 405 Problem Set#4 Solutions

1
b,c EU (W/ Info) =78.4 , EVPI = 78.4 – 78 = 0.4 Utility points = 0.4 Surfing Days or $400

Question 7.

Hire “Contractor C”
IE 405 Problem Set#4 Solutions

2
Question 8.

A is preferred to B since in both reliability and cost it gets better scores, so no matter what the
weights are, A is always preferred to B.

For product C:

First, reliability score:

Rc = 5p + (1-p) 8 = 8 -3p => if 8 – 3p > 6 => p < 2/3 then C is preferred to A

Second, Cost Score:

Cc = 9p + (1-p)7 = 7 + 2p => if 7 + 2p > 8 => p > 1/2 then C is preferred to A

If we choose 1/2 < p < 2/3 then C is preferred to A under any condition.

Now if we consider p = 0.7 =>

Rc = 5 x 0.7 + 0.3 x 8 = 5.9 , Cc = 9 x 0.7 + 0.3 x 7 = 8.4

Ur,c(x,y) = Kr.Ur(x) + Kc.Uc(y) + [ 1-Kr-Kc ].Ur(x).Uc(y)

Ur,c (5,10) = 2/3 Ur,c (0,3) + 1/3 Ur,c (4,0) => 0.5Kr + Kc + [1-Kr-Kc]0.5 = 2/3 Kc 0.3 + 1/3 Kr 0.4

0.1333 Kr – 0.3 Kc = 0.5 (1)

Ur,c (4,8) = 0.5 Ur,c (10,0) + 0.5 Ur,c (0,10) => 0.4 Kr + 0.8 Kc + [1 – Kr – Kc] 0.4 x 0.8 = 0.5 Kr + 0.5 Kc

0.42 Kr + 0.02 Kc = 0.32 (2)

(1) , (2) => Kr = 0.7 , Kc = 1.3 Kr + Kc = 2 > 1 , so these 2 attributes are complements

Decision Maker’s Utility Function: Ur,c(x,y) = 0.7 Ur(x) + 1.3 Uc(y) – Ur(x)Uc(y)

By this function we will have:

Alternative Reliability Cost Total Utility

A 6 8 0.98

B 4 6 0.82

C 5.9 8.4 1

So she will choose to buy C.

IE 405 Problem Set#4 Solutions