Business 4401 Solutions Manual: C A.R. Redlack D.M. Tulett December 14, 2004

BUSINESS 4401
SOLUTIONS MANUAL
c 1987-2005 A.R. Redlack D.M. Tulett
December 14, 2004
ii
Contents
1 Introduction 1
2 Uncertainty 9
3 Decision Trees 39
4 Imperfect Information 67
5 Linear Optimization 203
6 Markov Chains 249
7 Utility Theory 289
8 Game Theory 317
9 Appendix E: Applications 339
iii
iv CONTENTS
Chapter 1
Introduction
1.
Problem - The car needs to be regularly replaced.
Objective - Minimize the average annual cost associated with owning the car.
Controllable Factor - replacement plan i.e. replacement period.
Uncontrollable Factor - 11 year life of vehicle
This problem has the same structure as the example given in the text. The
main difference is that a greater number of years has to be considered.
Model
There is only one decision (the replacement decision) with alternatives A
i
-
replace the vehicle every i years, where i ranges from 1 to 11.
Our objective is to minimize
Purchase Price +Maintenance Cost Resale Value
Purchase Maintenance Resale Net Average
Alternative Price Cost Value Cost Annual Cost
A
1
20,000 100 14, 000 6,100 6,100
A
2
20,000 100+200 10, 000 10,300 5,150
A
3
20,000 300+400 7, 000 13,700 4,567
A
4
20,000 700+600 5, 000 16,300 4,075
A
5
20,000 1, 300+1, 000 3, 500 18,800 3,760
A
6
20,000 2, 300+1, 500 2, 500 21,300 3,550
A
7
20,000 3, 800+2, 000 2, 000 23,800 3,400
A
8
20,000 5, 800+2, 500 1, 500 26,800 3,350
A
9
20,000 8, 300+3, 000 1, 000 30,300 3,367
A
10
20,000 11, 300+3, 000 500 33,800 3,380
A
11
20,000 14, 300+3, 000 0 37,300 3,391
1
2 CHAPTER 1. INTRODUCTION
Recommendation: Replace the vehicle on an eight year cycle for an average
annual cost of $3,350.
2.
If the rst woman is telling the truth, then the fourth woman would also have to be
telling the truth. But only one tells the truth. Therefore, the rst woman is lying,
from which it follows that the fourth woman is also lying. Given this, the fourth
woman cannot be the Queen, so the second woman is lying. The only one left is
the the third woman, who is the Queen.
3.
The following sets of four numbers (in non-decreasing order) have a product of 36:
(1,1,1,36), (1,1,2,18), (1,1,3,12), (1,1,4,9), (1,1,6,6), (1,2,2,9), (1,2,3,6), (1,3,3,4),
and (2,2,3,3). The sums of these numbers are 39, 22, 17, 15, 14, 14, 12, 11, and
10 respectively. The only sums which are not unique are the two 14s. (If all the
numbers had been unique, then the third clue would not have been needed; this
implies that there are 14 councillors). This narrows the search to (1,1,6,6) and
(1,2,2,9). Since 61 = 5 is an odd number, but 91 = 8 is not, we are left with
only (1,1,6,6). Therefore, they have six-year old twins, and one-year old twins.
4.
Cells A1, B1, and C1 have been formatted so that the decimal point and any
subsequent digits do not appear. If, for example, 3.3 is entered into both cells A1
and B1, it appears in each cell as a 3, while 3.33.3 = 10.89 is rounded to 11 in
cell C1. (No matter how a number is formatted, the memory stores that number
as accurately as it can.)
5.
The probability that someone has the rare blood type given that he is the murderer
is 0.99, but what we want is the probability that someone is the murderer given
that he has the rare blood type. Of the 1,000,000 people on the island, about 100
3
have the rare blood, and of these about 5 would be left-handed males. So even if
the murderer denitely has the rare blood type, there is only about a 20% chance
that a particular left-handed male with this blood type is the murderer. The arrest
record for theft might up this chance slightly, but not to anywhere near 95%.
Advanced Problems
1.
Problem - The thermocouples need to be regularly replaced.
Objective - Minimize the cost associated with replacing the thermocouples.
Controllable Factor - replacement plan i.e. replacement period of all thermo-
couples (or no replacement of all thermocouples)
Uncontrollable Factor - none. The maximumve month life of a thermocouple
does not restrict the decision maker.
Model
Only one decision (the replacement decision) with alternatives A
i
- replace all
the thermocouples every i months, where i ranges from 1 to 5. We denote alter-
native A
0
as meaning that there is no periodic replacement of all thermocouples
(only the failed ones are replaced).
We wish to nd the policy which will minimize
Final Month All-Replacement Cost +
Prior Month(s) Individual Cost
The complicating factor for this problem is keeping track of the failures of the
thermocouples which have been replaced on an individual basis. In the following
table Set j refers to the set of failed thermocouples individually replaced in month
j.
Number Failing for Each Set of Replacements
Month Original Set 1 Set 2 Set 3 Set 4 Set 5 Sum
1 .11000 100
2 .21000 .1100 210
3 .21000 .2100 .1210 241
4 .31000 .2100 .2210 .1241 386
5 .21000 .3100 .2210 .2241 .1386 359
6 - .2100 .3210 .2241 .2386 .1359 244
The above table has been stopped at 6 months, which is more than sufcient
for analysing alternatives A
1
to A
5
. To analyse A
0
, however, we need to continue
this table in order to nd the steady-state number of replacements required. This
is easily performed by using a spreadsheet to do the calculations.
5
We can input the sum data given above in the rst ve rows, then input a
formula to nd the sum value for row six as a function of the preceding data.
This formula is then copied into a sufcient number of subsequent cells in that
column.
A
1 100
2 210
3 241
4 386
5 359
6 =.2*A1+.3*A2+.2*A3+.2*A4+.1*A5
7 copy A6
8 copy A6
9 copy A6
Since we do not know ahead of time where the steady-state will be obtained,
we can copy the formula in cell A6 for say 100 rows (range A7:A106). In turns
out that after about 20 months the number of thermocouples replaced each month
remains constant at about 303. Thus, in the long run, the cost of alternative A
0
would be $25303 = $7, 575 per month.
Now we consider the other alternatives. The combined costs associated with
mass replacement and individual replacements are as follows:
Altern. Mass Individual Sum Monthly
A
1
141000 25(0) 14,000 14,000
A
2
141000 25(100) 16,500 8,250
A
3
141000 25(100+210) 21,750 7,250
A
4
141000 25(100+210+241) 27,775 6,944
A
5
141000 25(100+210+241+386) 37,425 7,485
Recommendation: Replace all the thermocouples every 4 months (and the
failed ones in between) for a average monthly cost of $6,944.
2.
At the outset, there is one chance in three of guessing correctly. If the contestant
has guessed correctly, then switching results in an incorrect door being chosen,
no matter which of the other two doors the host shows. But if the initial guess
is incorrect (two chances in three), then switching will result in the correct door
being chosen. This is because the host has not chosen randomly, but instead has
shown the one door of the two unchosen ones which does not lead to the car, hence
the other door (the one neither chosen initially nor shown by the host) must lead
to the car. Hence switching has a one in three chance of turning up nothing, or two
chances in three of winning the car. Hence, the contestant should switch, thereby
increasing his or her chances of winning from one in three to two in three.
7
Advice on Using this Solutions Manual
In doing the problems of Chapter 1, did you do the problems and then check your
answers, or did you peek rst? It is best to try the problems rst; only if you are
absolutely stuck should you look in this book before coming up with an answer.
Chapter 2
Uncertainty
1.
Outcome Criterion
O
1
O
2
O
3
O
4
Opt. Pess. Hurwicz
A
1
8 6 3 12 12 3 .712+.33 = 9.3
A
2
14 3 10 7 14 3 .714+.33 = 8.9
A
3
9 3 5 13 13 3 .713+.33 = 10.0
A
4
4 5 7 6 7 4 .77+.34 = 6.1
Choice a. A
2
b. A
4
c. A
3
d. Laplace Criterion
A
1
(8 + 6 + 3 + 12)/4 = 7.25
A
2
(143+10+7)/4 = 7.00
A
3
(9 + 3 + 5 + 13)/4 = 7.50
A
4
(9 + 5 + 7 + 6)/4 = 5.50
Choose A
3
for a ranking payoff of 7.5.
e. Expected Value
A
1
.38+.46+.23+.112 = 6.6
A
2
.314+.4(3) +.210+.17 = 5.7
A
3
.39+.43+.25+.113 = 6.2
A
4
.34+.45+.27+.16 = 5.2
Choose A
1
9
10 CHAPTER 2. UNCERTAINTY
f. Perfect Information
Outcome O
1
O
2
O
3
O
4
Best Alternative A
2
A
1
A
2
A
3
Best Payoff 14 6 10 13
EV with PI = .314+.46+.210+.113
= 9.9
EV of PI = 9.96.6
= 3.3
g. The regret matrix
O
1
O
2
O
3
O
4
(h) E. O. L.
A
1
6 0 7 1 3.3
A
2
0 9 0 6 4.2
A
3
5 3 5 0 3.7
A
4
10 1 3 7 4.7
Prob. .3 .4 .2 .1
Optimal choice is to choose A
1
(same as part (e)) for an EOL of 3.3 (which is
the EV of PI found in (f)).
2.
Outcome Criterion
O
1
O
2
O
3
a. Opt. b. Pess. c. Hurwicz
A
1
32 31 34 34 31 .834+.231 = 33.4
A
2
45 8 51 51 8 .851+.2(8) = 39.2
A
3
50 30 40 50 30 .850+.230 = 46.0
A
4
12 35 68 68 12 .868+.212 = 56.8
A
5
3 12 70 70 3 .870+.23 = 56.6
Choice A
5
A
1
A
4
d. Laplace Criterion
11
A
1
(32 + 31 + 34)/3 = 97/3
A
2
(458+51)/3 = 88/3
A
3
(50 + 30 + 40)/3 = 120/3
A
4
(12 + 35 + 68)/3 = 115/3
A
5
(3 + 12 + 70)/3 = 85/3
Choose A
3
for a ranking payoff of 120/3 = 40.
e. Expected Value
A
1
.4532+.0231+.5334 = 33.04
A
2
.4545+.02(8) +.5351 = 47.12
A
3
.4550+.0230+.5340 = 44.30
A
4
.4512+.0235+.5368 = 42.14
A
5
.453+.0212+.5370 = 38.69
Choose A
2
f. Perfect Information
Outcome O
1
O
2
O
3
Best Alternative A
3
A
4
A
5
Best Payoff 50 35 70
EV with PI = .4550+.0235+.5370
= 60.3
EV of PI = 60.347.12
= 13.18
g. The regret matrix
O
1
O
2
O
3
(h) E. O. L.
A
1
18 4 36 27.26
A
2
5 43 19 13.18
A
3
0 5 30 16.00
A
4
38 0 2 18.16
A
5
47 23 0 21.61
Prob. .45 .02 .53
Optimal choice is to choose A
2
(same as part (e)) for an EOL of 13.18 (which
is the EV of PI found in (f)).
3.
The decision, D
b
, is a replacement board decision with alternatives, A
i
buy the
computer with i replacement boards.
The event, E
f
, board failure, has outcomes, O
j
j boards fail with probabili-
ties (0.55, 0.25, 0.15, 0.05) for j = 0, 1, 2, 3 respectively.
The objective is to minimize the expected cost associated with replacement
boards.
payoff =
_
_
_
200i if j i
200i +500( j i) if j i
= 500 j 300i
_
_
_
a. Cost matrix
O
0
O
1
O
2
O
3
A
0
0 500 1000 1500
A
1
200 200 700 1200
A
2
400 400 400 900
A
3
600 600 600 600
Prob. 0.55 0.25 0.15 0.05
b. Expected costs
A
0
: .550+.25500+.151000+.051500 = $350
A
1
: (.55+.25) 200+.15700+.051200 = $325
A
2
: (.55+.25+.15) 400+.05900 = $425
A
3
: (.55+.25+.15+.05) 600 = $600
Optimal solution is A
1
for a ranking payoff (minimum cost) of $325.
c. Perfect Information
Outcome O
0
O
1
O
2
O
3
Best Alternative A
0
A
1
A
2
A
3
13
EV with PI = .550+.25200+.15400+.05600
= 140
EV of PI = Expected Cost Expected Cost with PI
= 325140
= 185
d. Opportunity loss matrix (Regret matrix)
O
0
O
1
O
2
O
3
(e.) E.O.L.
A
0
0 300 600 900 210
A
1
200 0 300 600 185
A
2
400 200 0 300 285
A
3
600 400 200 0 460
Prob. 0.55 0.25 0.15 0.05
The optimal alternative using E.O.L. is A
1
(same as b.) with an expected
opportunity loss of 185 (same as c.).
Thus
min E.O.L. = 185
= EVPI
4.
Problem: Uncertainty in the weather
Objective: Minimize travel time
One decision - mode of travel with alternatives
A
1
take the bus and
A
2
take the plane.
One event - the weather event with outcomes
O
1
the weather is clear and
O
2
the weather is foggy.
The probability is based on the historical frequency.
p(O
1
) =
8 times
10 times
= 0.8
p(O
2
) = 10.8
= 0.2
a. Payoff matrix
O
1
O
2
Expected Time
A
1
4 4 4
A
2
.75 20.75 4.75
Prob. 0.8 0.2
Solution: Take the bus for a ranking time of 4 hours for the trip.
b. Indifference probabilities
Let
p(O
2
) = probability of foggy weather
1p(O
2
) = probability of clear weather
The indifference equation is
Payoff(A
1
) = Payoff(A
2
)
4[1p(O
2
)] +4p(O
2
) = 0.75[1p(O
2
)] +20.75p(O
2
)
4 = 0.75+20p(O
2
)
which simplies to
20p(O
2
) = 3.25
p(O
2
) = 0.1625
Thus if p(O
2
) > 0.1625, take the bus; or if p(O
2
) < 0.1625, take the plane.
c. There are more weather possibilities, which increases the number of possible
outcomes. The new set of outcomes is:
15
O
1
clear weather
O
2
6 hours of fog
O
3
20 hours of fog
O
4
30 hours of fog
The probabilities are:
p(O
1
) = 0.8
p(O
2
) = p(O
2
/foggy) p(foggy)
= 0.20.2
= .04
p(O
3
) = p(O
3
/foggy) p(foggy)
= 0.70.2
= .14
p(O
4
) = p(O
4
/foggy) p(foggy)
= 0.10.2
= .02
O
1
O
2
O
3
O
4
Exp. Time
A
1
4 4 4 4 4
A
2
.75 6.75 20.75 30.75 4.39
Prob. 0.8 0.04 0.14 0.02
The recommendation remains unchanged; take the bus for a ranking payoff of
4.
5.
This is an ordering decision with four alternatives:
A
1
: order q = 40 kgs
A
2
: order q = 50 kgs
A
3
: order q = 60 kgs
A
4
: order q = 70 kgs
The demand event has four outcomes with the probabilities determined from
the historical frequencies.
O
1
: d = 40 kgs demanded; prob. =
40
120
=
1
3
O
2
30
120
=
1
4
O
3
30
120
=
1
4
O
4
20
120
=
1
6
If the demand quantity ordered, then amount sold = q
Prot = (1.000.60) q
= 0.4q
If the demand quantity ordered, then amount sold = d
Prot = 1.00d 0.60q
a. Conditional prot table
O
1
O
2
O
3
O
4
Exp. Prot
A
1
16 16 16 16 16.00
A
2
10 20 20 20 16.67
A
3
4 14 24 24 14.83
A
4
2 8 18 28 10.50
Prob.
1
3
1
4
1
4
1
6
Recommend Fres Froot order 50 kgs per day for an average payoff of $16.67.
b. Perfect Information
Outcome O
1
O
2
O
3
O
4
Best Alternative A
1
A
2
A
3
A
4
EV with PI =
1
3
16+
1
4
20+
1
4
24+
1
6
28
= 21
EV of PI = EV with PI EV without PI
= 2116.667
= 4.333 (per day)
17
c. Conditional prot table with salvage value of $.10.
If d < q, then the payoff will increase by $.10 per unit short.
O
1
O
2
O
3
O
4
Exp. Prot
A
1
16 16 16 16 16.00
A
2
11 20 20 20 17.00
A
3
6 15 24 24 15.75
A
4
1 10 19 28 12.25
Prob.
1
3
1
4
1
4
1
6
Recommendation for Fres Froot remains the same. Order 50 kgs per day for
an average payoff of $17.00.
d. Conditional payoff table with salvage value s.
When d < q, the payoffs will increase by s dollars per unit short.
O
1
O
2
O
3
O
4
Exp. Prot
A
1
16 16 16 16 16.00
A
2
10+10s 20 20 20 16.67+3.333s
A
3
4+20s 14+10s 24 24 14.83+9.17s
A
4
2+30s 8+20s 18+10s 28 10.50+17.50s
Prob.
1
3
1
4
1
4
1
6
A
1
will never be chosen. As s increases, a point will be reached where the
decision maker is indifferent between A
2
and A
3
.
16
2
3
+3
1
3
s = 14
5
6
+9
1
6
s
1
5
6
= 5
5
6
s
Therefore, s =
11
35
0.3143
(At this value of s, A
2
and A
3
are better than A
4
.) As s continues to increase,
there will be a point where the decision maker is indifferent between A
3
and A
4
.
14
5
6
+9
1
6
s = 10
1
2
+17
1
2
s
4
1
3
= 8
1
3
s
Therefore, s =
13
25
= 0.52
e. Marginal analysis with salvage value $0.10.
Demand Prob. Cumulative
Prob.
40
1
3
1
3
= 0.3333
50
1
4
7
12
= 0.5833
60
1
4
10
12
= 0.8333
70
1
6
1
The critical ratio is
r w
r s
=
1.6
1.1
=
.4
.9
= 0.4444
0.3333 < 0.4444 < 0.5833
Choose the order quantity associated with 0.5833. i.e. order 50 kgs.
6.
There is one decision the number of units to prepare, i, with alternatives
A
1
: prepare i = 5000 boxes
A
2
A
3
A
4
There is one event - the demand event with outcomes
O
1
: demand d = 5000 boxes
O
2
O
3
O
4
For this problem, we have a negative salvage value. Any units left over have a
disposal cost of 0.15/50 = $0.003 per box. i.e. s =0.003. Thus
19
Prot = .6i if i d
= 1d .4i 0.003(i d)
= 1.003d .403i if i > d
The payoff matrix is
O
1
O
2
O
3
O
4
Exp. Prot
A
1
3000 3000 3000 3000 3000.0
A
2
1791 4800 4800 4800 4499.1
A
2a
682 3591 6600 6600 5394.6
A
3
179 3188 7200 7200 5695.5
A
3a
224 2785 6797 7800 5693.7
A
4
1030 1979 5991 9000 5690.1
Prob. 0.1 0.2 0.3 0.4
Alternatives A
2a
and A
3a
, (11,000 and 13,000) units respectively have been
added to illustrate that the order should match the demand. They are not needed
to solve the problem.
The recommended alternative is to order 12,000 bags for an average payoff of
$5,695.50 per game.
7.
a. The total number of days is 300. Hence the expected demand is
120
300
10+
90
300
11+
75
300
12+
15
300
13 = 10.95
b. There is one decision the number of units to order, i, with alternatives
A
1
: order i = 10 units
A
2
A
3
A
4
There is one event - the demand event with outcomes
O
1
: demand d = 10 units
O
2
O
3
O
4
For this problem, we have a regular salvage value of $1. Thus
Prot = (6.55.0)i
= 1.5i if i d
Prot = 6.5d 5.0i +1.0(i d)
= 5.5d 4.0i if i > d
The payoff matrix is
O
1
O
2
O
3
O
4
Exp. Prot
A
1
15 15 15 15 15.0
A
2
11 16.5 16.5 16.5 14.3
A
3
7 12.5 18 18 11.95
A
4
3 8.5 14 19.5 8.23
Prob. 0.4 0.3 0.25 0.05
The recommended alternative is to order 10 units for an actual payoff of $15
per order.
c. Marginal analysis with salvage value $1.00.
Demand Prob. Cumulative
Probability
9 0.00 0.00
10 0.40 0.40
11 0.30 0.70
12 0.25 0.95
13 0.05 1.00
The critical ratio is
r w
r s
=
6.55.0
6.51.0
=
1.5
5.5
= 0.2727
0.0000 < 0.2727 < 0.4000
Choose the order quantity associated with 0.4. i.e. order 10 units.
21
8.
Payoff matrix with salvage value. This is an ordering decision with alternatives
A
i
= 100i where i = 0, 1, 2, 3, 4. The demand event has outcomes
O
50
demand = 50; probability = .05
O
100
O
150
O
200
O
250
O
300
O
350
a. The payoff matrix is
O
50
O
100
O
150
O
200
O
250
O
300
O
350
EV
A
0
0 0 0 0 0 0 0 0
A
1
450 300 300 300 300 300 300 262.5
A
2
1250 500 250 1000 1000 1000 1000 587.5
A
3
1650 900 150 600 1350 2100 2100 562.5
A
4
2450 1700 950 200 550 1300 2050 200
Prob. 0.05 0.10 0.20 0.30 0.20 0.10 0.05
We recommend that the owner order 200 units for a ranking prot of 587.5.
Note that A
3
is better than A
4
for all payoffs and hence we can say A
3
dominates
A
4
. Thus, A
4
would never be selected.
b. Perfect information
Outcome O
50
O
100
O
150
O
200
O
250
O
300
O
350
Best Alternative A
0
A
1
A
1
A
2
A
2
A
3
A
3
Best Payoff 0 300 300 1000 1350 2100 2100
EV with PI = .050+(.10+.20) 300+.301000+
.201350+(.10+.05) 2100
= 975
EV of PI = 975587.5
= 387.5
c. The payoff matrix with salvage value s = 5+s is:
O
50
O
100
O
150
O
200
A
1
450+50s 300 300 300
A
2
1250+150s 500+100s 250+50s 1000
A
3
1650+250s 900+200s 150+150s 600+100s
A
4
2450+350s 1700+300s 950+250s 200+200s
Prob. 0.05 0.10 0.20 0.30
O
250
O
300
O
350
Expected Value
A
1
300 300 300 262.5+2.5s
A
2
1000 1000 1000 587.5+27.5s
A
3
1350+50s 2100 2100 562.5+102.5s
A
4
550+150s 1300+100s 2050+50s 200+200s
Prob. 0.2 0.10 0.05
For any positive value of s, (i.e. s 5), A
2
will always be better than A
1
and hence there is no need to consider A
1
. The indifference point between A
2
and
A
3
occurs when
587.5+27.5s = 562.5+102.5s
75s = 25
s =
1
3
The indifference point between A
3
and A
4
occurs when
562.5+102.5s = 200+200s
97.5s = 762.5
s = 7.821
Thus, since s is currently 5, we would recommend
Alternative Range for s
A
2
0.00 to 5.333
A
3
5.333 to 12.821
A
4
12.821 to 13.0 (the current wholesale price)
23
9.
In this problem the payoff matrix has a stockout cost. The cost of the extra books
is a sunk cost and needs to be considered only at the end. This is an ordering
decision with alternatives A
i
where i = 150, 175, 200, 225, 250. The event is a
demand event which has outcomes
O
150
demand j = 150; probability = .20
O
175
O
200
O
225
O
250
a. We dene the symbol c
s
to represent the special cost per unit. The model is:
payoff =
_
r j wi c
s
( j i) if i j
r j wi if i j
_
or
payoff =
_
5i 1 j if i j
25 j 21i if i j
_
b. The payoff matrix is
O
150
O
175
O
200
O
225
O
250
Exp. Value
A
150
600 575 550 525 500 560
A
175
75 700 675 650 625 555
A
200
450 175 800 775 750 355
A
225
975 350 275 900 875 40
A
250
1500 875 250 375 1000 500
Prob. 0.2 0.3 0.3 0.1 0.1
Recommend ordering 150 +10 = 160 manuals for a ranking prot of 560
210 = 350.
Outcome O
150
O
175
O
200
O
225
O
250
Best Alternative A
150
A
175
A
200
A
225
A
250
Best Payoff 600 700 800 900 1000
EV with PI = .2600+.3(700+800) +.1(900+1000)
= 760
EV of PI = 760560 = 200
d. Variance
Var = .2(600560)
2
+.3(575560)
2
+.3(550560)
2
+
.1(525560)
2
+.1(500560)
2
= 900
=

900
= 30
10.
Payoff matrix with salvage value. This is an ordering decision with alternatives A
i
where i = 40, 80, 120, 160. The event is a demand event which has outcomes
O
50
O
75
O
100
O
125
a. Model
payoff =
_
_
_
r j wi +50c
s
if j i 50
r j wi +s(i j) if j i j +50
(r w)i if j i
_
_
_
Substituting the particular values for the parameters we obtain:
payoff =
_
_
_
125 j 75i +2500 if j i 50
75j 25i if j i j +50
50i if j i
_
_
_
b. The payoff matrix is
25
O
50
O
75
O
100
O
125
Exp. Value
A
40
2000 2000 2000 2000 2000
A
80
1750 3625 4000 4000 3587.50
A
120
250 2625 4500 6000 3237.50
A
160
3250 125 3000 5375 1050
Prob. 0.10 0.50 0.30 0.10
Recommend ordering 80 pairs of skis for a ranking prot of 3587.50.
Outcome O
50
O
75
O
100
O
125
Best Alternative A
40
A
80
A
120
A
120
Best Payoff 2000 3625 4500 6000
EV with PI = .12000+.53625+.34500+.16000
= 3962.50
EV of PI = 3962.503587.50
= 375.00
d. Variance
Var = .1(17503587.50)
2
+.5(36253587.50)
2
+
(.3+.1)(40003587.50)
2
= 406, 406.25
=
_
406, 406.25
= 637.50
e. Let the new probabilities be p
75
=0.5+p and p
100
=0.3p, where 0.5
p 0.3. The new payoffs are
Alternative Payoff
A
40
2000
A
80
3587.50375p
A
120
3237.501875p
A
160
10503125p
It is trivially obvious that A
40
would never be preferred to A
80
, and A
160
would
never be preferred to A
120
. Thus we need to compare only A
80
and A
120
.
3587.50375p = 3237.501875p
1500p = 350
p = 0.2333
Thus we would recommend
Recommend Range for p
A
40
never
A
80
0.2333 to 0.3000
A
120
0.5000 to 0.2333
A
160
never
11.
This is a transportation mode decision with alternatives
A
1
ride your bicycle
A
2
drive your car
A
3
take the bus
The event is a trafc event which has outcomes
O
1
trafc is light; probability = .30
O
2
trafc is medium; probability = .50
O
3
trafc is heavy; probability = 1.30.50 = .20
There are no appropriate decision or outcome variables so we have to investi-
gate each combination individually. Although there appear to be two objectives,
(time and cost), only cost needs to be considered since we are given the tradeoff
between time and cost (1 minute = $0.30).
The costs associated with A
1
are independent of the event. For each event
i = 1, 2, 3:
Payoff(O
i
) = 20 minutes late
= 200.30
= $6
27
2
are a base cost due to gasoline and parking of
20.50+3 = 4 plus an additional
Extra cost = 15 minutes late
= 150.30
= $4.5
if the trafc is medium or heavy (outcomes O
2
and O
3
).
3
are a base cost due to the bus fare of $1 plus an
additional
Extra cost for O
i
= 10i minutes late
= 10i 0.30
= $3.00i
where i = 1, 2, 3.
a. Summarizing the results in a payoff table we have
O
1
O
2
O
3
EV
A
1
6.00 6.00 6.00 6.00
A
2
4.00 8.50 8.50 7.15
A
3
4.00 7.00 10.00 6.70
Prob. 0.30 0.50 0.20
Thus the recommended alternative is to ride your bicycle for an expected cost
of $6.00.
b. This is a problem in which there is incomplete information; there is no unique
correct answer. Various approaches need to be investigated to determine one with
which a decision maker is comfortable.
Outcome Criterion
O
1
O
2
O
3
Pessimism Optimism Laplace
A
1
6.00 6.00 6.00 6.00 6.00 6.00
A
2
4.00 8.50 8.50 8.50 4.00 7.00
A
3
4.00 7.00 10.00 10.00 4.00 7.00
Alternative(s) A
1
A
2
, A
3
A
1
If one has a probability of optimism, then one can also add the Hurwicz crite-
rion to the list. The visual aids approach has to be dealt with separately as follows:
O
1
O
2
O
3
Exp. Value
A
1
6.00 6.00 6.00 6.00
A
2
4.00 8.50 8.50 8.504.5p
1
A
3
4.00 7.00 10.00 106p
1
3p
2
Prob. p
1
p
2
1p
1
p
2
We have to perform three comparisons A
1
with A
2
, A
1
with A
3
and A
2
with
A
3
.
A
1
is preferred to A
2
if
6 < 8.504.5p
1
4.5p
1
< 2.5
p
1
<
5
9
A
1
is preferred to A
3
if
6 < 10.006p
1
3p
2
3p
2
< 46p
1
p
2
<
4
3
2p
1
A
2
is preferred to A
3
if
8.54.5p
1
< 10.006p
1
3p
2
3p
2
< 1.51.5p
1
p
2
< 0.50.5p
1
The lines of indifference are shown in Figure 2.1. Examining the dominate
alternatives we obtain the regions where each alternative dominates as shown in
Figure 2.2. We see that A
1
dominates A
2
and A
3
over a very large region.
Thus given the above results, A
1
(ride your bicycle) appears to be the alterna-
tive which should be chosen since it is preferred with most criteria.
29
`
`
`
`
`
`
`
`
`
`
p
1
p
2
0 .1 .2 .3 .4 .5 .6 .7 .8 .9 1.0
0
.1
.2
.3
.4
.5
.6
.7
.8
.9
1.0
A
2
A
3
A
1
A
2
A
1
A
3
Figure 2.1: Lines of Indifference
`
`
`
`
`
`
`
p
1
p
2
0 .1 .2 .3 .4 .5 .6 .7 .8 .9 1.0
0
.1
.2
.3
.4
.5
.6
.7
.8
.9
1.0
A
1
A
3
A
2
Figure 2.2: Regions of Dominance
12.
This is a quantity discount problem where it is not practical to set up the model.
Instead, we just set up the payoff matrix.
This is an ordering decision with alternatives A
i
where i is the number of pi-
anos ordered. The event is a demand event with outcomes O
j
where j is the
number of pianos demanded. Both i and j range from 2 to 5.
O
2
O
3
O
4
O
5
Exp. Value
A
2
5200 5200 5200 5200 5200
A
3
4400 8400 8400 8400 7800
A
4
3600 7600 11600 11600 9600
A
5
2800 6800 10800 14800 9800
Prob. 0.15 0.20 0.40 0.25
Thus the recommendation would be to order ve pianos for a ranking prot of
$9,800.
Outcome O
2
O
3
O
4
O
5
Best Alternative A
2
A
3
A
4
A
5
Best Payoff 5200 8400 11600 14800
EV with PI = .155200+.208400+
.411600+.2514800
= 10800
EV of PI = 108009800
= 1000
c. Sensitivity Analysis
Setting p(O
4
) = 0.4+p and p(O
5
) = 0.25p, the new set of payoffs are
A
2
5200
A
3
7800
A
4
9600
A
5
98004000p
31
We only need to consider A
4
and A
5
. We are indifferent between them when
9600 = 98004000p
4000p = 200
p = .05
Thus we are indifferent between the two alternatives when p(O
4
) = 0.45 and
p(O
5
) = 0.20.
13.
We must order by the dozen. Since the demand is at least 30, we will order at least
24 (2 dozen). The total number which can be sold is 60 (@ $15) + 10 (@ $12)
= 70. Hence, we need not consider ordering more than 72 (6 dozen). Thus the
alternatives are A
i
where i = 2, 3, 4, 5, 6 is the number of dozen ordered.
The demand event has outcomes O
j
where j = 30, 40, 50, 60.
payoff =
_
60i if j 12i
15 j +12min{12i j, 10}120i if j 12i
_
Alt. Demand Exp. Value
30 40 50 60
A
2
120 120 120 120 120.0
A
3
162 180 180 180 178.2
A
4
90 216 240 240 213.0
A
5
30 120 270 300 168.0
A
6
150 0 150 300 60.0
Prob. 0.1 0.5 0.3 0.1
Thus the recommendation would be to order four dozen for a ranking prot of
$213. Note that for any set of probabilities, A
5
is better than A
6
since the payoffs
for any outcome are either better or equal. This is an example of dominance which
will be discussed later.
Outcome O
30
O
40
O
50
O
60
Best Alternative A
3
A
4
A
5
A
5
or A
6
Best Payoff 162 216 270 300
EV with PI = .10162+.50216+
.3270+.20300
= 235.20
EV of PI = 235.20213.00
= 22.20
c. Sensitivity Analysis
Set p(O
40
) = 0.5+p and p(O
50
) = 0.30p; the new set of payoffs is
A
2
120.0
A
3
178.2
A
4
213 24p
A
5
168 150p
We only have to consider A
4
and A
5
(even if p = 1, A
4
is greater than A
3
).
We are indifferent between them when
21324p = 168150p
126p = 45
p =
45
126
0.357
Thus we are indifferent between the two alternatives when p(O
40
) = 0.143
and p(O
5
) = 0.657.
14.
a. The only conceptual difference between the problem of Mrs. Reids News
Depot, and that of Mr. Apples Strawberries in the text, is that the former contains
a price break. One way to handle this would be to use an IF expression which
references a cell containing 0.60 when the order quantity is less than or equal to
44, and references a cell containing 0.54 otherwise. An easier way is to simply
create a price column next to the order quantity column. Using the latter approach,
the rst few columns would be
33
A B C D
1 Mrs. Reids News Depot
2 Retail Price 0.80
3 Salvage Value 0.05 Demanded
4 Wholesale Ordered 31
5 0.60 =$A$5 31 =$B$2*MIN($C5,D$4)-$B5*$C5+$B$3*MAX(0,$C5-D$4)
6 copy B5 32 copy D5
19 0.54 =$A$19 45 copy D5
24 Prob. 0.01
In column C, as an alternative to typing each number from 31 to 49 inclusive,
we could enter =C5 into cell C6, and then copy C6 into the range C7:C23. A
similar operation could be done in row 4.
The quantity demanded ranges from 31 in column D to 49 in column V. Hence
the formula in cell D5 is copied into the range D5:V23. The probabilities in row
24 from D24 to V24 are respectively: 0.01, 0.02, 0.03, 0.04, 0.05, 0.06, 0.07, 0.08,
0.09, 0.1, 0.09, 0.08, 0.07, 0.06, 0.05, 0.04, 0.03, 0.02, and 0.01.
Using the SUMPRODUCT function, we calculate the expected prot in column
W. In cell W5 we write
=SUMPRODUCT(D5:V5,D$24:V$24)
We then copy cell W5 into the range W6:W23.
b.
31 33 35 37 39 41 43 45 47 49
5.00
6.00
7.00
8.00
Expected
Prot
Number of Newspapers Ordered
Mrs. Reids News Depot
The recommended solution is to order 45 newspapers each day for an expected

daily prot of $7.80. Note that it would not be correct to connect the dots, since
we are dealing with a discrete number of newspapers.
c. We use the spreadsheets solver to nd the value in cell B2 which makes the
expression =MAX(W5:W18)-W19 as close to 0 as possible. Doing this we obtain
in cell B2 the critical value 0.620175. If the price is based on an integer num-
ber of cents, then she will order 45 newspapers at 63 cents (but would order 33
newspapers at a retail price of 62 cents).
15.
We solve parts (a), (b), and (c) next to the table:
O
1
O
2
O
3
O
4
(a) (b) (c)
A
1
7 4 5 8 8 4 5.6+1.2 = 6.8
A
2
13 9 3 5 13 3 9.1+0.9 = 10.0
A
3
11 8 6 3 11 3 7.7+0.9 = 8.6
A
4
7 15 4 11 15 4 10.51.2 = 9.3
for (g) and (h) Prob. 0.1 0.3 0.4 0.2
35
a. 15, A
4
b. 4, A
1
c. 10.0, A
2
A
1
24/4 = 6
A
2
30/4 = 7.5
A
3
28/4 = 7
A
4
29/4 = 7.25
d. 7.5, A
2
O
1
O
2
O
3
O
4
A
1
6 11 1 3 11
A
2
0 6 3 6 6
A
3
2 7 0 8 7
A
4
6 0 10 0 10
for (f) Prob. 0.1 0.3 0.4 0.2
e. 6, A
2
f. The EOLs are 4.9 for A
1
, 4.2 for A
2
, 3.9 for A
3
, 4.6 for A
4
; minimum EOL is
3.9, hence choose A
3
g. EVs are 5.5 for A
1
, 6.2 for A
2
, 6.5 for A
3
, 5.8 for A
4
; maximum EV is 6.5,
hence choose A
3
h. EVPI
Outcome O
1
O
2
O
3
O
4
Best Alternative A
2
A
4
A
3
A
4
EV with PI = 1.3+4.5+2.4+2.2
= 10.4
EV of PI = EVEV with PI
= 10.46.5
= 3.9
16.
a. This problem is most easily solved by calculating the terms on the main diag-
onal rst, and then calculating the other payoffs each row at a time. If demand >
order, then add 4000 3000 50 = 950 for each one. If demand < order, then
subtract 40002000 = 2000 for each one. Doing this we obtain:
Demand
2 3 4 5 EV
2 2600 3550 4500 5450 3132.5
Order 3 1900 3900 4850 5800 3970
4 2400 4400 6400 7350 4942.5
5 2000 4000 6000 8000 4700
Prob. 0.25 0.3 0.3 0.15
The solution is to order four computers for an expected prot of $4,942.50.
b. EVPI
Demand 2 3 4 5
Best Order 2 3 4 5
Best Payoff 2600 4400 6400 8000
EV with PI = .25(2600) +.3(4400) +.3(6400) +.15(8000)
= 5090
EV of PI = EVEV with PI
= 50904942.50
= $147.50
c. Let p
4
= 0.3+p, and p
5
= 0.15p. Clearly, 0.3 p 0.15.
2 3132.5950p
3 3970.0950p
4 4942.5950p
5 4700.02000p
Hence, ordering four dominates ordering two or three. We are indifferent between
4 and 5 when
47002000p = 4942.5950p
37
at which p = 0.23. This value is in the allowable range. We are indifferent
between 4 and 5 when p
4
= 0.07 and p
5
= 0.38.
Chapter 3
Decision Trees
We will be using the symbols D, A, E and O on the tree. Alternatively, one can
use detailed descriptions. They can be written on the tree which will avoid having
to dene the symbols initially, but the tree will be more crowded. Although not
universally applicable, we will generally use an increasing subscript to indicate a
more benecial outcome.
1.
The managerial problem can be stated as the land being available. This gives rise
to the objective of maximizing the benet associated with dealing with the land.
The problem has the following main elements
D
1
Decision to buy the land in October
A
1,0
do nothing
A
1,1
purchase the option ($32,000)
A
1,2
purchase the land ($2,000,000)
E Event of future development of the oil
O
1
development does not go ahead (prob. = 0.30)
O
2
development does go ahead (prob. = 0.70)
D
2
Decision to exercise the option in April
A
2,0
do nothing
A
2,1
exercise the option ($2,150,000)
39
40 CHAPTER 3. DECISION TREES
(a) The decision tree formulation for the situation is
D
1
D
2
D
2
`
_
E
`
_
E
`
`
`
`
`
`
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
Z
Z
Z
Z
Z
Z
.
.
.
.
.
.
.
.
.
.
.
.
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
Z
Z
Z
Z
Z
Z
`
`
`
`
`
`
`
`
`
`
`
`
A
1,0
A
1,1
A
1,2
A
2,0
A
2,1
A
2,0
A
2,1
O
1
O
2
O
1
O
2
0.3
0.7
0.3
0.7
32
2000
2150
2150
0
1500
2400
0
1500
0
2400
0
250
175
2130
143
Thus, she should purchase the option. If the oil development goes ahead, then
exercise the option. Otherwise, do not exercise the option. The ranking prot is
$143,000.
(b) If we let p(O
2
) = 0.7+p, then p(O
1
) = 0.3p. Examining just the effect
of the changes on the calculations due to p in the tree we have
41
Effect of p alone
D
1
`
_
E
`
_
E
`
`
`
`
`
`
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
Z
Z
Z
Z
Z
Z
.
.
.
.
.
.
.
.
.
.
.
.
`
`
`
`
`
`
32
2000
A
1,0
A
1,1
A
1,2
O
1
O
2
O
1
O
2
p
p
p
p
0
1500
2400
0
250
250 p
900 p
We are indifferent when EV(A
1,2
) = EV(A
1,1
) or
2130+900p2000 = 175+250p32
650p = 13
p =
13
650
= .02
Thus we would be indifferent between the two alternatives when the probabil-
ity of going ahead is 0.70+0.02 = 0.72 and the probability of not going ahead is
0.300.02 = 0.28.
(c) Expected Value of Perfect Information
If we know in advance that the development will not go ahead, then we will
do nothing for a payoff of 0. Otherwise, we will purchase the land for $2,000,000
and then later sell it for $2,400,000, for a net payoff of $400,000.
Outcome O
1
O
2
Probability 0.30 0.70
Alternative A
1,0
A
1,2
Payoff 0 400
EV with PI = 0.300+0.70400
= 280
EV of PI = 280143
= 137
Hence the EVPI is $137,000.
2.
The managerial problem is the new product concept. This gives rise to the objec-
tive of maximizing the benet received from the new product.
D
1
Decision on what to do with the product
A
1,1
sell immediately ($50,000)
A
1,2
develop internally ($80,000)
E
1
Development event
O
1,1
development is successful (prob. = 0.70)
O
1,2
development is unsuccessful (prob. = 0.30)
E
2
Sale event
O
2,1
sale unsuccessful (prob. = 0.80) ($140,000)
O
2,2
sale successful (prob. = 0.20) ($230,000)
D
1
`
_
E
1
`
_
E
2
`
`
`
`
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
`
`
`
`
`
.
.
.
.
.
.
A
1,1
A
1,2
O
1,2
O
1,1
O
2,1
O
2,2
0.30
0.70
0.80
0.20
80
140
230
30
50
158
119.6
50
43
Thus the recommendation would be to sell immediately for a payoff of $50,000.
(b) An additional decision and an additional event has been added to the situation
D
2
Marketing decision
A
2,1
market it themselves
A
2,2
sell the rights
E
3
Market event
O
3,1
low demand (prob. = 0.30)
O
3,2
medium demand (prob. = 0.40)
O
3,3
high demand (prob. = 0.30)
The new decision tree for the situation is
D
1
D
2
`
_
E
1
`
_
E
2
`
_
E
3
`
`
`
`
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
`
`
`
`
`
.
.
.
.
.
.
`
`
`
`
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
Z
Z
Z
Z

.
.
.
.
.
.
A
1,1
A
1,2
A
2,2
A
2,1
O
1,2
O
1,1
O
2,1
O
2,2
O
3,3
O
3,2
O
3,1
0.30
0.70
0.80
0.20
0.30
0.40
0.30
80
140
230
280
180
100
30
50
186
186
158 139.2
59.2
Thus the new recommendation would be to develop the product internally. If
it is successful, then market it themselves; otherwise sell the rights for a ranking
prot of $59,200.
3.
The managerial problem is the new product concept. This gives rise to the objec-
tive of maximizing the benet received from the new product.
D
1
A
1,1
complete the research ($200,000)
A
1,0
abandon the project
E
1
Research event
O
1,0
research is unsuccessful (prob. = 0.25)
O
1,1
research is successful (prob. = 0.75)
E
2
Competitor event
O
2,1
competitor successful (prob. = 0.20)
O
2,2
competitor unsuccessful (prob. = 0.80)
E
3
Demand event
O
3,1
low (prob. = 0.50 or 0.1)
O
3,2
medium (prob. = 0.30)
O
3,3
high (prob. = 0.20 or 0.6)
D
1
`
_
E
1
`
_
E
2
`
_
E
3
`
_
E
3
`
_
`
`
`
`
`
`
`
`
`
`
.
.
.
.
.
Z
Z
Z
Z
Z
`
`
`
`
` .
.
.
.
.
.
.
.
.
.
A
1,0
A
1,1
O
1,0
O
1,1
O
2,2
O
2,1
O
3,1
O
3,2
O
3,3
O
3,1
O
3,2
O
3,3
0.25
0.75
0.80
0.20
0.20
0.30
0.50
0.60
0.30
0.10
0
0
200
250
100
500
800
100
500
800
570
290
514 264
198
0
45
Thus the recommendation would be to cancel the project for a payoff of $0.
(b) The additional assumption would cause one more decision to be added to the
tree.
D
2
A
2,1
go ahead with production ($250,000)
A
2,0
abandon the project
The new decision tree is
D
1
`
_
E
1
`
_
E
2
D
2
250
`
_
E
3
A
2,0
A
2,1
0
D
2
250
`
_
E
3
A
2,0
A
2,1
0
`
`
`
`
`
`
`
`
`
`
.
.
.
.
.
Z
Z
Z
Z
Z
`
`
`
`
`
A
1,0
A
1,1
O
1,0
O
1,1
O
2,2
O
2,1
0.25
0.75
0.80
0.20
0
0
200
320
40
264
198
0
570
290
The E
3
nodes were exactly the same, so we carried over the value of the node
rather than the full node plus outcomes. As before, the recommendation would be
to abandon the project immediately for a payoff of $0.
For part (b) the tree does not have to be drawn. It is enough to note that there
will be a prot whether or not the competitor develops the product and hence
advance knowledge of the competitors success does not change the result.
4.
The managerial problem can be stated as the tender being available. This gives
rise to the objective of maximizing the benet associated with dealing with the
tender.
D
p
Decision to prepare the bid
A
p,0
do nothing
A
p,1
prepare the bid ($75,000)
E
p
Preparation event
O
p,0
preparation is unsuccessful (prob. = 0.05)
O
p,1
preparation is successful (prob. = 0.95)
D
2
Decision on how to bid
A
b,1
submit a low bid
A
b,2
submit a high bid
E
b
Bid result event
O
b,0
bid is unsuccessful (prob. = 0.20 or 0.60)
O
b,1
bid is successful (prob. = 0.80 or 0.40)
E
u
Unforeseen factors event
O
u,0
nothing unforeseen happens (prob. = 0.90)
O
u,1
unforeseen problems arise (prob. = 0.10)
(a) The decision tree model for this problem is
D
p
D
b
`
_
E
p
`
_
E
b
`
_
`
_
E
u
`
`
`
`
.
.
.
.
`
`
`
`
O
b,1
O
b,0
O
u,1
O
u,0
0
0
100
0.9
0.1
10
`
_
E
b
`
_
`
_
E
u
`
`
`
`
.
.
.
.
`
`
`
`
O
b,1
O
b,0
O
u,1
O
u,0
0
0
100
0.9
0.1
10
`
`
`
`
`
`
`
`
Z
Z
Z
Z
`
`
`
`
`
`
`
`
`
`
`
`
.
.
.
.
.
.
.
.
A
p,0
A
p,1
O
p,0
O
p,1
A
b,2
A
b,1
0.05
0.95
0.4
0.6
0.8
0.2
0
45
75 (400)
(200)
390
190
156
152
156
75.45
150.45
The recommendation would be to prepare the bid. If the preparation is suc-
cessful, then submit a high end bid for a ranking prot of $75,450.
47
(b) The EVPI for the unforeseen event is trivially zero, since the unforeseen costs
are not sufcient to cause a loss to occur.
5.
The main managerial problem is due to the uncertainty in the demand. This gives
rise to the objective of minimizing the costs associated with meeting the demand.
D
i
p
Production decision
A
p,1
use overtime
A
p,2
put on an additional shift ($15,000)
E
d
Demand event
O
d,1
low demand (5,000 units) (prob. = 0.30)
O
d,2
medium demand (10,000 units) (prob. = 0.50)
O
d,3
high demand (15,000 units) (prob. = 0.20)
E
l
Labour event
O
l,0
no labour unrest (prob. = 0.50)
O
l,1
there is labour unrest (prob. = 0.50)
We have superscripted D
p
since the mode of production can be changed when
desired. In this problem, possible production changes can occur initially, after
two months and after six months.
(a) A possible decision tree model
1
is as follows:
1
A larger but more informative tree could be drawn which would use payoff/cost branches to
explicitly keep track of the costs during the rst 2 months and the next 4 months. In this tree all
costs would be the resultant annual cost.
D
(1)
p
D
(2)
p
D
(3)
p
`
_
E
l
`
_
E
d
`
`
`
`
`
`
.
.
.
.
.
.
O
d,3
O
d,2
O
d,1
0.2
0.5
0.3
`
_
E
d
`
`
`
`
`
`
.
.
.
.
.
.
O
d,3
O
d,2
O
d,1
0.2
0.5
0.3
`
`
`
`
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
Z
Z
Z
Z
.
.
.
.
.
.
`
`
`
`
`
`
.
.
.
.
.
.
.
.
.
.
15
A
p,2
A
p,1
.
.
.
.
.
.
.
.
.
.
15
A
p,2
A
p,1
A
p,1
A
p,2
O
l,0
O
l,1
0.5
0.5
15
15
10
18.333 20
45
30
60
30
15
45
45
35
26.5
13.5
26.5
The payoffs, which require a bit of thought, are determined as follows:
Path overtime, Payoffs
extra shift
(in months)
A
p,2
O
d,1
10, 2 5, 000(
10
12
3+
2
12
1) +5, 000 = 18, 333
A
p,1
O
d,3
A
p,2
2, 10 15, 000(
2
12
3+
10
12
1) = 20, 000
A
p,1
O
d,3
A
p,1
O
l,1
A
p,2
6, 6 15, 000(
6
12
3+
6
12
1) = 30, 000
The recommendation is to use overtime initially. If the demand is high, then
start an extra shift for a ranking cost of $26,500.
(b) Perfect information
Outcome O
d,1
O
d,2
O
d,3
Probability 0.30 0.50 0.20
Alternative A
p,1
A
p,2
A
p,2
Cost 15,000 25,000 30,000
49
EV with PI = 0.3015, 000+0.5025, 000+0.2030, 000
= 23, 000
EV of PI = 23, 000(26, 500)
= 3, 500
Since the cost of the information ($1,000) is less than the benet from the
information ($3,500), the information should be purchased. If the survey predicts
a low demand, then use overtime; otherwise use an additional shift.
6.
The main managerial problemis due to the uncertainty in the percentage of defects
produced by the machine. This gives rise to the objective of maximizing the prot
associated with the order.
D
t
Trial run decision
A
t,0
no trial
A
t,1
perform trial run ($30)
E
d
Defect event
O
d,1
defect rate of 1% (prob. = 0.50)
O
d,2
O
d,3
O
d,4
D
a
Adjustment decision
A
a,0
no adjustment
A
a,1
minor adjustment ($42)
A
a,2
major adjustment ($100)
(a) A decision tree model for this situation is
D
t
`
_
E
d
`
`
`
`
`
`
~
~
~
~
~
~
.
.
.
.
.
.
Z
Z
Z
Z
Z
Z
O
d,4
O
d,3
O
d,2
O
d,1
3930
3860
3790
3650
0.08
0.12
0.30
0.50
`
_
E
d
`
`
`
`
`
`
`
`
`
`
~
~
~
~
~
~
Z
Z
Z
Z
Z
Z
/
/
/
/
/
/
/
/
/
/
O
d,4
O
d,3
O
d,2
O
d,1
3930
0.08
0.12
0.30
0.50
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
//
/
/
/
/
/
/
/
/
/
//
A
a,1
42
A
a,1
42
D
a
-
-
-
-
-
-
-
-
-
-
.
.
.
.
.
.
.
.
.
.
100
3930
A
a,2
A
a,0
D
a
-
-
-
-
-
-
-
-
-
-
.
.
.
.
.
.
.
.
.
.
100
3930
A
a,2
A
a,0
D
a
-
-
-
-
-
-
-
-
-
-
.
.
.
.
.
.
.
.
.
.
100
3930
A
a,2
A
a,0
A
t,0
A
t,1
30
3860
3650
3860
3790
3860
3830
3830
3860
3889
3869.8
3869.8
A sample calculation for the payoff for a 1% defect situation is
Prot = 220003.502000.01
= 400070
= 3930
The recommendation would be to perform no trial run for a ranking prot of
$3,869.80.
51
7.
The main managerial problem is due to the uncertainty in the quality of the weld-
ing of the seams. This gives rise to the objective of minimizing the costs associated
with the defective seams.
D
c
Decision to check the seams
A
c,0
no checks
A
c,1
check all the seams ($20 each)
E
d
Defect event
O
d,1
O
d,2
O
d,3
O
d,4
(a) For this problem, the actual number of seams to be checked will not affect the
decision, although it will affect the costs. To show its effect we will let N be the
number of seams. A decision tree model for this situation is
D
c
`
_
E
d
`
`
`
`
`
`
~
~
~
~
~
~
.
.
.
.
.
.
Z
Z
Z
Z
Z
Z
O
d,4
O
d,3
O
d,2
O
d,1
0.18
0.30
0.50
0.02
`
_
E
d
`
`
`
`
`
`
~
~
~
~
~
~
.
.
.
.
.
.
Z
Z
Z
Z
Z
Z
O
d,4
O
d,3
O
d,2
O
d,1
0.18
0.30
0.50
0.02
10N
50N
100N
200N
1N
5N
10N
20N
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
A
c,0
A
c,1
20N
9.12N
91.2N
29.12N
A sample calculation for the cost associated with a 1% defect situation with
no checking is
Cost = 10000.01N
= 10N
The recommendation would be to use the master welders to check every seam
and rework if necessary for an average cost of $29.12 per seam.
(b) The modication to the problem adds one more alternative to D
c
and an addi-
tional decision as follows:
53
D
c
Decision to check the seams
A
c,0
no checks
A
c,1
check all the seams ($20 each)
A
c,2
check 10% of the seams ($20 each)
D
d
Decision to discontinue checking the seams
A
c,0
discontinue the checking
A
c,1
continue the checking ($20 each)
The modications to the decision tree are as follows:
D
t
`
_
E
d
`
`
`
`
`
`
`
`
``
.
.
.
.
.
.
/
/
/
/
/
/
/
/
//
O
d,4
O
d,3
O
d,2
O
d,1
0.02
0.50
0.30
0.18
`
_
D
d
.
.
.
.
.
.
.
.
.
.
A
d,0
A
d,1
18N
`
_
D
d
.
.
.
.
.
.
.
.
.
.
A
d,0
A
d,1
18N
`
_
D
d
.
.
.
.
.
.
.
.
.
.
A
d,0
A
d,1
18N
`
_
D
d
.
.
.
.
.
.
.
.
.
.
A
d,0
A
d,1
18N
180N
18N
90N
9N
45N
4.5N
9N
0.9N
2N
1N
0.5N
0.1N
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
/
//
/
/
/
/
/
/
/
/
/
/
/
//
A
c,0
A
c,1
A
c,2
20N
2N
36N
27N
22.5N
9.0N
38N
28N
23N
9.1N
26.92N
91.2N
9.12N
28.92N
The recommendation is now to rst check 10% of the seams. If there are only
1% defectives, then stop checking; otherwise continue the checking for an average
cost of $28.92 per seam.
8.
The main managerial problem is the evaluation of a new product concept. This
gives rise to the objective of obtaining an index with which to rank new products.
To obtain this index an additional objective of maximizing the benet from the
product is required.
D
t
Decision to proceed with technical development
A
c,0
cancel project
A
c,1
proceed ($T)
E
t
Technical feasibility event
O
t,0
development is a failure (prob. = 1p)
O
t,1
development is a success (prob. = p)
D
c
Decision to proceed with commercial development
A
c,0
cancel project
A
c,1
proceed ($C)
E
c
Commercial event
O
c,0
product is a failure (prob. = 1q)
O
c,1
product is a success (prob. = q)
In addition we need R, the expected return from the product. The decision tree
for this situation is as follows:
55
D
t
D
c
E
d
E
c
`
`
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
Z
Z

.
.
.
.
.
.
`
_
0
0
`
`
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
Z
Z

.
.
.
.
.
.
`
_
0
0
O
c,0
O
c,1
O
t,0
O
t,1
A
c,0
A
c,1
A
t,0
A
t,1
R
C
T
1q
q
1p
p
qR
qRC
pqRpC
pqRpCT
An index which is associated with a products success is the ratio of the ex-
pected prot to the expected investment. From the tree we can determine both of
these quantities.
Expected prot = pqRpCT
Expected cost = pC+T
Thus the ratio is
Expected prot
Expected cost
=
pqRpCT
pCT
=
pqR
pC+T
1
The 1 term would be common to all products and hence is irrelevant when
comparing products. Thus an appropriate project value index, PVI, would be
PVI =
pqR
pC+T
This index might be different if other assumptions were used.
9.
The main managerial problem is due to the existence of the lawsuits. This gives
rise to the objective of minimizing the costs associated with the handling of the
lawsuits.
D
J
Decision about what to do before July
A
J,0
settle the July lawsuit
A
J,1
prepare the July defence ($15,000)
A
J,2
prepare both defences ($25,000)
E
J
July lawsuit event
O
J,0
July lawsuit is lost (prob. = 0.50)
O
J,1
July lawsuit is won (prob. = 0.50)
D
N
Decision about what to do before November
A
N,0
settle the November lawsuit
A
N,1
prepare the November defence ($15,000)
E
N
November lawsuit event
O
N,0
November lawsuit has major loss (prob. is conditional)
O
N,1
November lawsuit has minor loss
O
N,2
November lawsuit is won
The decision tree for this situation is too large to display properly in one dia-
gram, so we split it into two trees as follows
57
D
J
`
_
E
J
`
_
E
J
sub-tree
`
_
D
N
`
`
`
`
`
`
`
`
.
.
.
.
.
.
`
_
E
N
200
80
50
0
80
A
N,0
A
N,1
O
N,0
O
N,1
O
N,2
`
_
D
N
`
`
`
`
`
`
`
`
.
.
.
.
.
.
`
_
E
N
200
80
50
0
80
A
N,0
A
N,1
O
N,0
O
N,1
O
N,2
15
0.4
0.3
0.3
0.4
0.4
0.2
95
100
95
D
N
`
`
`
`
`
`
`
`
.
.
.
.
.
.
`
_
E
N
200
50
0
80
A
N,0
A
N,1
35
35
O
N,0
O
N,1
O
N,2
0.1
0.3
0.6
`
`
`
`
`
``
`
`
`
`
`
``
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
O
J,0
O
J,1
0.5
0.5
A
J,0
A
J,1
A
J,2
15
25
80
150
230
132.5
140
160
155
`
_
E
J
sub-tree
`
_
D
N
`
`
`
`
`
`
`
`
.
.
.
.
.
.
`
_
E
N
15
200
50
0
80
A
N,0
A
N,1
O
N,0
O
N,1
O
N,2
0.4
0.4
0.2
D
N
`
`
`
`
`
`
`
`
.
.
.
.
.
.
`
_
E
N
15
200
50
0
80
A
N,0
A
N,1
50
35
100
80
O
N,0
O
N,1
O
N,2
0.1
0.3
0.6
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
O
J,0
O
J,1
0.5
0.5
150
230
140
The recommendation would be to prepare the July defence. If the July case is
won, then prepare the November defence. If the July case is lost, then settle the
November case for a ranking cost of $155,000.
59
10.
The main managerial problem is the government plan to build a new college. This
gives rise to the objective of maximizing the benets associated with obtaining
land to take advantage of the new college.
D
L
Land decision
A
L,0
do nothing
A
L,A
purchase land at site A ($500,000)
A
L,B
purchase land at site B ($1,000,000)
A
L,P
purchase options on both sites ($100,000)
E
C
Committee recommendation event
O
C,A
committee recommends A (prob. = 0.60)
O
C,B
committee recommends B (prob. = 0.40)
E
G
Government event
A
G,A
selects site A (prob. = 0.20 or 0.80)
A
G,B
selects site B (prob. = 0.80 or 0.20)
D
O
Decision to exercise the option
A
O,0
do nothing
A
O,A
purchase land at site A ($500,000)
A
O,B
purchase land at site B ($1,000,000)
E
p
Government proceeding with the college event
O
p,0
college is cancelled (prob. = 0.15)
O
p,1
college goes ahead (prob. = 0.85)
Although the government action is a decision of government, from the devel-
opers point of view it is an event. It is possible to use accept or reject for the
outcomes of this event. However, as a general principle, denitions of outcomes
should be unconditional if possible and if necessary, the probabilities become
conditional as in this case.
The decision tree for this situation is too large to display properly in one dia-
gram, so we split it into two trees as follows
D
L
`
_
E
C
sub-tree
0
`
`
`
`
`
`
`
`
``
`
`
`
`
`
`
`
`
``
.
.
.
.
.
.
.
.
.
.
.
.
/
/
/
/
/
/
/
/
//
/
/
/
/
/
/
/
/
//
`
_
E
C
O
C,B
O
C,A
0.4
0.6
`
_
E
G
O
G,A
O
G,B
0.2
0.8
`
_
E
G
O
G,B
O
G,A
0.2
0.8
`
`
`
`
`
`
.
.
.
.
.
.
.
.
.
.
.
.
`
_
E
C
O
C,B
O
C,A
0.4
0.6
`
_
E
G
O
G,A
O
G,B
0.2
0.8
`
_
E
G
O
G,B
O
G,A
0.2
0.8
`
`
`
`
`
`
.
.
.
.
.
.
.
.
.
.
.
.
`
_
E
p
O
p,0
O
p,1
0.15
0.85
300
800
~
~
~
~
~
~
.
.
.
.
.
.
`
_
E
p
O
p,0
O
p,1
0.15
0.85
300
800
~
~
~
~
~
~
.
.
.
.
.
.
`
_
E
p
O
p,0
O
p,1
0.15
0.85
600
1400
~
~
~
~
~
~
.
.
.
.
.
.
`
_
E
p
O
p,0
O
p,1
0.15
0.85
600
1400
~
~
~
~
~
~
.
.
.
.
.
.
500
100
1,000
A
L,A
A
L,0
A
L,B
A
L,P
300
300
600
600
725
725
1280
1280
385
640
1144
736
899.2
249.2
538
149.2
61
`
_
E
C
sub-tree
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
`
_
E
G
O
G,B
O
G,A
A
O,B
A
O,A
1000
500
600
1400
300
800
1280
725
280
225
`
`
`
`
`
`
D
O
`
_
E
p
O
p,0
O
p,1
0.15
0.85
A
O,0
0
-
-
-
-
-
-
-
-
-
-
.
.
.
.
.
.
.
.
.
.
~
~
~
~
~
~
.
.
.
.
.
.
D
O
`
_
E
p
O
p,0
O
p,1
0.15
0.85
A
O,0
0
-
-
-
-
-
-
-
-
-
-
.
.
.
.
.
.
.
.
.
.
~
~
~
~
~
~
.
.
.
.
.
.
`
_
E
G
O
G,B
O
G,A
A
O,B
A
O,A
1000
500
600
1400
300
800
1280
725
280
225
`
`
`
`
`
`
D
O
`
_
E
p
O
p,0
O
p,1
0.15
0.85
A
O,0
0
-
-
-
-
-
-
-
-
-
-
.
.
.
.
.
.
.
.
.
.
~
~
~
~
~
~
.
.
.
.
.
.
D
O
`
_
E
p
O
p,0
O
p,1
0.15
0.85
A
O,0
0
-
-
-
-
-
-
-
-
-
-
.
.
.
.
.
.
.
.
.
.
~
~
~
~
~
~
.
.
.
.
.
.
O
C,B
O
C,A
0.4
0.6
0.8
0.2
0.2
0.8
269
236
249.2
We have simplied the tree slightly by not considering the alternative to exer-
cise the option for the site which was not selected. This is trivially worse than the
other two options.
The recommendation would be to purchase the option and exercise the option
in whichever location the government selects to build the college for a ranking
payoff of $149,200. It is of interest to note that although the committee decision
is needed for the decision tree, the decision is not affected by it.
11.
The main managerial problem is the faulty production. This gives rise to the
objective of minimizing the costs associated with spoiled batches.
D
T
Decision to test the batch
A
T,0
cancel production
A
T,1
process with no testing
A
T,2
test at the outset ($50)
A
T,3
test when 50% completed ($20)
E
I
Ink event
O
I,0
Ink is solid (prob. = 0.10)
O
I,1
Ink is acceptable (prob. = 0.90)
D
F
Decision to x the batch
A
F,0
do nothing
A
F,C
use chemicals to x the batch
A
F,H
use heat to x the batch
An appropriate model is as follows:
63
D
T
`
_
E
I
O
I,1
O
I,0
A
T,0
A
T,1
A
T,2
A
T,3
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
/
/
/
/
//
/
/
/
/
/
/
/
/
/
/
/
/
/
/
//
.
.
.
.
.
.
`
_
E
I
O
I,1
O
I,0
D
F
A
F,H
A
F,C
A
F,0
0.9
0.1
3000
0
~
~
~
~
~
~
.
.
.
.
.
.
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
`
_
E
I
O
I,1
O
I,0
D
F
A
F,H
A
F,C
A
F,0
0.9
0.1
3000
0
~
~
~
~
~
~
.
.
.
.
.
.
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
2000
1250
50
20
0.9
0.1
790
3000
395
1500
3000
0
0
1000
395
2700
2800
2739.5
2750
The recommendation would be to test the batch at the outset. If the ink turns
out to be solid, then add chemicals; otherwise process as is, for a ranking payoff
of $2,750.
12.
The main managerial problem is the faulty production. This gives rise to the
objective of minimizing the costs associated with defective items.
D
T
Decision to perform a trial run
A
T,0
no trial run
A
T,1
perform trial run ($200)
E
I
Defect event
O
D,0
1% defect rate (prob. = 0.30)
O
D,1
O
D,2
D
A
Decision to perform an adjustment
A
D,0
do nothing
A
D,1
use a minor adjustment ($100)
A
D,2
use a major adjustment ($500)
An appropriate model is as follows:
65
D
T
`
_
E
D
`
_
E
D
A
T,1
A
T,0
O
D,0
O
D,1
O
D,2
O
D,0
O
D,1
O
D,2
D
A
D
A
`
`
`
`
`
`
`
`
``
`
`
`
`
`
`
`
`
``
/
/
/
/
/
/
/
/
//
/
/
/
/
/
/
/
/
//
`
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
Z
`
`
`
`
`
`
.
.
.
.
.
.
.
.
.
.
.
.
200
A
D,2
A
D,0
A
D,2
A
D,1
A
D,0
500
500
100
0.30
0.45
0.25
0.30
0.45
0.25
19,640
19,640
19,280
18,200
19,640
19,280
19,640
19,280
18,200
19280
19180
19363
19118
19163
As sample calculation is as follows. If the defect rate is 1%, then
prot = 5400090.014000
= 20, 000360
= 19, 640
Thus the appropriate recommendation is to perform the trial run. If there is
a 5% defect rate, then perform a minor adjustment, otherwise perform no adjust-
ment for a ranking prot of $19,163.
Chapter 4
Imperfect Information
Although many of the problems do not explicitly ask for the expected value of
perfect information, we will calculate it in all cases to emphasize the process of
how it is evaluated. In addition, the statement of the problem is not to be taken as
the only answer. It is only an indicator of the type of answer which is desired.
1.
The problem facing Major Motors is the production of lemons. An appropriate
objective is to minimize the costs associated with the lemons.
(a) The relevant factors for this problem are
D
r
Decision to rework car
A
r,0
do nothing
A
r,1
rework the car ($400)
E
L
The lemon event
O
L,1
car is a lemon (prob. = 0.03)
O
L,2
car is normal (prob. = 0.97)
For this stage of the problem we can use a payoff matrix to formulate the
model.
67
68 CHAPTER 4. IMPERFECT INFORMATION
D
r
E
L
E.V.
O
L,1
O
L,2
A
r,0
10, 000 500 785
A
r,1
900 900 900
Prob. 0.03 0.97
Thus one would recommend doing nothing for an expected payoff of $785
per car, i.e. an expected cost of $785 per car.
Outcome O
L,1
O
L,2
Prob. 0.03 0.97
Alternative A
r,1
A
r,0
Payoff 900 500
E.V. with P.I. = 9000.03+5000.97
= 512
EVPI = 512(785)
= 273 (per car)
(c) The modication adds two additional factors for this problem:
D
I
Decision to inspect the car
A
I,0
do nothing
A
I,1
inspect the car ($50)
E
I
The inspection event
O
I,1
car looks bad
O
I,2
inconclusive
O
I,3
car looks good
The Bayesian revision is performed in the following set of probability trees:
69
`
_
E
L
O
L,2
O
L,1
`
_
E
I
`
_
`
_
`
_
O
I,3
O
I,2
O
I,1
`
`
`
`
`
`
`
_
E
I
`
_
`
_
`
_
O
I,3
O
I,2
O
I,1
`
`
`
`
`
`
`
_
E
I
O
I,3
O
I,2
O
I,1
`
_
E
L
`
_
`
_
O
L,2
O
L,1
.
.
.
.
.
.
`
_
E
L
`
_
`
_
O
L,2
O
L,1
.
.
.
.
.
.
`
_
E
L
`
_
`
_
O
L,2
O
L,1
.
.
.
.
.
.
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
0.97
0.03
0.80
0.20
0.00
0.00
0.25
0.75
1.0
0.0
388
403
15
403
0.0
1.0
0.776
0.194
0.000
0.0000
0.0075
0.0225
0.776
0.000
0.194
0.0075
0.000
0.0225
0.776
0.2015
0.0225
1.00
The decision tree for the situation is
D
I
`
_
E
I
A
I,1
A
I,0
O
I,3
O
I,2
O
I,1
50
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
D
r
`
_
E
L
A
r,0
A
r,1
O
L,2
O
L,1
400
500
10, 000
500
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
D
r
`
_
E
L
A
r,0
A
r,1
O
L,2
O
L,1
400
500
10, 000
500
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
D
r
`
_
E
L
A
r,0
A
r,1
O
L,2
O
L,1
400
500
10, 000
500
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
1.00
0.00
388
403
15
403
0.00
1.00
0.776
0.2015
0.0225
500
500
344,000
403
344,000
403
10,000
900
785 (part a)
580.25
630.25
The recommendation is to inspect each car. If it looks bad, then rework the
car, otherwise do not rework the car for a ranking cost of $630.25 per car.
71
2.
The problem facing the publishing company is the manuscript from the two un-
known authors. An appropriate objective is to maximize the benet obtained from
the manuscript.
D
d
Decision to develop the book
A
d,0
do nothing
A
d,1
develop the book ($50,000)
E
b
The book event
O
b,1
the book is a failure (prob. = 0.80)
O
b,2
the book is a minor success (prob. = 0.15)
O
b,3
the book is a major success (prob. = 0.05)
model.
D
d
E
b
E.V.
O
b,1
O
b,2
O
b,3
A
d,0
0 0 0 0
A
d,1
50, 000 50, 000 450, 000 10, 000
Prob. 0.80 0.15 0.05
Thus one would recommend doing nothing for an actual payoff of 0.
Outcome O
b,1
O
b,2
O
b,3
Prob. 0.80 0.15 0.05
Alternative A
d,0
A
d,1
A
d,1
Payoff 0 50 450
E.V. with P.I. = 00.80+500.15+4500.05
= 30
EVPI = 30(0)
= $30, 000
(c) The modication adds two additional factors to this problem:
D
r
Decision to review the manuscript
A
r,0
do nothing
A
r,1
review the manuscript
E
r
The reviewer event
O
r,n
reviewer is negative
O
r,r
reviewer recommends book
`
_
E
r
O
r,n
O
r,r
`
_
E
b
`
_
`
_
`
_
O
b,1
O
b,2
O
b,3
`
`
`
`
`
`
`
_
E
b
`
_
`
_
`
_
O
b,1
O
b,2
O
b,3
`
`
`
`
`
`
`
_
E
b
O
b,1
O
b,2
O
b,3
`
_
E
r
`
_
`
_
O
r,n
O
r,r
.
.
.
.
.
.
`
_
E
r
`
_
`
_
O
r,n
O
r,r
.
.
.
.
.
.
`
_
E
r
`
_
`
_
O
r,n
O
r,r
.
.
.
.
.
.
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
0.80
0.15
0.05
640
705
60
705
5
705
160
295
90
295
45
295
0.8
0.2
0.4
0.6
0.1
0.9
0.640
0.060
0.005
0.160
0.090
0.045
0.640
0.160
0.060
0.090
0.005
0.045
0.705
0.295
1.00
An appropriate decision tree model for this situation is
73
D
r
`
_
E
r
A
r,1
A
r,0
O
r,n
O
r,r
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
`
`
`
`
`
`
.
.
.
.
.
.
D
d
`
_
E
b
A
d,0
A
d,1
O
b,1
O
b,2
O
b,3
50
0
0
100
500
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
`
`
`
`
`
`
.
.
.
.
.
.
D
d
`
_
E
b
A
d,0
A
d,1
O
b,1
O
b,2
O
b,3
50
0
0
100
500
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
`
`
`
`
`
`
.
.
.
.
.
.
640
705
60
705
5
705
160
295
90
295
45
295
0.705
0.295
8,500
705
31,500
295
16,750
295
0
0 (part a)
16.75
16.75
Thus the recommendation would be to send the manuscript to the reviewer. If
the reviewer recommends the book, then proceed with developing it. Otherwise,
abandon the manuscript for a ranking prot of $16,750.
The expected value of imperfect information
1
is
EVII = E.V. with infoE.V. without info
= 16, 7500
= $16, 750
1
Typically a review of a manuscript costs in the neighbourhood of $500. As long as the value
of the information is more than this, the review should be done.
3.
The problem facing Ms Blossom is what to do with her copyright books. An
appropriate objective is to maximize the benet obtained by selling the rights to
her books.
D
s
Decision on selling the rights to the book
A
s,1
sell to a movie company
A
s,2
sell to a TV network
E
b
The box ofce event
O
b,1
box ofce is small (prob. = 0.30)
O
b,2
box ofce is medium (prob. = 0.50)
O
b,3
box ofce is large (prob. = 0.20)
model.
D
s
E
b
E.V.
O
b,1
O
b,2
O
b,3
A
s,1
100 1, 000 3, 000 1, 130
A
s,2
1, 100 1, 100 1, 100 1, 100
Prob. 0.30 0.50 0.20
Thus one would recommend selling the rights to the movie company for a
ranking payoff of $1,130,000.
Outcome O
b,1
O
b,2
O
b,3
Prob. 0.30 0.50 0.20
Alternative A
s,2
A
s,2
A
s,1
Payoff 1, 100 1, 100 3, 000
E.V. with P.I. = 1, 1000.30+1, 1000.50+3, 0000.20
= 1, 480
75
EVPI = 1, 4801, 130
= 350 or $350, 000
D
r
Decision to research the market
A
r,0
do nothing
A
r,1
research the market ($25,000)
E
r
The research event
O
r,u
research says looks unfavourable
O
r, f
research says looks favourable
`
_
E
r
O
r,g
O
r,u
`
_
E
b
`
_
`
_
`
_
O
b,3
O
b,2
O
b,1
`
`
`
`
`
`
`
_
E
b
`
_
`
_
`
_
O
b,3
O
b,2
O
b,1
`
`
`
`
`
`
`
_
E
b
O
b,3
O
b,2
O
b,1
`
_
E
r
`
_
`
_
O
r, f
O
r,u
.
.
.
.
.
.
`
_
E
r
`
_
`
_
O
r, f
O
r,u
.
.
.
.
.
.
`
_
E
r
`
_
`
_
O
r, f
O
r,u
.
.
.
.
.
.
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
0.20
0.50
0.30
16
52
30
52
6
52
4
48
20
48
24
48
0.8
0.2
0.6
0.4
0.2
0.8
0.16
0.30
0.06
0.04
0.20
0.24
0.16
0.04
0.30
0.20
0.06
0.24
0.52
0.48
1.00
D
r
`
_
E
r
A
r,1
A
r,0
O
r, f
O
r,u
25
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
`
`
`
`
`
`
.
.
.
.
.
.
D
s
`
_
E
b
A
s,2
A
s,1
O
b,3
O
b,2
O
b,1
1,100
3,000
1,000
100
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
`
`
`
`
`
`
.
.
.
.
.
.
D
s
`
_
E
b
A
s,2
A
s,1
O
b,3
O
b,2
O
b,1
1,100
3,000
1,000
100
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
`
`
`
`
`
`
.
.
.
.
.
.
16
52
30
52
6
52
4
48
20
48
24
48
0.52
0.48
78,600
52
2150
3
1,100
78,600
52
1,130 (part a)
1,314
1289
The recommendation would be for Ms Blossom to do the market research. If
the result is looks unfavourable, then sell the rights to the TV network. Other-
wise, sell them to the movie company for a ranking payoff of $1,289,000.
(d) The Expected Value of Imperfect Information is
EVII = E.V. with researchE.V. without research
= 1, 3141, 130
= 184 or $184, 000
77
4.
The problem facing the ski resort operator is the lack of snow. A sub-problem
is the uncertainty in the demand for ski slopes. An appropriate objective is to
maximize the benet obtained from preparing the ski slopes using articial snow.
D
s
Decision on how many slopes to prepare
A
p,3
prepare three slopes
A
p,4
prepare four slopes
E
b
The demand event
O
d,1
demand is light (prob. = 0.50)
O
d,2
demand is moderate (prob. = 0.40)
O
d,3
demand is heavy (prob. = 0.10)
model.
D
p
E
d
E.V.
O
d,1
O
d,2
O
d,3
A
p,3
7 10 12 8.7
A
p,4
6 10 16 8.6
Prob. 0.50 0.40 0.10
Thus the resort operator should prepare 3 slopes for a ranking payoff of $8,700.
Outcome O
d,1
O
d,2
O
d,3
Prob. 0.50 0.40 0.10
Alternative A
d,3
A
d,3
, A
d,4
A
d,4
Payoff 7 10 16
E.V. with P.I. = 70.50+100.40+160.10
= 9.1
EVPI = 9.18.7
= 0.4 or $400
D
r
Decision to research the market
A
r,0
do nothing
A
r,1
research the sports shops ($200)
E
r
The research event
O
r,l
research says low
O
r,h
research says high
`
_
E
r
O
r,h
O
r,l
`
_
E
d
`
_
`
_
`
_
O
d,3
O
d,2
O
d,1
`
`
`
`
`
`
`
_
E
d
`
_
`
_
`
_
O
d,3
O
d,2
O
d,1
`
`
`
`
`
`
`
_
E
d
O
d,3
O
d,2
O
d,1
`
_
E
r
`
_
`
_
O
r,h
O
r,l
.
.
.
.
.
.
`
_
E
r
`
_
`
_
O
r,h
O
r,l
.
.
.
.
.
.
`
_
E
r
`
_
`
_
O
r,h
O
r,l
.
.
.
.
.
.
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
0.10
0.40
0.50
90
405
240
405
75
405
10
595
160
595
425
595
0.90
0.10
0.60
0.40
0.15
0.85
0.090
0.240
0.075
0.010
0.160
0.425
0.090
0.010
0.240
0.160
0.075
0.425
0.405
0.595
1.00
79
D
r
`
_
E
r
A
r,1
A
r,0
O
r,h
O
r,l
0.20
`
`
`
`
`
`
`
`
`
`
`
`
.
.
.
.
.
.
.
.
.
.
.
.
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
D
p
A
p,4
A
p,3
4
3
`
`
`
`
`
`
`
`
`
`
`
`
.
.
.
.
.
.
.
.
.
.
.
.
20
14
10
15
13
10
`
_
E
d
O
d,3
O
d,2
O
d,1
`
`
`
`
`
`
.
.
.
.
.
.
`
_
E
d
O
d,3
O
d,2
O
d,1
`
`
`
`
`
`
.
.
.
.
.
.
D
p
A
p,4
A
p,3
4
3
`
`
`
`
`
`
`
`
`
`
`
`
.
.
.
.
.
.
.
.
.
.
.
.
20
14
10
15
13
10
`
_
E
d
O
d,3
O
d,2
O
d,1
`
`
`
`
`
`
.
.
.
.
.
.
`
_
E
d
O
d,3
O
d,2
O
d,1
`
`
`
`
`
`
.
.
.
.
.
.
90
405
240
405
75
405
90
405
240
405
75
405
10
595
160
595
425
595
10
595
160
595
425
595
0.405
0.595
5910
405
5220
405
6690
595
6480
595
4290
405
4695
595 8.7 (part a)
8.985
8.785
The recommendation would be for the resort operator to do the survey. If the
result is low, then prepare 3 slopes. Otherwise, prepare 4 slopes for a ranking
payoff of $8,785.
(d) The Expected Value of Imperfect Information is
= $8, 985$8, 700
= $285
5.
The problem is the availability of the game. An appropriate objective is to maxi-
mize the benet from playing the game.
D
c
Decision on the type of coin
A
c,0
do nothing
A
c,2
say the coin is two-headed
A
c,n
say the coin is normal
E
c
The coin event
O
c,2
the coin is two-headed (prob. = 0.50)
O
c,n
the coin is normal (prob. = 0.50)
Before considering the issue of ipping the coin, we can use a payoff matrix
to investigate what to do if the coin is not ipped.
D
c
E
c
E.V.
O
c,2
O
c,n
A
c,0
0 0 0.0
A
c,2
2 1 0.5
A
c,n
1 2 0.5
Prob. 0.50 0.50
Thus one would play and say either the coin is normal or say the coin is two-
headed for a ranking payoff of $0.50. The alternative of doing nothing is clearly
sub-optimal and will be dropped from further consideration.
Considering the value of perfect information, we have
Outcome O
c,2
O
c,n
Prob. 0.50 0.50
Alternative A
c,2
A
c,n
Payoff 2 2
81
E.V. with P.I. = 20.50+20.5
= 2
EVPI = 2.00.5
= $1.50
The cost of the ip is well below the cost of perfect information. Thus it is
worthwhile to investigate whether the information is worth purchasing. This adds
two additional factors for this problem:
D
f
Decision to ip the coin
A
f ,0
do nothing
A
f ,1
ip the coin ($0.20)
E
f
The ip event
O
f ,h
ip turns up a head
O
f ,t
ip turns up a tail
E
c
O
c,n
O
c,2
E
f
E
f
O
f ,t
O
f ,h
O
f ,t
O
f ,h
E
f
O
f ,t
O
f ,h
E
c
E
c
O
c,n
O
c,2
O
c,n
O
c,2
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
0.5
0.5
0.5
0.5
0.0
1.0
1.0
0.0
1
3
2
3
0.25
0.25
0.00
0.50
0.25
0.00
0.25
0.50
0.25
0.75
1.00
In a situation like this, where one of the information results (a tail) determines
with certainty the outcome (a normal coin), one does not have to put a decision
node on the tree. Instead it can be treated as a terminal payoff.
An appropriate decision tree model (which includes the unnecessary decision
node for illustrative purposes) for this situation is
83
D
f
`
_
E
f
A
f ,1
A
f ,0
O
f ,t
O
f ,h
0.20
`
`
`
`
`
`
`
`
`
`
`
`
.
.
.
.
.
.
.
.
.
.
.
.
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
D
c
A
c,n
A
c,2
`
`
`
`
`
`
`
`
`
`
`
`
.
.
.
.
.
.
.
.
.
.
.
.
2
1
1
2
`
_
E
c
O
c,n
O
c,2
.
.
.
.
.
.
`
_
E
c
O
c,n
O
c,2
.
.
.
.
.
.
D
c
A
c,n
A
c,2
`
`
`
`
`
`
`
`
`
`
`
`
.
.
.
.
.
.
.
.
.
.
.
.
2
1
1
2
`
_
E
c
O
c,n
O
c,2
.
.
.
.
.
.
`
_
E
c
O
c,n
O
c,2
.
.
.
.
.
.
1
0
1
0
1
3
2
3
1
3
2
3
0.25
0.75
2
1
0
1
2
1
0.5 (above)
1.25
1.05
Thus the recommendation would be to pay for one ip; if the ip is heads,
then say that it is a two-headed coin. Otherwise, say that it is a normal coin for a
ranking payoff of $1.05.
(b) The Expected Value of Imperfect Information is
EVII = E.V. with ipE.V. without ip
= 1.250.50
= $0.75
(c) Allowing the coin to be ipped twice adds one more alternative A
f ,2
ip the
coin twice ($0.40). To obtain the revised probabilities after the ip, one would
normally perform two more Bayesian revisions one using the probabilities as
revised with a rst tail result and another using the probabilities as revised with
a rst head result. However, in this case, if a tail results, then we know that the
coin is normal and hence the result of the second ip is irrelevant. After a ip of
a head, the new probabilities are
2
3
for a two-headed coin and
1
3
for a normal coin.
Thus the Bayesian revision would give
E
c
O
c,n
O
c,2
E
f
E
f
O
f ,t
O
f ,h
O
f ,t
O
f ,h
E
f
O
f ,t
O
f ,h
E
c
E
c
O
c,n
O
c,2
O
c,n
O
c,2
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
1
3
2
3
0.5
0.5
0.0
1.0
1.0
0.0
1
5
4
5
1
6
1
6
0.00
2
3
1
6
0.00
1
6
2
3
1
6
5
6
1.00
Remember that the above revision applies only if a head is obtained on the
rst ip. Thus the probability of obtaining two heads is
3
4
5
6
=
5
8
and hence the
probability of not obtaining two heads is 1
5
8
=
3
8
.
85
D
f
`
_
E
f
A
f ,2
A
f ,1
O
f ,t
O
f ,h
0.40
`
`
`
`
`
`
`
`
`
`
`
`
.
.
.
.
.
.
.
.
.
.
.
.
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
D
c
A
c,n
A
c,2
`
`
`
`
`
`
`
`
`
`
`
`
.
.
.
.
.
.
.
.
.
.
.
.
2
1
1
2
`
_
E
c
O
c,n
O
c,2
.
.
.
.
.
.
`
_
E
c
O
c,n
O
c,2
.
.
.
.
.
.
D
c
A
c,n
A
c,2
`
`
`
`
`
`
`
`
`
`
`
`
.
.
.
.
.
.
.
.
.
.
.
.
2
1
1
2
`
_
E
c
O
c,n
O
c,2
.
.
.
.
.
.
`
_
E
c
O
c,n
O
c,2
.
.
.
.
.
.
1
0
1
0
1
5
4
5
1
5
4
5
3
8
5
8
2
1
0.4
1.4
2
1.4
1.05 (above)
1.625
1.225
Thus the recommendation would be to pay for two ips; if both ips are heads,
6.
This is the same problem as in the previous question. An appropriate objective is
to maximize the benet from playing the game. The only modication which has
to be applied to the previous solution is the probabilities of the normal vs two-
headed coin. Since only two of the ve coins in the coin pool were two-headed,
the probability of a two-headed coin is now 0.4 rather than 0.5. Thus we would
proceed as follows.
D
c
Decision on the type of coin
A
c,0
do nothing
A
c,2
A
c,n
say the coin is normal
E
c
The coin event
O
c,2
the coin is two-headed (prob. = 0.40)
O
c,n
the coin is normal (prob. = 0.60)
Before considering the issue of ipping the coin, we can use a payoff matrix
to investigate what to do if the coin is not ipped.
D
c
E
c
E.V.
O
c,2
O
c,n
A
c,0
0 0 0.0
A
c,2
2 1 0.2
A
c,n
1 2 0.8
Prob. 0.40 0.60
Thus one would play and say the coin is normal for a ranking payoff of $0.80.
The alternative of doing nothing is clearly sub-optimal and will be dropped from
further consideration.
Outcome O
c,2
O
c,n
Prob. 0.40 0.60
Alternative A
c,2
A
c,n
Payoff 2 2
87
E.V. with P.I. = 20.40+20.6
= 2
EVPI = 2.00.8
= $1.20
The cost of the ip is well below the cost of perfect information. Thus it is
worthwhile to investigate whether the information is worth purchasing. This adds
D
f
Decision to ip the coin
A
f ,0
do nothing
A
f ,1
ip the coin ($0.20)
E
f
The ip event
O
f ,h
ip turns up a head
O
f ,t
ip turns up a tail
E
c
O
c,n
O
c,2
E
f
E
f
O
f ,t
O
f ,h
O
f ,t
O
f ,h
E
f
O
f ,t
O
f ,h
E
c
E
c
O
c,n
O
c,2
O
c,n
O
c,2
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
0.6
0.4
0.5
0.5
0.0
1.0
1.0
0.0
3
7
4
7
0.30
0.30
0.00
0.40
0.30
0.00
0.30
0.40
0.30
0.70
1.00
89
D
f
`
_
E
f
A
f ,1
A
f ,0
O
f ,t
O
f ,h
0.20
`
`
`
`
`
`
`
`
`
`
`
`
.
.
.
.
.
.
.
.
.
.
.
.
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
D
c
A
c,n
A
c,2
`
`
`
`
`
`
`
`
`
`
`
`
.
.
.
.
.
.
.
.
.
.
.
.
2
1
1
2
`
_
E
c
O
c,n
O
c,2
.
.
.
.
.
.
`
_
E
c
O
c,n
O
c,2
.
.
.
.
.
.
D
c
A
c,n
A
c,2
`
`
`
`
`
`
`
`
`
`
`
`
.
.
.
.
.
.
.
.
.
.
.
.
2
1
1
2
`
_
E
c
O
c,n
O
c,2
.
.
.
.
.
.
`
_
E
c
O
c,n
O
c,2
.
.
.
.
.
.
1
0
1
0
3
7
4
7
3
7
4
7
0.30
0.70
2
1
2
7
5
7
2
5
7
0.8 (above)
1.10
0.90
Thus the recommendation would be to pay for one ip; if the ip is heads,
(b) The Expected Value of Imperfect Information is
EVII = E.V. with ipE.V. without ip
= 1.100.80
= $0.30
(c) Allowing the coin to be ipped twice adds one more alternative A
f ,2
ip the
coin twice ($0.40). To obtain the revised probabilities after the ip, one would
normally perform two more Bayesian revisions one using the probabilities as
revised with a rst tail result and another using the probabilities as revised with
a rst head result. However, in this case if a tail results, then we know that the
coin is normal and hence the result of the second ip is irrelevant. After a ip of
a head, the new probabilities are
4
7
for a two-headed coin and
3
7
for a normal coin.
Thus the Bayesian revision would give
E
c
O
c,n
O
c,2
E
f
E
f
O
f ,t
O
f ,h
O
f ,t
O
f ,h
E
f
O
f ,t
O
f ,h
E
c
E
c
O
c,n
O
c,2
O
c,n
O
c,2
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
3
7
4
7
0.5
0.5
0.0
1.0
1.0
0.0
3
11
8
11
3
14
3
14
0.00
4
7
3
14
0.00
3
14
4
7
3
14
11
14
1.00
Remember that the above revision applies only if a head is obtained on the
rst ip. Thus the probability of obtaining two heads is 0.7
11
14
=0.55 and hence
the probability of not obtaining two heads is 10.55 = 0.45.
91
D
f
`
_
E
f
A
f ,2
A
f ,1
O
f ,t
O
f ,h
0.40
`
`
`
`
`
`
`
`
`
`
`
`
.
.
.
.
.
.
.
.
.
.
.
.
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
D
c
A
c,n
A
c,2
`
`
`
`
`
`
`
`
`
`
`
`
.
.
.
.
.
.
.
.
.
.
.
.
2
1
1
2
`
_
E
c
O
c,n
O
c,2
.
.
.
.
.
.
`
_
E
c
O
c,n
O
c,2
.
.
.
.
.
.
D
c
A
c,n
A
c,2
`
`
`
`
`
`
`
`
`
`
`
`
.
.
.
.
.
.
.
.
.
.
.
.
2
1
1
2
`
_
E
c
O
c,n
O
c,2
.
.
.
.
.
.
`
_
E
c
O
c,n
O
c,2
.
.
.
.
.
.
1
0
1
0
3
11
8
11
3
11
8
11
0.45
0.55
2
1
2
11
13
11
2
13
11
0.90 (above)
1.55
1.15
Thus the recommendation would be to pay for two ips, if both ips are heads,
7.
The problem is the requirement to take and pass the Management Science course.
An appropriate objective is to maximize the benet associated with taking the
course.
The relevant factors for this problem are
D
t
Decision on using a tutor
A
t,0
do nothing
A
t,1
use a tutor ($100)
E
c
The course event
O
c, f
fail the course
O
c,p
pass the course
Before considering the issue of taking the pretest, we can use a probability
matrix to investigate what to do if the pretest is not taken.
D
t
E
c
E.V.
O
c, f
O
c,p
A
t,0
0.7 0.3 150
A
t,1
0.1 0.9 450100 = 350
Payoff 0 500
Thus one would use the tutor for a ranking payoff of $350.
Outcome (no tutor) O
c, f
O
c,p
Outcome (with tutor) O
c, f
O
c,p
O
c, f
O
c,p
Prob. 0.700.10 0.700.90 0.300.10 0.300.90
Alternative A
t,0
A
t,1
A
t,0
A
t,0
Payoff 0 400 500 500
E.V. with P.I. = 00.07+4000.63+5000.3
= 402
93
EVPI = 402350
= $52
The cost of the pretest is well below the cost of perfect information. Thus it
is worthwhile to investigate whether the information given by the pretest makes it
worth doing. This adds two additional factors for this problem:
D
p
Decision to take the pretest
A
p,0
do nothing
A
p,1
take the pretest ($10)
E
p
The results of the pretest
O
p, f
fail the pretest
O
p,p
pass the pretest
Since the pretest is correct 18 times out of 20 we have
P(pass pre-test/pass course) =
18
20
= 0.90
P(fail pre-test/fail course) =
18
20
= 0.90
E
c
O
c, f
O
c,p
E
p
E
p
O
p, f
O
p,p
O
p, f
O
p,p
E
p
O
p, f
O
p,p
E
c
E
c
O
c, f
O
c,p
O
c, f
O
c,p
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
0.7
0.3
0.9
0.1
0.1
0.9
21
22
1
22
7
34
27
34
0.63
0.07
0.03
0.27
0.63
0.03
0.07
0.27
0.66
0.34
1.00
95
D
p
`
_
E
p
A
p,1
A
p,0
O
p, f
O
p,p
10
`
`
`
`
`
`
`
`
`
`
`
`
.
.
.
.
.
.
.
.
.
.
.
.
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
D
t
A
t,0
A
t,1
100
`
`
`
`
`
`
`
`
`
`
`
`
.
.
.
.
.
.
.
.
.
.
.
.
0
500
0
500
`
_
E
c
O
c, f
O
c,p
.
.
.
.
.
.
`
_
E
c
O
c, f
O
c,p
.
.
.
.
.
.
D
t
A
t,0
A
t,1
100
`
`
`
`
`
`
`
`
`
`
`
`
.
.
.
.
.
.
.
.
.
.
.
.
0
500
0
500
`
_
E
c
O
c, f
O
c,p
.
.
.
.
.
.
`
_
E
c
O
c, f
O
c,p
.
.
.
.
.
.
21
22
1
22
0.1
0.9
7
34
27
34
0.1
0.9
0.66
0.34
500
22
450
13500
34
450
350
13500
34
350 (above)
366
356
Thus the recommendation would be to take the pretest. If the pretest is failed,
then hire a tutor. Otherwise, write the exam directly for a ranking payoff of $356.
8.
The problem is the new toy which has been developed. An appropriate objective
is to maximize the benet associated with developing the toy.
D
p
Decision on producing the toy
A
p,0
do nothing
A
p,1
produce and market the toy
E
m
The market event
O
m, f
the toy is a failure
O
m,s
the toy is a success
Before considering the issue of doing the market surveys, we can use the pay-
off matrix to investigate what to do if the market survey is not done.
D
p
E
m
E.V.
O
m, f
O
m,s
A
p,0
0 0 0
A
p,1
400 600 200
Prob. 0.4 0.6
Thus the new toy should be marketed for a ranking payoff of $200,000.
Outcome O
m, f
O
m,s
Prob. 0.4 0.6
Alternative A
p,0
A
p,1
Payoff 0 600
E.V. with P.I. = 00.40+6000.60
= 360
EVPI = 360200
= 160 or $160, 000
97
The cost of the market surveys is well below the cost of perfect information.
Thus we will investigate whether or not it is worthwhile to gather the information.
To simplify the trees, we will consider each of the surveys separately.
The rst survey adds two additional factors for this problem:
D
s1
Decision to do survey 1
A
s1,0
do nothing
A
s1,1
perform survey 1 ($40,000)
E
s1
The results of survey 1
O
s1,u
interviewed owners are unimpressed
O
s1, f
interviewed owners are favourably impressed
E
m
O
m, f
O
m,s
E
s1
E
s1
O
s1,u
O
s1, f
O
s1,u
O
s1, f
E
s1
O
s1,u
O
s1, f
E
m
E
m
O
m, f
O
m,s
O
m, f
O
m,s
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
0.40
0.60
0.75
0.25
0.20
0.80
5
7
2
7
10
58
48
58
0.30
0.10
0.12
0.48
0.30
0.12
0.10
0.48
0.42
0.58
1.00
D
s1
`
_
E
s1
A
s1,1
A
s1,0
O
s1,u
O
s1, f
40
.
.
.
.
.
.
.
.
.
.
.
.
`
`
`
`
`
`
D
p
A
p,1
A
p,0
`
_
E
m
O
m, f
O
m,s
400
600
0
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
D
p
A
p,1
A
p,0
`
_
E
m
O
m, f
O
m,s
400
600
0
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
5
7
2
7
10
58
48
58
800
7
24,800
58
0
24,800
58
0.42
0.58
200 (above)
248
208
Thus the recommendation would be to performsurvey 1. If the owner response
is favourable, then market the toy. Otherwise, cancel the toy for a ranking payoff
of $208,000.
The second survey adds two additional factors for this problem:
D
s2
Decision to do survey 2
A
s2,0
do nothing
A
s2,1
perform survey 2 ($20,000)
E
s2
The results of survey 2
O
s2,0
interviewed owners are negative
O
s2,1
interviewed owners are neutral
O
s2,2
interviewed owners are positive
99
`
_
E
m
O
m, f
O
m,s
`
_
E
s2
`
_
`
_
`
_
O
s2,0
O
s2,1
O
s2,2
`
`
`
`
`
`
`
_
E
s2
`
_
`
_
`
_
O
s2,0
O
s2,1
O
s2,2
`
`
`
`
`
`
`
_
E
s2
O
s2,0
O
s2,1
O
s2,2
`
_
E
m
`
_
`
_
O
m, f
O
m,s
.
.
.
.
.
.
`
_
E
m
`
_
`
_
O
m, f
O
m,s
.
.
.
.
.
.
`
_
E
m
`
_
`
_
O
m, f
O
m,s
.
.
.
.
.
.
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
0.40
0.60
0.50
0.30
0.20
0.15
0.25
0.60
20
29
9
29
4
9
5
9
2
11
9
11
0.20
0.12
0.08
0.09
0.15
0.36
0.20
0.09
0.12
0.15
0.08
0.36
0.29
0.27
0.44
1.00
The decision tree model taking this new situation into account is
D
s2
`
_
E
s2
A
s2,1
A
s2,0
O
s2,0
O
s2,1
O
s2,2
20
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
D
p
`
_
E
p
A
p,1
A
p,0
O
p,s
O
p, f
400
600
0
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
D
p
`
_
E
p
A
p,1
A
p,0
O
p,s
O
p, f
400
600
0
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
D
p
`
_
E
p
A
p,1
A
p,0
O
p,s
O
p, f
400
600
0
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
20
29
9
29
4
9
5
9
2
11
9
11
0.29
0.27
0.44
4400
29
0
1400
9
1400
9
4600
11
4600
11
208 (part a)
226
208
Thus the recommendation would still be to prefer survey 1. If the owner re-
sponse is favourable, then market the toy. Otherwise, cancel the toy for a ranking
payoff of $208,000.
(b) Efciency of information
Eff(Survey 1) =
EVII
EVPI
=
48
160
= 0.30
Eff(Survey 2) =
EVII
EVPI
101
=
26
160
= 0.16
9.
The problem is the requirement to pass the management science course. An ap-
propriate objective is to maximize the benet associated with writing the exam.
D
p
Decision to attend preparation session
A
d,0
do nothing (cost $7)
A
d,1
attend session (cost $?)
E
e
The exam event
O
e, f
fail the exam (prob. 0.4)
O
e,p
pass the exam (prob. 0.6)
E
p
The preparation session event
O
p,0
feel despair
O
p,1
feel confusion
O
p,2
feel condent
`
_
E
e
O
e, f
O
e,p
`
_
E
p
`
_
`
_
`
_
O
p,0
O
p,1
O
p,2
`
`
`
`
`
`
`
_
E
p
`
_
`
_
`
_
O
p,0
O
p,1
O
p,2
`
`
`
`
`
`
`
_
E
p
O
p,0
O
p,1
O
p,2
`
_
E
e
`
_
`
_
O
e, f
O
e,p
.
.
.
.
.
.
`
_
E
e
`
_
`
_
O
e, f
O
e,p
.
.
.
.
.
.
`
_
E
e
`
_
`
_
O
e, f
O
e,p
.
.
.
.
.
.
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
0.40
0.60
0.50
0.30
0.20
0.10
0.30
0.60
20
26
6
26
12
30
18
30
8
44
36
44
0.20
0.12
0.08
0.06
0.18
0.36
0.20
0.06
0.12
0.18
0.08
0.36
0.26
0.30
0.44
1.00
An appropriate decision tree for this situation is as follows:
103
D
p
`
_
E
p
`
_
E
e
A
p,1
A
p,0
O
p,0
O
p,1
O
p,2
O
e, f
O
e,p
?
7
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
Z
Z
Z
Z
Z
Z
`
`
`
`
`
`
`
`
.
.
.
.
.
.
`
_
E
e
O
e, f
O
e,p
30
25
.
.
.
.
.
.
`
_
E
e
O
e, f
O
e,p
30
25
.
.
.
.
.
.
`
_
E
e
O
e, f
O
e,p
30
25
.
.
.
.
.
.
20
26
6
26
12
30
18
30
8
44
36
44
450
26
90
30
660
44
0.26
0.30
0.44
0.40
0.60
30
25
3
3
Thus one would be willing to pay up to $7 to attend the seminar. This answer
can be determined without the use of a decision tree. The explanation is left up to
the reader.
10.
The problem facing Ms Descartes is the uncertainty of the earnings announce-
ment. An appropriate objective is to maximize the benet obtained selling the
1000 shares of stock.
D
s
Decision to sell the stock
A
s,1
sell now
A
s,2
sell later
E
s
The stock event
O
s,0
stock price is $10 (prob. = 0.10)
O
s,1
O
s,2
O
s,3
O
s,4
model.
D
s
E
s
E.V.
O
s,0
O
s,1
O
s,2
O
s,3
O
s,4
A
s,1
15 15 15 15 15 15
A
s,2
10 13 15 17 20 15.5
Prob. 0.10 0.20 0.30 0.20 0.20
Thus Ms Descartes should wait to sell the stock for a ranking payoff of $15,500.
Outcome O
s,0
O
s,1
O
s,2
O
s,3
O
s,4
Prob. 0.10 0.20 0.30 0.20 0.20
Alternative A
s,1
A
s,1
A
s,1
, A
s,2
A
s,2
A
s,2
Payoff 15 15 15 17 20
105
E.V. with P.I. = 15(0.10+0.20+0.30) +170.20+200.20
= 16.4
EVPI = 16.415.5
= 0.9 or $900
D
r
Decision to research the company
A
r,0
do nothing
A
r,1
research the company ($?)
E
r
The research event
O
r,0
research says worse
O
r,1
research says as expected
O
r,2
research says better
`
_
E
e
O
s,4
O
s,3
O
s,2
O
s,1
O
s,0
`
_
E
r
_
_
_
O
r,2
O
r,1
O
r,0
.
.
.
.
.
.
`
_
E
r
_
_
_
O
r,2
O
r,1
O
r,0
.
.
.
.
.
.
`
_
E
r
_
_
_
O
r,2
O
r,1
O
r,0
.
.
.
.
.
.
`
_
E
r
_
_
_
O
r,2
O
r,1
O
r,0
.
.
.
.
.
.
`
_
E
r
_
_
_
O
r,2
O
r,1
O
r,0
.
.
.
.
.
.
`
_
E
r
O
r,2
O
r,1
O
r,0
`
_
E
s
_
_
_
_
_
O
s,4
O
s,3
O
s,2
O
s,1
O
s,0
`
`
`
`
`
`
.
.
.
.
.
.
Z
Z
Z
Z
Z
Z
`
_
E
s
_
_
_
_
_
O
s,4
O
s,3
O
s,2
O
s,1
O
s,0
`
`
`
`
`
`
.
.
.
.
.
.
Z
Z
Z
Z
Z
Z
`
_
E
s
_
_
_
_
_
O
s,4
O
s,3
O
s,2
O
s,1
O
s,0
`
`
`
`
`
`
.
.
.
.
.
.
Z
Z
Z
Z
Z
Z
\
\
\
\
\
\
\
\
\
\
\
\
\
\
\
\
\
\\
`
`
`
`
`
`
`
`
``
/
/
/
/
/
/
/
/
//
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
//
\
\
\
\
\
\
\
\
\
\
\
\
\
\
\\
/
/
/
/
/
/
/
/
/
/
/
/
/
/
//
0.20
0.20
0.30
0.20
0.10
0.93
0.05
0.02
0.75
0.15
0.10
0.30
0.40
0.30
0.05
0.25
0.70
0.01
0.09
0.90
186
437
150
437
90
437
10
437
1
437
10
219
30
229
120
219
50
219
9
219
4
344
20
344
90
344
140
344
90
344
0.186
0.010
0.004
0.150
0.030
0.020
0.090
0.120
0.090
0.010
0.050
0.140
0.001
0.009
0.090
0.186
0.150
0.090
0.010
0.001
0.010
0.030
0.120
0.050
0.009
0.004
0.020
0.090
0.140
0.090
0.437
0.219
0.344
1.00
107
D
r
A
r,1
A
r,0
`
_
E
r
O
r,2
O
r,1
O
r,0
D
s
A
s,1
A
s,2
`
_
E
s
O
s,4
O
s,3
O
s,2
O
s,1
O
s,0
15 20
17
15
13
10
`
`
`
`
`
`
.
.
.
.
.
.
Z
Z
Z
Z
Z
Z
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
D
s
A
s,1
A
s,2
`
_
E
s
O
s,4
O
s,3
O
s,2
O
s,1
O
s,0
15 20
17
15
13
10
`
`
`
`
`
`
.
.
.
.
.
.
Z
Z
Z
Z
Z
Z
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
D
s
A
s,1
A
s,2
`
_
E
s
O
s,4
O
s,3
O
s,2
O
s,1
O
s,0
15 20
17
15
13
10
`
`
`
`
`
`
.
.
.
.
.
.
Z
Z
Z
Z
Z
Z
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
`
`
`
`
`
`
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
Z
Z
Z
Z
Z
Z
\
\
\
\
\
\
\
\
\
\
\
\
\
\
\\
/
/
/
/
/
/
/
/
/
/
/
/
/
/
//
186
437
150
437
90
437
10
437
1
437
10
219
30
229
120
219
50
219
9
219
4
344
20
344
90
344
140
344
90
344
7760
437
3250
219
4490
344
7760
437
15
15
0.437
0.219
0.344
16.205
15.5
from part (a)
16.205
= $16, 205$15, 500
= $705
Thus Ms Descartes would be willing to pay up to $705 for the information.
11.
The problem facing the farmer is the unused land. An appropriate objective is to
maximize the benet obtained from using the land.
D
u
Land use decision
A
u,0
do nothing
A
u,1
rent to the circus
A
u,2
rent to the rock concert
E
w
The weather event
O
w,1
rain (prob. = 0.10)
O
w,2
cloud (prob. = 0.30)
O
w,3
sun (prob. = 0.60)
model.
A sample calculation for the payoff for the rock concert with rain (alternative
A
u,2
with outcome O
w,1
) is
5, 000+0.1020, 000 = 7, 000
D
u
E
w
E.V.
O
w,1
O
w,2
O
w,3
A
u,0
0 0 0 0
A
u,1
10 10 10 10
A
u,2
7 12 15 13.3
Prob. 0.10 0.30 0.60
Thus one would recommend doing the rock concert for a ranking payoff of
$13,300. We note that both A
u,1
and A
u,2
always have better payoffs than A
u,0
,
and hence A
u,0
will not be considered further.
109
Outcome O
w,1
O
w,2
O
w,3
Prob. 0.10 0.30 0.60
Alternative A
u,1
A
u,2
A
u,2
Payoff 10 12 15
E.V. with P.I. = 100.10+120.30+150.60
= 13.6
EVPI = 13.613.3
= 0.3 or $300
(c) The cost of the information is a signicant portion of the value of perfect
information and hence it is unlikely to be worth buying. The modication adds
D
f
Decision to obtain the long-range forecast
A
f ,0
do nothing
A
f ,1
obtain the forecast ($200)
E
f
The forecast event
O
f ,1
forecast is for rain
O
f ,2
forecast is for cloud
O
f ,3
forecast is for sun
`
_
`
_
`
_
`
_
`
_
`
`
`
`
`
`
.
.
.
.
.
.
`
_
`
_
`
_
`
_
`
`
`
`
`
`
.
.
.
.
.
.
`
_
`
_
`
_
`
_
`
`
`
`
`
`
.
.
.
.
.
.
\
\
\
\
\
\
\
\
\
\
\
\
\
\
\\
/
/
/
/
/
/
/
/
/
/
/
/
/
/
//
`
_
`
_
`
_
`
_
`
_
`
`
`
`
`
`
.
.
.
.
.
.
`
_
`
_
`
_
`
_
`
`
`
`
`
`
.
.
.
.
.
.
`
_
`
_
`
_
`
_
`
`
`
`
`
`
.
.
.
.
.
.
\
\
\
\
\
\
\
\
\
\
\
\
\
\
\\
/
/
/
/
/
/
/
/
/
/
/
/
/
/
//
E
w
O
w,3
O
w,2
O
w,1
E
f
O
f ,3
O
f ,2
O
f ,1
E
f
O
f ,3
O
f ,2
O
f ,1
E
f
O
f ,3
O
f ,2
O
f ,1
E
f
O
f ,3
O
f ,2
O
f ,1
E
w
O
w,3
O
w,2
O
w,1
E
w
O
w,3
O
w,2
O
w,1
E
w
O
w,3
O
w,2
O
w,1
0.60
0.30
0.10
0.80
0.10
0.10
0.30
0.60
0.10
0.10
0.20
0.70
0.48
0.06
0.06
0.09
0.18
0.03
0.01
0.02
0.07
48
58
9
58
1
58
6
26
18
26
2
26
6
16
3
16
7
16
0.48
0.09
0.01
0.06
0.18
0.02
0.06
0.03
0.07
0.58
0.26
0.16
1.00
111
D
f
`
_
E
f
A
f ,1
A
f ,0
O
f ,3
O
f ,2
O
f ,1
0.20
`
`
`
`
`
`
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
Z
Z
Z
Z
Z
Z
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
D
u
`
_
E
w
A
u,2
A
u,1
O
w,3
O
w,2
O
w,1
15
12
7
10
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
D
u
`
_
E
w
A
u,2
A
u,1
O
w,3
O
w,2
O
w,1
15
12
7
10
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
D
u
`
_
E
w
A
u,2
A
u,1
O
w,3
O
w,2
O
w,1
15
12
7
10
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
48
58
9
58
1
58
6
26
18
26
2
26
6
16
3
16
7
16
0.58
0.26
0.16
835
58
320
26
175
16
835
58
320
26
175
16
13.3
13.3 (part a)
13.3
Thus the information has no value and hence one would recommend renting
to the rock concert without obtaining the forecast for a ranking prot of $13,300.
(d) The standard deviation is found as follows
Variance = 0.6(15, 00013, 300)
2
+0.3(12, 00013, 300)
2
+0.1(7, 00013, 300)
2
= 6, 210, 000
(x) =
_
6, 210, 000
= 2, 492
(e) Expected Value of Imperfect Information
EVII = E.V. with forecast E.V. without forecast
= 13, 30013, 300
= $0
The reason for the information having no value is that although the information
is relevant, it does not affect the uncertainties sufciently to change the original
recommendation.
12.
The problem facing the company is the plot of land. An appropriate objective is
to maximize the benet obtained from the land.
D
d
Decision to drill for oil
A
d,0
do nothing
A
d,1
drill for oil ($700,000)
E
o
The oil event
O
o,0
no oil (prob. = 0.99)
O
o,1
oil (prob. = 0.01)
model.
D
d
E
o
E.V.
O
o,0
O
o,1
A
d,0
0 0 0
A
d,1
700 39, 300 300
Prob. 0.99 0.01
Thus one would recommend not to drill the oil well for an actual payoff of $0.
Perfect information
113
Outcome O
o,0
O
o,1
Prob. 0.99 0.01
Alternative A
d,0
A
d,1
Payoff 0 39, 300
E.V. with P.I. = 00.10+39, 3000.01
= 393
EVPI = 3930
= $393, 000
The cost of the information is much smaller than the value of perfect information
and hence it is likely to be worth buying. The modication adds two additional
factors for this problem:
D
s
Decision to perform the seismic test
A
s,0
do nothing
A
s,1
do the seismic test ($50,000)
E
s
The forecast event
O
s,1
test is positive
O
s,2
test is inconclusive
O
s,3
test is negative
`
_
E
o
O
o,0
O
o,1
`
_
E
s
`
_
`
_
`
_
O
s,3
O
s,2
O
s,1
`
`
`
`
`
`
`
_
E
s
`
_
`
_
`
_
O
s,3
O
s,2
O
s,1
`
`
`
`
`
`
`
_
E
s
O
s,3
O
s,2
O
s,1
`
_
E
o
`
_
`
_
O
o,0
O
o,1
.
.
.
.
.
.
`
_
E
o
`
_
`
_
O
o,0
O
o,1
.
.
.
.
.
.
`
_
E
o
`
_
`
_
O
o,0
O
o,1
.
.
.
.
.
.
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
0.99
0.01
0.55
0.35
0.10
0.05
0.25
0.70
5445
5450
5
5450
3465
3440
25
3440
99
106
7
106
0.5445
0.3465
0.0990
0.0005
0.0025
0.0007
0.5445
0.0005
0.3465
0.0025
0.0990
0.0070
0.545
0.349
0.106
1.00
115
D
s
`
_
E
s
A
s,1
A
s,0
O
s,3
O
s,2
O
s,1
50
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
D
d
`
_
E
o
A
d,1
A
d,0
O
o,0
O
o,1
700
0
40,000
0
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
D
d
`
_
E
o
A
d,1
A
d,0
O
o,0
O
o,1
700
0
40,000
0
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
D
d
`
_
E
o
A
d,1
A
d,0
O
o,0
O
o,1
700
0
40,000
0
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
5445
5450
5
5450
3465
3490
35
3490
99
106
7
106
0.545
0.349
0.106
36.7
0
286.5
0
280,000
106
205,800
106
0 (part a)
205.8
155.8
Thus the recommendation would be to perform the seismic test. If the test
result is positive, then drill for oil; otherwise, do not drill. The ranking prot
for this strategy is $155,800.
13.
The problem facing the captain is the knowledge of the sunken wreck. An ap-
propriate objective is to maximize the benet obtained from using the knowledge
about the sunken wreck.
D
s
Submarine search decision
A
s,0
do nothing
A
s,1
perform search ($800,000)
E
g
The galleon event
O
g,0
no galleon (prob. =
7
8
)
O
g,1
galleon is present (prob. =
1
8
)
model.
D
s
E
g
E.V.
O
g,0
O
g,1
A
s,0
0 0 0
A
s,1
800 8, 000 300
Prob.
7
8
1
8
Thus one would recommend using the submarine to search for the galleon and
retrieve the gold if the galleon is found for a ranking payoff of $300,000.
Perfect information
Outcome O
g,0
O
g,1
Prob.
7
8
1
8
Alternative A
s,0
A
s,1
Payoff 0 8, 000
E.V. with P.I. = 0
7
8
+8, 000
1
8
= 1, 000
EVPI = 1, 000300
= $700, 000
117
The cost of the information is much smaller than the value of perfect information,
D
t
Decision to perform the test
A
t,0
do nothing
A
t,1
do the underwater test for gold ($50,000)
E
t
The test event
O
t,1
test is weak
O
t,2
test is medium
O
t,3
test is strong
`
_
E
g
O
g,0
O
g,1
`
_
E
t
`
_
`
_
`
_
O
t,1
O
t,2
O
t,3
`
`
`
`
`
`
`
_
E
t
`
_
`
_
`
_
O
t,1
O
t,2
O
t,3
`
`
`
`
`
`
`
_
E
t
O
t,1
O
t,2
O
t,3
`
_
E
g
`
_
`
_
O
g,0
O
g,1
.
.
.
.
.
.
`
_
E
g
`
_
`
_
O
g,0
O
g,1
.
.
.
.
.
.
`
_
E
g
`
_
`
_
O
g,0
O
g,1
.
.
.
.
.
.
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
7
8
1
8
0.70
0.25
0.05
0.10
0.40
0.50
0.98
0.02
35
43
8
43
7
17
10
17
0.6125
0.21875
0.04375
0.0125
0.0500
0.0625
0.6125
0.0125
0.21875
0.05000
0.04375
0.06250
0.625
0.26875
0.10625
1.00
D
t
`
_
E
t
A
t,1
A
t,0
O
t,1
O
t,2
O
t,3
50
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
D
s
`
_
E
o
A
s,1
A
s,0
O
g,0
O
g,1
800
0
8,800
0
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
D
s
`
_
E
o
A
s,1
A
s,0
O
g,0
O
g,1
800
0
8,800
0
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
D
s
`
_
E
o
A
s,1
A
s,0
O
g,0
O
g,1
800
0
8,800
0
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
0.98
0.02
35
43
8
43
7
17
10
17
0.625
0.269
0.106
176
0
1,637.2
837.2
5,176.5
4,376.5
300 (part a)
690
640
The recommendation is to perform the test. If the result of the test is strong
or medium, then search using the submarine. If the result is weak, then abandon
the project. The ranking payoff is $640,000.
119
14.
The problem facing Nu Products is the need to market the new product. An ap-
propriate objective is to maximize the benet obtained from the new product.
D
p
Plan decision
A
p,A
use Plan A
A
p,B
use Plan B
E
n
Marketing event
O
m,A
plan A will be successful (prob. = 0.4)
O
m,B
plan B will be successful (prob. = 0.6)
model.
D
p
E
m
E.V.
O
m,A
O
m,B
A
p,A
500 200 320
A
p,B
300 450 390
Prob. 0.4 0.6
Thus one would recommend using Plan B to market the product for a ranking
payoff of $390,000.
Perfect information
Outcome O
m,A
O
m,B
Prob. 0.4 0.6
Alternative A
p,A
A
p,B
Payoff 500 450
E.V. with P.I. = 5000.4+4500.60
= 470
EVPI = 470390
= $80, 000
The cost of the information is much smaller than the value of perfect information
D
s
Decision to perform the survey
A
s,0
do nothing
A
s,1
do survey ($10,000)
E
s
The survey event
O
s,A
survey recommends A
O
s,B
survey recommends B
E
m
O
m,B
O
m,A
E
s
E
s
O
s,B
O
s,A
O
s,B
O
s,A
E
s
O
s,B
O
s,A
E
m
E
m
O
m,B
O
m,A
O
m,B
O
m,A
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
0.60
0.40
0.80
0.20
0.20
0.80
6
7
1
7
3
11
8
11
0.48
0.12
0.08
0.32
0.48
0.08
0.12
0.32
0.56
0.44
1.00
121
D
s
`
_
E
s
A
s,1
A
s,0
O
s,B
O
s,A
10
`
`
`
`
`
`
`
`
`
`
`
`
.
.
.
.
.
.
.
.
.
.
.
.
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
D
p
A
p,B
A
p,A
`
`
`
`
`
`
`
`
`
`
`
`
.
.
.
.
.
.
.
.
.
.
.
.
450
300
200
500
`
_
E
m
O
m,B
O
m,A
.
.
.
.
.
.
`
_
E
m
O
m,B
O
m,A
.
.
.
.
.
.
D
p
A
p,B
A
p,A
`
`
`
`
`
`
`
`
`
`
`
`
.
.
.
.
.
.
.
.
.
.
.
.
450
300
200
500
`
_
E
m
O
m,B
O
m,A
.
.
.
.
.
.
`
_
E
m
O
m,B
O
m,A
.
.
.
.
.
.
6
7
1
7
6
7
1
7
3
11
8
11
3
11
8
11
0.56
0.44
3,000
7
1,700
7
3,750
11
4,600
11
3,000
7
4,600
11
390 (above)
424
414
Thus the recommendation would be to perform the survey, and then follow the
recommendation of the survey for a ranking payoff of $414,000.
15.
The problem facing the student is the uncertain job market upon graduation. An
appropriate objective is to maximize the benet obtained from attending univer-
sity.
D
u
The university decision
A
u,0
go to OWU
A
u,1
go to CBU
D
i
the information decision
A
i,0
do not see the futurist
A
i,1
see the futurist
E
i
The information event
O
i,0
the futurist says OWU will be preferred
O
i,1
the futurist says CBU will be preferred
When there is common identier (in this case OWU or CBU) it is important to
use the same subscript to indicate it. For example, we have used 0 for OWU and
1 for CBU in the denitions of the alternatives and the outcomes.
Setting up the problem with a base tree and three similar sub-trees, we have
D
i
D
u
D
u
D
u
`
_
E
i
`
`
`
`
Z
Z
Z
Z
`
`
`
`
Z
Z
Z
Z
1
A
i0
A
i1
O
i0
O
i1
.59
.41
#1
#2
#3
Completed Base of the Tree
D
u
#1
`
_
`
_
E
u
E
u
`
`
`
`
Z
Z
Z
Z
`
`
`
`
Z
Z
Z
Z
`
`
`
`
`
`
`
`
A
u1
A
u0
O
u1
O
u0
O
u1
O
u0
.4
.6
.4
.6
39.0
35.5
34.0
38.0
The University Decision
123
D
u
#2
`
_
`
_
E
u
E
u
`
`
`
`
Z
Z
Z
Z
`
`
`
`
Z
Z
Z
Z
`
`
`
`
`
`
`
`
A
u1
A
u0
O
u1
O
u0
O
u1
O
u0
2
59
57
59
2
59
57
59
39.0
35.5
34.0
38.0
D
u
#3
`
_
`
_
E
u
E
u
`
`
`
`
Z
Z
Z
Z
`
`
`
`
Z
Z
Z
Z
`
`
`
`
`
`
`
`
A
u1
A
u0
O
u1
O
u0
O
u1
O
u0
38
41
3
41
38
41
3
41
39.0
35.5
34.0
38.0
The University Decisions with Additional Information
_
1
.4
.6
.38
.02
.03
.57
`
`
`
`
`
``
`
`
`
`
`
`
`
`
O
u1
O
u0
O
i1
O
i0
O
i1
O
i0
.4
.6
.95
.05
.05
.95
Prior Probability Tree
_
1
.41
.59
.38
.03
.02
.57
`
`
`
`
`
``
`
`
`
`
`
`
`
`
O
i1
O
i0
O
u1
O
u0
O
u1
O
u0
.41
.59
38
41
3
41
2
59
57
59
Posterior Probability Tree
The rst decision, D
i
, is to see the futurist. Then, the event E
i
will occur - if
the futurist says OWU will be preferred, then decision D
u
is go to OWU; if the
futurist says CBU will be preferred, then decision D
u
is to go to CBU. This will
give a ranking payoff of $37,225.
16.
The problem facing General Lemmor is the enemy defensive fortication. Appro-
priate objectives are to maximize the number of uninjured troops or to minimize
the casualties amongst his troops.
D
a
The assault decision
A
a,1
immediate all-out attack
A
a,2
wait for reinforcements
E
f
The fortication event
O
f ,1
well defended (prob. = 0.3)
O
f ,2
lightly defended (prob. = 0.7)
model.
D
a
E
f
E.V.
O
f ,1
O
f ,2
A
a,1
2000 50 635
A
a,2
1100 1000 1030
Prob. 0.3 0.7
Thus one would recommend using an all-out attack for a ranking cost of 635
casualties.
Perfect information
Outcome O
f ,1
O
f ,2
Prob. 0.3 0.7
Alternative A
a,2
A
a,1
Payoff 1100 50
125
E.V. with P.I. = 11000.3+500.70
= 365
EVPI = 365(635)
= 270 casualties
The maximum cost of the information is much smaller than the value of perfect
information and hence it is likely to be worth obtaining. The modication adds
D
p
Decision to probe the fortication
A
p,0
do nothing
A
p,1
do probe
E
p
The probe event
O
p,1
100 casualties
O
p,2
10 casualties
E
f
O
f ,2
O
f ,1
E
p
E
p
O
p,2
O
p,1
O
p,2
O
p,1
E
p
O
p,2
O
p,1
E
f
E
f
O
f ,2
O
f ,1
O
f ,2
O
f ,1
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
0.70
0.30
0.95
0.05
0.10
0.90
665
695
30
695
35
305
270
305
0.665
0.035
0.030
0.270
0.665
0.030
0.035
0.270
0.695
0.305
1.00
127
D
p
`
_
E
p
A
p,1
A
p,0
O
p,2
O
p,1
`
`
`
`
`
`
`
`
`
`
`
`
.
.
.
.
.
.
.
.
.
.
.
.
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
`
_
D
a
A
a,2
A
a,1
1000
`
`
`
`
`
`
`
`
`
`
`
`
.
.
.
.
.
.
.
.
.
.
.
.
0
100
50
2000
`
_
E
f
O
f ,2
O
f ,1
.
.
.
.
.
.
`
_
E
f
O
f ,2
O
f ,1
.
.
.
.
.
.
`
_
D
a
A
a,2
A
a,1
1000
`
`
`
`
`
`
`
`
`
`
`
`
.
.
.
.
.
.
.
.
.
.
.
.
0
100
50
2000
`
_
E
f
O
f ,2
O
f ,1
.
.
.
.
.
.
`
_
E
f
O
f ,2
O
f ,1
.
.
.
.
.
.
665
695
30
695
665
695
30
695
35
305
270
305
35
305
270
305
10
100
0.695
0.305
3,000
695
93,250
695
27,000
305
541,750
305
93,250
695
332,000
305
100,200
695
362,500
305
635 (above)
462.7
462.7
In doing the roll-back, alternatives with minimum values are selected since the
objective is to minimize losses.
Thus the recommendation is to launch the probe. If there are 100 casualties,
then wait for reinforcements. Otherwise, launch an all-out assault for a ranking
payoff of 462.7 casualties.
17.
The problem facing the company is the new venture. An appropriate objective is
to maximize the benet obtained from the new venture.
D
v
The venture decision
A
v,0
abandon the venture
A
v,1
proceed with the venture
E
v
The venture event
O
v, f
venture is a failure (prob. = 0.4)
O
v,s
venture is a success (prob. = 0.6)
model.
D
v
E
v
E.V.
O
v, f
O
v,s
A
v,0
0 0 0
A
v,1
15 25 9
Prob. 0.4 0.6
Thus one would recommend proceeding with the venture for a ranking payoff
of $9,000.
Perfect information
Outcome O
v, f
O
v,s
Prob. 0.4 0.6
Alternative A
v,0
A
v,1
Payoff 0 25
E.V. with P.I. = 00.4+250.60
= 15
EVPI = 159
= $6, 000
129
The maximum cost of the information is smaller than the value of perfect infor-
mation and hence it is likely to be worth obtaining. The actual problem has two
additional factors:
D
c
Decision to consult
A
c,0
do not consult
A
c,1
use plan A
A
c,2
use plan B
E
c
The consultant event
O
c,0
consultant does not recommend the venture
O
c,1
consultant recommends the venture
E
v
O
v, f
O
v,s
E
c
E
c
O
c,0
O
c,1
O
c,0
O
c,1
E
c
O
c,0
O
c,1
E
v
E
v
O
v, f
O
v,s
O
v, f
O
v,s
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
0.40
0.60
0.65
0.35
0.30
0.70
26
44
18
44
1
4
3
4
0.26
0.14
0.18
0.42
0.26
0.18
0.14
0.42
0.44
0.56
1.00
The decision tree is too large to t conveniently into one diagramso we present
it as a base tree with two sub-trees.
D
c
`
_
E
c
# 2
`
_
E
c
# 1
A
c,2
A
c,1
A
c,0
2
.
.
.
.
.
.
.
.
.
.
.
.
9 (above)
`
_
E
c
# 1
O
c,0
O
c,1
`
`
`
`
`
`
D
v
A
v,s
A
v, f
`
_
E
v
O
v,1
O
v,0
15
25
0
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
D
v
A
v,s
A
v, f
`
_
E
v
O
v,1
O
v,0
15
25
0
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
26
44
18
44
1
4
3
4
60
44
15
60
44
15
0.44
0.56
9
131
`
_
E
c
# 2
O
c,0
O
c,1
`
`
`
`
`
`
D
v
A
v,1
A
v,0
3
0.5
`
_
E
v
O
v, f
O
v,s
15
25
0
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
D
v
A
v,1
A
v,0
3
0.5
`
_
E
v
O
v, f
O
v,s
15
25
0
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
26
44
18
44
1
4
3
4
60
44
15
0.5
12
0.44
0.56
6.5
Completing the base tree we have
D
c
`
_
E
c
# 2
`
_
E
c
# 1
A
c,2
A
c,1
A
c,0
2
.
.
.
.
.
.
.
.
.
.
.
.
6.5
9
9 (above)
9
The recommendation would be to not hire the consultant for a ranking payoff
of $9,000.
(b) If plan B were used, then the average cost of the information would be
Cost = 0.56$3, 000+0.44$500
= $1, 900
This problem has the interesting result that, on average, plan A costs more
than plan B, but has a higher expected payoff since the information is not used.
18.
The problem facing the company is the erratic production. An appropriate objec-
tive is to maximize the benet from the product.
D
r
The reset decision
A
r,0
do not reset
A
r,1
reset the machine
E
p
The production event
O
p,1
O
p,2
The revenue is calculated using
Revenue = number of units (prot(1defect rate) loss defect rate)
The results for various levels of production are as follows:
No. of 2% 30% reset
units defects defects
50 5840.0 3600 n/a
49 5723.2 3528 n/a
48 5606.4 3456 n/a
47 5489.6 3384 5640
46 5372.8 3312 5520
45 5256.0 3240 5400
44 5139.2 3168 5280
43 5022.4 3096 5160
Initially we will use a payoff matrix to formulate the model.
D
r
E
p
E.V.
O
p,1
O
p,2
A
r,0
5840 3600 5504
A
r,1
5140 5140 5140
Prob. 0.85 0.15
133
If the line is reset, then the $500 cost of the reset has to be included as well.
Thus one would recommend proceeding with the production without resetting the
machine for a ranking payoff of $5,504.
Perfect information
Outcome O
p,1
O
p,2
Prob. 0.85 0.15
Alternative A
r,0
A
r,1
Payoff 5840 5140
E.V. with P.I. = 58400.85+51400.15
= 5734
EVPI = 57355504
= $231
The cost of the information, which 2 $55 = $110, is less than the EVPI, and
hence we should see if the information is worth obtaining.
The actual problem has two additional factors:
D
t
Decision to test
A
t,0
do not test
A
t,1
test 1 item
A
t,2
test 2 items
E
ti
The test event for i items
O
ti,0
no defective item
O
ti,1
1 defective item
O
ti,2
2 defective items
E
p
O
p,2
O
p,1
E
t1
E
t1
O
t1,1
O
t1,0
O
t1,1
O
t1,0
E
t1
O
t1,1
O
t1,0
E
p
E
p
O
p,2
O
p,1
O
p,2
O
p,1
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
0.15
0.85
0.30
0.70
0.02
0.98
45
62
17
62
105
938
833
938
0.045
0.105
0.017
0.833
0.045
0.017
0.105
0.833
0.062
0.938
1.00
135
`
_
E
p
O
p,2
O
p,1
`
_
E
t2
`
_
`
_
`
_
O
t2,2
O
t2,1
O
t2,0
`
`
`
`
`
`
`
_
E
t2
`
_
`
_
`
_
O
t2,2
O
t2,1
O
t2,0
`
`
`
`
`
`
`
_
E
t2
O
t2,0
O
t2,1
O
t2,2
`
_
E
p
`
_
`
_
O
p,2
O
p,1
.
.
.
.
.
.
`
_
E
p
`
_
`
_
O
p,2
O
p,1
.
.
.
.
.
.
`
_
E
p
`
_
`
_
O
p,2
O
p,1
.
.
.
.
.
.
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
0.15
0.85
0.09
0.42
0.49
0.0004
0.0392
0.9604
0.978
0.022
0.654
0.346
0.0826
0.9174
0.0135
0.0630
0.0735
0.0003
0.0333
0.8163
0.0135
0.0003
0.0630
0.0333
0.0735
0.8163
0.0138
0.0963
0.8898
1.00
The tree is too big to t conveniently in one diagram so we will use a small
base tree supplemented with two sub-trees as follows:
D
t
`
_
E
t2
`
_
E
t1
A
t,2
A
t,1
A
t,0
55
110
.
.
.
.
.
.
.
.
.
.
.
.
5504 (above)
`
_
E
t1
O
t1,0
O
t1,1
(120)
`
_
`
`
`
`
`
`
D
r
A
r,0
A
r,1
500
`
_
E
p
O
p,2
O
p,1
3528
5723.2
5520
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
D
r
A
r,0
A
r,1
500
`
_
E
p
O
p,2
O
p,1
3528
5723.2
5520
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
45
62
17
62
105
938
833
938
5,477.5
4,129.9
5,477.5
5,020
5,597.5
0.062
0.938
5,561.7
`
_
E
t2
O
t2,2
O
t2,1
O
t2,0
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
D
r
`
_
E
p
A
r,0
A
r,1
O
p,2
O
p,1
500
3456
5606.4
5400
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
`
_
D
r
`
_
E
p
A
r,0
A
r,1
O
p,2
O
p,1
500
3456
5606.4
5400
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
`
_
D
r
`
_
E
p
A
r,0
A
r,1
O
p,2
O
p,1
500
3456
5606.4
5400
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
0.9754
0.0246
0.6541
0.3459
0.0826
0.9174
(120)
(240)
0.0138
0.0963
0.8898
3,508.8
4,900
4,199.9
4,900 5,020
5,428.8
5,428.8 5,668.8
5,595.1
Completing the base of the tree, we have
137
D
t
`
_
E
t2
`
_
E
t1
A
t,2
A
t,1
A
t,0
55
110
.
.
.
.
.
.
.
.
.
.
.
.
5,595.1
5,561.7
5,504 (above)
5,506.7
Thus the recommendation is to test 1 tube. If defective, then reset. Otherwise,
do not reset for a ranking payoff of about
2
$5,506.70.
In a situation like this, where the payoffs are so close between A
t,0
and A
t,1
,
a second criterion such as improved quality could be used to decide between the
two.
19.
The problem is the choice of urns. An appropriate objective is to maximize the
benet from selecting an urn.
D
u
Decision on the type of urn
A
u,1
say urn has 1000 gold coins
A
u,2
say urn has 600 gold coins
E
u
The urn event
O
u,1
the urn has 1000 gold coins (prob. = 0.50)
O
u,2
the urn has 600 gold coins (prob. = 0.50)
Before considering the issue of drawing a coin, we can use a payoff matrix to
investigate what to do if a coin is not drawn.
2
Using exact gures we obtain, to the nearest cent, a ranking payoff of $5,506.67.
D
u
E
u
E.V.
O
u,1
O
u,2
A
u,1
1600 100 850
A
u,2
100 1600 850
Prob. 0.50 0.50
Thus one would play and say either urn has 1000 gold coins for a ranking
payoff of 850 gold coins.
Outcome O
u,1
O
u,2
Prob. 0.50 0.50
Alternative A
u,1
A
u,2
Payoff 1600 1600
E.V. with P.I. = 16000.50+16000.5
= 1600
EVPI = 1600850
= 750 gold coins
The cost of drawing a coin is well below the cost of perfect information. Thus
it is worthwhile to investigate whether the information is worth purchasing. This
adds two additional factors for this problem:
D
p
Decision to draw a coin
A
d,0
do nothing
A
d,1
draw a coin
E
c
The coin event
O
c,l
the drawn coin is lead
O
c,g
the drawn coin is gold
139
E
u
O
u,2
O
u,1
E
c
E
c
O
c,l
O
c,g
O
c,l
O
c,g
E
c
O
c,l
O
c,g
E
u
E
u
O
c,2
O
c,1
O
c,2
O
c,1
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
0.5
0.5
0.4
0.6
0.0
1.0
1.0
0.0
3
8
5
8
0.20
0.30
0.00
0.50
0.20
0.00
0.30
0.50
0.20
0.80
1.00
D
d
`
_
E
c
A
d,1
A
d,0
O
c,l
O
c,g
`
`
`
`
`
`
`
`
`
`
`
`
.
.
.
.
.
.
.
.
.
.
.
.
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
D
u
A
u,2
A
u,1
`
`
`
`
`
`
`
`
`
`
`
`
.
.
.
.
.
.
.
.
.
.
.
.
1100
80
80
1100
`
_
E
u
O
u,2
O
u,1
.
.
.
.
.
.
`
_
E
u
O
u,2
O
u,1
.
.
.
.
.
.
D
u
A
u,2
A
u,1
`
`
`
`
`
`
`
`
`
`
`
`
.
.
.
.
.
.
.
.
.
.
.
.
1100
80
80
1100
`
_
E
u
O
u,2
O
u,1
.
.
.
.
.
.
`
_
E
u
O
u,2
O
u,1
.
.
.
.
.
.
1
0
1
0
3
8
5
8
3
8
5
8
0.20
0.80
1100
80
3700
8
5740
8
1100
5740
8
850 (above)
794
850
Thus the recommendation would be to not draw a coin and guess the urn has
either 1000 or 600 gold coins for a ranking payoff of 850 gold coins.
141
20.
The problem is the need to develop a mass production process for the vaccine. An
appropriate objective is to minimize the time required to perfect the process.
D
p
Decision on the type of process
A
p,x
test process X (2 years)
A
p,y
test process Y (1 year)
E
p
The process event
O
p,x
process X is the correct process (prob. = 0.30)
O
p,y
process Y is the correct process (prob. = 0.70)
Before considering the issue of performing the experiment, we can use a pay-
off matrix to investigate what to do if no experiment is performed.
D
p
E
p
E.V.
O
p,x
O
p,y
A
p,x
2 3 2.7
A
p,y
3 1 1.6
Prob. 0.30 0.70
Thus one would choose to test process Y rst for a ranking cost of 1.6 years.
Outcome O
p,x
O
p,y
Prob. 0.30 0.70
Alternative A
p,x
A
p,y
Payoff 2 1
E.V. with P.I. = 20.30+10.7
= 1.3
EVPI = (1.3) (1.6)
= 0.3 years
The cost of performing the experiment is high relative to the cost of perfect
information and hence it is unlikely to be fruitful. Using the experiment will add
D
e
Decision to use the experiment
A
e,0
do nothing
A
e,1
use the experiment
E
e
The experiment event
O
e,x
the experiment predicts process X
O
e,y
the experiment predicts process Y
E
p
O
p,y
O
p,x
E
e
E
e
O
e,y
O
e,x
O
e,y
O
e,x
E
e
O
e,y
O
e,x
E
p
E
p
O
p,y
O
p,x
O
p,y
O
p,x
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
0.7
0.3
0.9
0.1
0.2
0.8
21
23
2
23
7
31
24
31
0.63
0.07
0.06
0.24
0.63
0.06
0.07
0.24
0.69
0.31
1.00
143
D
e
`
_
E
e
A
e,1
A
e,0
O
e,y
O
e,x
0.25
`
`
`
`
`
`
`
`
`
`
`
`
.
.
.
.
.
.
.
.
.
.
.
.
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
D
p
A
p,y
A
p,x
1
2
`
`
`
`
`
`
`
`
`
`
`
`
.
.
.
.
.
.
.
.
.
.
.
.
0
2
1
0
`
_
E
p
O
p,y
O
p,x
.
.
.
.
.
.
`
_
E
p
O
p,y
O
p,x
.
.
.
.
.
.
D
p
A
p,y
A
p,x
1
2
`
`
`
`
`
`
`
`
`
`
`
`
.
.
.
.
.
.
.
.
.
.
.
.
0
2
1
0
`
_
E
p
O
p,y
O
p,x
.
.
.
.
.
.
`
_
E
p
O
p,y
O
p,x
.
.
.
.
.
.
21
23
2
23
21
23
2
23
7
31
24
31
7
31
24
31
0.69
0.31
4
23
21
23
48
31
7
31
27
23
69
31
1.6 (above)
1.5
1.6
This is a minimization problem and hence the alternative with the minimum
value for each decision is selected.
Thus the recommendation would be to not perform the experiment and test
process Y rst for a ranking cost of 1.6 years.
21.
tive is to minimize the cost attributable to defective items.
D
r
The rework decision
A
r,0
do not rework
A
r,1
rework all the items
E
p
O
p,1
O
p,2
O
p,3
Cost = number of units cost/unit defect rate
The results for various levels of production are as follows:
No. of 1% 4% 10% rework
units defects defects defects
1000 1000 4000 10000 4000
999 999 3996 9990 4000
998 998 3992 9980 4000
997 997 3988 9970 4000
D
r
E
p
E.V.
O
p,1
O
p,2
O
p,3
A
r,0
1000 4000 10000 3400
A
r,1
4000 4000 4000 4000
Prob. 0.40 0.50 0.10
Thus one would recommend proceeding with the production without rework-
ing the items for a ranking cost of $3,400.
Perfect information
145
Outcome O
p,1
O
p,2
O
p,3
Prob. 0.40 0.50 0.10
Alternative A
r,0
A
r,0
, A
r,1
A
r,1
Payoff 1000 4000 4000
E.V. with P.I. = 10000.40+40000.50+40000.10
= 2800
EVPI = 2800(3400)
= $600
The cost of the information ($50) is signicantly smaller than the value of perfect
information and hence it may be worth obtaining.
D
t
Decision to test
A
t,0
do not test
A
t,1
test 1 unit
A
t,2
test 2 units
A
t,3
test 3 units
A
t,4
test 4 units
E
ti
O
ti,0
no defective unit
O
ti,1
1 defective unit
O
ti,2
2 defective units
O
ti,3
3 defective units
O
ti,4
4 defective units
`
_
E
t1
O
t1,1
O
t1,0
`
_
E
p
`
_
`
_
`
_
O
p,3
O
p,2
O
p,1
`
`
`
`
`
`
`
_
E
p
`
_
`
_
`
_
O
p,3
O
p,2
O
p,1
`
`
`
`
`
`
`
_
E
p
O
p,3
O
p,2
O
p,1
`
_
E
t1
`
_
`
_
O
t1,1
O
t1,0
.
.
.
.
.
.
`
_
E
t1
`
_
`
_
O
t1,1
O
t1,0
.
.
.
.
.
.
`
_
E
t1
`
_
`
_
O
t1,1
O
t1,0
.
.
.
.
.
.
`
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/
/
/
/
/
/
/
/
/
/
0.10
0.50
0.40
5
17
10
17
2
17
90
966
480
966
396
966
0.10
0.90
0.04
0.96
0.01
0.99
0.010
0.020
0.004
0.090
0.480
0.396
0.010
0.090
0.020
0.480
0.004
0.396
0.034
0.966
1.00
147
`
_
`
_
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_
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_
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.
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.
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.
.
.
.
.
.
\
\
\
\
\
\
\
\
\
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\
\
\
\
\\
/
/
/
/
/
/
/
/
/
/
/
/
/
/
//
`
_
`
_
`
_
`
_
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_
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.
.
.
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.
.
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.
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_
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.
.
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\\
/
/
/
/
/
/
/
/
/
/
/
/
/
/
//
E
p
O
p,3
O
p,2
O
p,1
E
t2
O
t2,3
O
t2,2
O
t2,1
E
t2
O
t2,3
O
t2,2
O
t2,1
E
t2
O
t2,3
O
t2,2
O
t2,1
E
t2
O
t2,3
O
t2,2
O
t2,1
E
p
O
p,3
O
p,2
O
p,1
E
p
O
p,3
O
p,2
O
p,1
E
p
O
p,3
O
p,2
O
p,1
0.10
0.50
0.40
0.01
0.18
0.81
0.0016
0.0768
0.9216
0.0001
0.0198
0.9801
0.0010
0.0180
0.0810
.0008
.0384
0.4608
.00004
.00792
0.3920
100
184
80
184
4
184
.2799
.5970
0.1231
.0867
.4935
0.4198
0.0010
0.0008
0.00004
.0180
.0384
0.00792
.0810
.4608
0.3920
0.00184
0.06432
0.9338
1.00
D
t
`
_
`
_
`
_
`
_
E
t4
E
t3
E
t2
E
t1
A
t,4
A
t,3
A
t,2
A
t,1
A
t,0
200
150
100
50
`
`
`
`
`
`
`
`
``
`
`
`
`
`
`
`
`
``
`
`
`
`
`
`
`
`
`
`
`
`
.
.
.
.
.
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.
/
/
/
/
/
/
/
/
//
/
/
/
/
/
/
/
/
//
3,400 (above)
`
_
E
t1
O
t1,0
O
t1,1
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
D
r
A
r,0
A
r,1
3996
`
_
E
p
O
p,3
O
p,2
O
p,1
9990
3996
999
0
.
.
.
.
.
.
.
.
.
.
.
.
`
`
`
`
`
`
.
.
.
.
.
.
D
r
A
r,0
A
r,1
3996
`
_
E
p
O
p,3
O
p,2
O
p,1
9990
3996
999
0
.
.
.
.
.
.
.
.
.
.
.
.
`
`
`
`
`
`
.
.
.
.
.
.
5
17
10
17
2
17
90
966
480
966
396
966
91908
17
3326
3996
3326
0.034
0.966
3349
149
`
_
E
t2
O
t2,0
O
t2,1
O
t2,2
`
`
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
/
/
D
r
A
r,0
A
r,1
3992
`
_
E
p
O
p,3
O
p,2
O
p,1
9980
3992
998
0
.
.
.
.
.
.
.
.
.
.
.
.
`
`
`
`
`
`
.
.
.
.
.
.
D
r
A
r,0
A
r,1
3992
`
_
E
p
O
p,3
O
p,2
O
p,1
9980
3992
998
0
.
.
.
.
.
.
.
.
.
.
.
.
`
`
`
`
`
`
.
.
.
.
.
.
D
r
A
r,0
A
r,1
3992
`
_
E
p
O
p,3
O
p,2
O
p,1
9980
3992
998
0
.
.
.
.
.
.
.
.
.
.
.
.
`
`
`
`
`
`
.
.
.
.
.
.
100
184
80
184
4
184
0.280
0.597
0.123
0.087
0.493
0.420
7181
5299
3254
3992
3992
3254
0.00184
0.06432
0.93384
3303
D
t
`
_
`
_
`
_
`
_
E
t4
E
t3
E
t2
E
t1
A
t,4
A
t,3
A
t,2
A
t,1
A
t,0
200
150
100
50
`
`
`
`
`
`
`
`
``
`
`
`
`
`
`
`
`
``
`
`
`
`
`
`
`
`
`
`
`
`
.
.
.
.
.
.
.
.
.
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.
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/
/
/
/
/
/
/
/
//
/
/
/
/
/
/
/
/
//
(not needed)
(not needed)
3,303
3,349
3,400 (above)
3,399
Thus the recommendation is to test 1 item. If defective, then rework the re-
maining 999 units. Otherwise, do not rework for a ranking cost of $3,399. There is
no need to consider the testing of 3 or 4 items, since the costs of these alternatives
must be higher than the cost of testing 2 items.
For this problem the difference in the costs from one alternative to the next is
small. Thus one may also look at the effect of the testing procedure on the quality
of the product.
Number of Percentage
Items Tested Defectives
0 3.400
1 3.216
2 3.045
Since there is a signicant increase in product quality, one could test 2 units
and if either item is defective then rework the remaining 998 units. This would
increase the ranking cost by only $4.
151
22.
tive is to minimize the cost attributable to defective items.
D
r
The rework decision
A
r,0
do not rework
A
r,1
rework all the items
E
p
O
p,1
O
p,2
Cost = number of units cost/unit defect rate
The costs based on a production level of 67 units are as follows:
No. of 4% 30% rework
units defects defects
67 21.44 160.80 134.00
D
r
E
p
E.V.
O
p,1
O
p,2
A
r,0
21.44 160.80 38.16
A
r,1
134.00 134.00 134.00
Prob. 0.88 0.12
Thus one would recommend proceeding with the production without rework-
ing the items for a ranking cost of $38.16.
Perfect information
Outcome O
p,1
O
p,2
Prob. 0.88 0.12
Alternative A
r,0
A
r,1
Payoff 21.44 134
E.V. with P.I. = 21.440.88+1340.12
= 34.95
EVPI = 38.16(34.95)
= $3.21
The cost of the information (which is $1.50 + $1 = $2.50) is slightly smaller
than the value of perfect information and hence unlikely to be worth obtaining.
However, it does need to be checked. Even though we can test up to three items,
(7067), we need to consider testing only one item since the cost of testing two
or more items is higher than the cost of perfect information and hence trivially
would not be done.
D
t
Decision to test
A
t,0
do not test
A
t,1
test 1 item
E
t
The test event for 1 item
O
t,0
no defective item
O
t,1
1 defective item
153
E
p
O
p,2
O
p,1
E
t
E
t
O
t,1
O
t,0
O
t,1
O
t,0
E
t
O
t,1
O
t,0
E
p
E
p
O
p,2
O
p,1
O
p,2
O
p,1
0.9288
0.0712
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
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_
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`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
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_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
0.12
0.88
0.30
0.70
0.04
0.96
0.5056
0.4944
0.0904
0.9096
0.0360
0.0840
0.0352
0.8448
0.0360
0.0352
0.0840
0.8448
0.0712
0.9288
1.00
An appropriate decision tree model is as follows:
D
t
`
_
E
t
A
t,1
A
t,0
O
t,1
O
t,0
2.50
.
.
.
.
.
.
.
.
.
.
.
.
`
`
`
`
`
`
D
r
A
r,0
A
r,1
134
`
_
E
p
O
p,2
O
p,1
160.80
21.44
0
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
D
r
A
r,0
A
r,1
134
`
_
E
p
O
p,2
O
p,1
160.80
21.44
0
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
0.5056
0.4944
0.0904
0.9096
91.90
34.04
91.90
34.04
0.0712
0.9288
38.16 (above)
38.16
38.16
Thus the recommendation is to not test any items for a ranking cost of $38.16.
23.
tive is to maximize the prot given that there are defective items.
D
b
The batch decision
A
b,0
send batch to customer
A
b,1
destroy the batch
E
b
The batch event
O
b,1
O
b,2
D
b
E
b
E.V.
O
b,1
O
b,2
A
b,0
5000 2000 3600
A
b,1
500 500 500
Prob. 0.80 0.20
Thus one would recommend sending the batch directly to the customer for a
ranking prot of $3600.
Perfect information
Outcome O
b,1
O
b,2
Prob. 0.80 0.20
Alternative A
r,0
A
r,1
Payoff 5000 500
E.V. with P.I. = 50000.80+(500) 0.20
= 3900
EVPI = 39003600
= $300
155
The cost of the information ($100) is a signicant fraction of the value of perfect
information and hence unlikely to be worth obtaining. To be sure, we need to
investigate the testing of a maximum of two items (since three items would not
give perfect information and yet would cost the same as perfect information).
D
t
Decision to test
A
t,0
do not test
A
t,1
test 1 item
A
t,2
test 2 items
E
ti
O
ti,0
no defective item
O
ti,1
1 defective item
O
ti,2
2 defective items
E
b
O
b,2
O
b,1
E
t1
E
t1
O
t1,1
O
t1,0
O
t1,1
O
t1,0
E
t1
O
t1,1
O
t1,0
E
b
E
b
O
b,2
O
b,1
O
b,2
O
b,1
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
0.20
0.80
0.30
0.70
0.00
1.00
1.00
0.00
14
94
80
94
0.06
0.14
0.00
0.80
0.06
0.00
0.14
0.80
0.06
0.94
1.00
`
_
E
b
O
b,2
O
b,1
`
_
E
t2
`
_
`
_
`
_
O
t2,2
O
t2,1
O
t2,0
`
`
`
`
`
`
`
_
E
t2
`
_
`
_
`
_
O
t2,2
O
t2,1
O
t2,0
`
`
`
`
`
`
`
_
E
t2
O
t2,0
O
t2,1
O
t2,2
`
_
E
b
`
_
`
_
O
b,2
O
b,1
.
.
.
.
.
.
`
_
E
b
`
_
`
_
O
b,2
O
b,1
.
.
.
.
.
.
`
_
E
b
`
_
`
_
O
b,2
O
b,1
.
.
.
.
.
.
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
0.20
0.80
0.09
0.42
0.49
0.00
0.00
1.00
1.00
0.00
1.00
0.00
98
898
800
898
0.018
0.084
0.098
0.000
0.000
0.800
0.018
0.000
0.084
0.000
0.098
0.800
0.018
0.084
0.898
1.00
D
t
`
_
E
t2
`
_
E
t1
A
t,2
A
t,1
A
t,0
100
200
.
.
.
.
.
.
.
.
.
.
.
.
3,600 (above)
157
`
_
E
t1
O
t1,0
O
t1,1
`
`
`
`
`
`
D
b
A
b,0
A
b,1
500
`
_
E
b
O
b,2
O
b,1
2000
5000
0
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
D
b
A
b,0
A
b,1
500
`
_
E
b
O
b,2
O
b,1
2000
5000
0
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
1.00
0.00
14
94
80
94
2000
372000
94
500
372000
94
0.06
0.94
3690
`
_
E
t2
O
t2,2
O
t2,1
O
t2,0
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
D
b
`
_
E
b
A
b,0
A
b,1
O
b,2
O
b,1
500
2000
5000
0
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
D
b
`
_
E
b
A
b,0
A
b,1
O
b,2
O
b,1
500
2000
5000
0
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
D
b
`
_
E
b
A
b,0
A
b,1
O
b,2
O
b,1
500
2000
5000
0
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
1.00
0.00
1.00
0.00
98
898
800
898
0.018
0.084
0.898
2000
2000
380400
898
500
500
380400
898
3,753
Completing the base of the tree we have
D
t
`
_
E
t2
`
_
E
t1
A
t,2
A
t,1
A
t,0
100
200
.
.
.
.
.
.
.
.
.
.
.
.
3,753
3,690
3,600 (above)
3,600
Thus the recommendation is to not test any items for a ranking prot of $3,600.
159
24.
The problem facing the company is the new product concepts. An appropriate
objective is to maximize the benet obtained from the new products.
This problem can be represented as two separate decisions one for product
1, and the other for product 2. To emphasize this, we will introduce the following
base tree:
D
p
D
2
D
1
A
p,2
A
p,1
A
p,0
.
.
.
.
.
.
.
.
.
.
.
.
0
where the symbols are dened as follows:
D
p
The product decision
A
p,0
abandon both products
A
p,1
consider product 1
A
p,2
consider product 2
D
1
The product 1 test marketing decision
A
1,0
do not test market product 1
A
1,1
test market the product 1 (cost $15,000)
D
2
The product 2 test marketing decision
A
2,0
do not test market product 2
A
2,1
test market the product 2 (cost $15,000)
We will now consider products 1 and 2 as individual decisions each product
decision is independent of the other product.
Product 1
The quantities which are relevant to the consideration of product 1 are as fol-
lows:
D
1d
Decision to develop product 1
A
1d,0
do not develop product 1
A
1d,1
develop product 1 (cost 10 million)
E
1m
Product 1 market results
O
1m,1
product has high demand (prob. 0.5)
O
1m,2
product has medium demand (prob. 0.4)
O
1m,3
product has low demand (prob. 0.1)
E
1
Product 1 test market results
O
1,g
test result is go
O
1,n
test result is no go
D
i
Decision to improve the product
A
i,0
do not improve the product
A
i,1
improve the product (cost 10 million)
E
i
Improved product result
O
i,1
product has high demand (prob 0.3)
O
i,2
product has medium demand (prob 0.7)
Before proceeding with the actual tree it is informative to consider the EVPI.
E
1m
Outcome O
1m,1
O
1m,2
O
1m,3
E
i
Outcome O
i,1
O
i,2
Prob. 0.50 0.40 0.03 0.07
Alternative A
1d,1
A
1d,0
A
1d,0
A
1d,0
Payoff 5 0 0 0
E.V. with P.I. = 50.50+0(0.40+0.03+0.07)
= 2.50
EVPI = 2.500
= 2.50 or $2, 500, 000
161
We have used a little foresight in the above equation by setting the expected
value of the decision to be zero. This is illustrated in the tree which follows. The
value of perfect information is very high as compared to the cost of the informa-
tion and hence likely to be worth obtaining.
The Bayesian revision which needs to be done is as follows:
`
_
E
1
O
1,n
O
1,g
`
_
E
1m
`
_
`
_
`
_
O
1m,3
O
1m,2
O
1m,1
`
`
`
`
`
`
`
_
E
1m
`
_
`
_
`
_
O
1m,3
O
1m,2
O
1m,1
`
`
`
`
`
`
`
_
E
1m
O
1m,3
O
1m,2
O
1m,1
`
_
E
1
`
_
`
_
O
1,n
O
1,g
.
.
.
.
.
.
`
_
E
1
`
_
`
_
O
1,n
O
1,g
.
.
.
.
.
.
`
_
E
1
`
_
`
_
O
1,n
O
1,g
.
.
.
.
.
.
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
0.10
0.40
0.50
7
45
28
45
10
45
3
55
12
55
40
55
0.70
0.30
0.70
0.30
0.20
0.80
0.07
0.03
0.28
0.12
0.10
0.40
0.07
0.28
0.10
0.03
0.12
0.40
0.45
0.55
1.00
In doing the above Bayesian revision, one needs to make the observation that
both outcomes O
1m,2
and O
1m,3
give rise to a loss and hence are unfavourable.
The decision tree for the product 1 decision is as follows:
D
1
`
_
E
1
A
1,1
A
1,0
O
1,n
O
1,g
0.015
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
`
`
`
`
`
`
`
`
D
1d
D
i
A
1d,0
A
1d,1
10
`
_
E
1m
O
1m,3
O
1m,2
O
1m,1
.
.
.
.
.
.
.
.
.
.
5
15
0
2
`
`
`
`
`
`
D
1d
D
i
A
1d,0
A
1d,1
10
`
_
E
1m
O
1m,3
O
1m,2
O
1m,1
.
.
.
.
.
.
.
.
.
.
5
15
0
2
`
`
`
`
`
`
D
1d
D
i
A
1d,0
A
1d,1
10
`
_
E
1m
O
1m,3
O
1m,2
O
1m,1
.
.
.
.
.
.
.
.
.
.
5
15
0
2
`
`
`
`
`
`
A
i,0
A
i,1
10
`
_
E
i
O
i,2
O
i,1
5 5
15
0.3
0.7
8
.
.
.
.
.
.
.
.
.
.
`
`
`
`
`
7
45
28
45
10
45
3
55
12
55
40
55
0.1
0.4
0.5
0.45
0.55
654
55
276
45
0
9.3
104
55
1.04
0
1.025
The D
i
decision node does not depend on the information received and hence
only one copy of the sub-tree associated with this node needs to be included on
the diagram.
Product 2
The quantities which are relevant to the consideration of product 2 are as fol-
lows:
163
D
2d
Decision to develop product 2
A
1d,0
do not develop product 2
A
1d,1
develop product 2 (cost 5 million)
E
2m
Product 2 market results
O
2m,g
product has good demand (prob. 0.6)
O
2m,p
product has poor demand (prob. 0.4)
E
2
Product 2 test market results
O
2,g
test result is go
O
2,n
test result is no go
D
i
Decision to improve the product
A
i,0
do not improve the product
A
i,1
improve the product (cost 2 million)
E
i
Improved product result
O
i,1
product has good demand (prob 0.5)
O
i,2
product has poor demand (prob 0.5)
Before proceeding with the actual tree it is informative to consider the EVPI.
E
2m
Outcome O
2m,g
O
2m,p
E
i
Outcome O
i,1
O
i,2
Prob. 0.60 0.20 0.20
Alternative(s) A
2d,1
A
2d,1
or A
2d,0
A
2d,0
Payoff 2 0 0
E.V. with P.I. = 20.60+0(0.20+0.20)
= 1.20
EVPI = 1.200
= 1.20 or $1, 200, 000
Once again we have set the expected value of the decision to be zero. This is
illustrated in the tree which follows. The value of perfect information is very high
as compared to the cost of the information and hence likely to be worth obtaining.
The Bayesian revision which needs to be done is as follows:
E
2m
O
2m,p
O
2m,g
E
2
E
2
O
2,n
O
2,g
O
2,n
O
2,g
E
2
O
2,n
O
2,g
E
2m
E
2m
O
2m,p
O
2m,g
O
2m,p
O
2m,g
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
0.40
0.60
0.70
0.30
0.20
0.80
0.70
0.30
0.20
0.80
0.28
0.12
0.12
0.48
0.28
0.12
0.12
0.48
0.40
0.60
1.00
An appropriate decision tree is as follows:
165
D
2
`
_
E
2
A
2,1
A
2,0
O
2,n
O
2,g
0.015
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
`
`
`
`
`
`
`
`
D
2d
D
i
A
2d,0
A
2d,1
5
`
_
E
2m
O
2m,p
O
2m,g
.
.
.
.
.
.
.
.
.
.
7
0
0.5
`
`
`
`
`
`
D
2d
D
i
A
2d,0
A
2d,1
5
`
_
E
2m
O
2m,p
O
2m,g
.
.
.
.
.
.
.
.
.
.
7
0
0.5
`
`
`
`
`
`
D
2d
D
i
A
2d,0
A
2d,1
5
`
_
E
2m
O
2m,p
O
2m,g
.
.
.
.
.
.
.
.
.
.
7
0
0.5
`
`
`
`
`
`
A
i,0
A
i,1
5
`
_
E
i
O
i,2
O
i,1
2 2
7
0.5
0.5
2.5
.
.
.
.
.
.
.
.
.
.
`
`
`
`
`
0.70
0.30
0.20
0.80
0.4
0.6
0.40
0.60
5.70
2.45
0
4.40
0.70
0.42
0
0.405
D
p
D
2
D
1
A
p,2
A
p,1
A
p,0
.
.
.
.
.
.
.
.
.
.
.
.
0.405
1.025
0
1.025
If we can only consider one of the two products, then it would be product
1. We would perform the test market and then follow its recommendation, for a
ranking prot of $1,025,000. If we may consider both products simultaneously,
then we would do so, performing the test market on each of the products. We
would then follow the recommendation of the test markets for a total ranking
prot of $1,430,000.
The expected values of imperfect information are $1,040,000 for product 1
and $420,000 for product 2.
167
Problems Involving Sequential Bayesian Revision
25.
(a) This is not a decision problem. We are only interested in determining the
probabilities associated with a certain combination of events and outcomes.
The quantities which are relevant to the situation are as follows:
E
p
Production event
O
p,n
normal defect rate (prob. 0.9)
O
p,a
abnormal defect rate (prob. 0.1)
E
t
Test event
O
t,1
item tests as good
O
t,2
item tests as inconclusive
O
t,3
item tests as poor
The Bayesian revision associated with the rst test is as follows:
`
_
E
p
O
p,n
O
p,a
`
_
E
t
`
_
`
_
`
_
O
t,3
O
t,2
O
t,1
`
`
`
`
`
`
`
_
E
t
`
_
`
_
`
_
O
t,3
O
t,2
O
t,1
`
`
`
`
`
`
`
_
E
t
O
t,3
O
t,2
O
t,1
`
_
E
p
`
_
`
_
O
p,a
O
p,n
.
.
.
.
.
.
`
_
E
p
`
_
`
_
O
p,a
O
p,n
.
.
.
.
.
.
`
_
E
p
`
_
`
_
O
p,a
O
p,n
.
.
.
.
.
.
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
0.10
0.90
0.40
0.50
0.10
0.10
0.30
0.60
4
13
9
13
5
32
27
32
1
55
54
55
0.04
0.05
0.01
0.09
0.27
0.54
0.04
0.09
0.05
0.27
0.01
0.54
0.13
0.32
0.55
1.00
Thus the probability of an inconclusive result, P(O
t,2
), is 0.32.
After the inconclusive result has been obtained, the probabilities of nor-
mal and abnormal have changed. Thus the results for a second test would be
169
`
_
E
p
O
p,n
O
p,a
`
_
E
t
`
_
`
_
`
_
O
t,3
O
t,2
O
t,1
`
`
`
`
`
`
`
_
E
t
`
_
`
_
`
_
O
t,3
O
t,2
O
t,1
`
`
`
`
`
`
`
_
E
t
O
t,3
O
t,2
O
t,1
`
_
E
p
`
_
`
_
O
p,a
O
p,n
.
.
.
.
.
.
`
_
E
p
`
_
`
_
O
p,a
O
p,n
.
.
.
.
.
.
`
_
E
p
`
_
`
_
O
p,a
O
p,n
.
.
.
.
.
.
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
5
32
27
32
0.40
0.50
0.10
0.10
0.30
0.60
20
47
27
47
25
106
81
106
5
167
162
167
20
320
25
320
5
320
27
320
81
320
162
320
20
320
27
320
25
320
81
320
5
320
162
320
47
320
106
320
167
320
1.00
The complete posterior tree is not needed since we are only interested in the
inconclusive outcome. However we have included it for completeness.
(b) Thus, the relevant probabilities given two inconclusive results are
P(normal/inconclusive twice) =
81
106
= 0.764
P(abnormal/inconclusive twice) =
25
106
= 0.236
26.
The source problem facing the decision maker is due to the uncertain nature of the
coin. An appropriate objective is to maximize his benet from playing the game.
(a) A simplifying feature of this game is that if a tail is turned up on a ip, then
one automatically knows that it is a fair coin. Thus we will not put a decision node
on the tree if a tail is turned up. Rather we will just put the certain payoff of $2.
(b) The quantities which are relevant to the situation are as follows:
D
c
Coin decision
A
c, f
say the coin is fair
A
c,t
E
c
Coin event
O
t, f
coin is fair (prob. 0.5)
O
t,t
coin is two-headed (prob. 0.5)
D
p
Flip decision
A
f ,0
do not ip
A
f ,1
ip the coin
E
f
Flip event
O
f ,h
a head is turned up
O
f ,t
a tail is turned up
We are not given any information about where the coin came from. Thus we
have to assess the uncertainty associated with the coin being fair or two-headed.
We have used the Laplace criterion to estimate the uncertainty associated with the
type of coin to be equally likely.
We will consider each ip in order. This allows us to use three almost identical
trees to represent the problem.
Flip One
The Bayesian revision associated with the rst ip of the coin is as follows:
171
E
c
O
c,t
O
c, f
E
f
E
f
O
f ,t
O
f ,h
O
f ,t
O
f ,h
E
f
O
f ,t
O
f ,h
E
c
E
c
O
c,t
O
c, f
O
c,t
O
c, f
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
0.50
0.50
0.00
1.00
0.50
0.50
0.00
1.00
2
3
1
3
0.00
0.50
0.25
0.25
0.00
0.25
0.50
0.25
0.25
0.75
1.00
The decision sub-tree associated with the rst ip of the coin is as follows:
D
f
# 1
D
f
# 2
`
_
E
f
A
f ,1
A
f ,0
O
f ,t
O
f ,h
0.20
2
`
`
`
`
`
`
`
`
``
`
`
`
`
`
`
`
`
``
/
/
/
/
/
/
/
/
//
/
/
/
/
/
/
/
/
//
`
`
`
`
`
`
.
.
.
.
.
.
D
c
A
c,t
A
c, f
`
`
`
`
`
`
`
`
`
`
`
`
.
.
.
.
.
.
.
.
.
.
.
.
2
1
2
1
`
_
E
c
O
c, f
O
c,t
.
.
.
.
.
.
`
_
E
c
O
c, f
O
c,t
.
.
.
.
.
.
0.25
0.75
1
2
1
2
1
2
1
2
0.5
0.5
1.383
0.50
1.538
1.338
Flip Two
The Bayesian revision associated with the second ip of the coin is as follows:
173
E
c
O
c,t
O
c, f
E
f
E
f
O
f ,t
O
f ,h
O
f ,t
O
f ,h
E
f
O
f ,t
O
f ,h
E
c
E
c
O
c,t
O
c, f
O
c,t
O
c, f
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
2
3
1
3
0.00
1.00
0.50
0.50
0.00
1.00
4
5
1
5
0.00
2
3
1
6
1
6
0.00
1
6
2
3
1
6
1
6
5
6
1.00
The decision sub-tree associated with the second ip of the coin is as follows:
D
f
# 2
D
f
# 3
`
_
E
f
A
f ,1
A
f ,0
O
f ,t
O
f ,h
0.20
2
`
`
`
`
`
`
`
`
``
`
`
`
`
`
`
`
`
``
/
/
/
/
/
/
/
/
//
/
/
/
/
/
/
/
/
//
`
`
`
`
`
`
.
.
.
.
.
.
D
c
A
c,t
A
c, f
`
`
`
`
`
`
`
`
`
`
`
`
.
.
.
.
.
.
.
.
.
.
.
.
2
1
2
1
`
_
E
c
O
c, f
O
c,t
.
.
.
.
.
.
`
_
E
c
O
c, f
O
c,t
.
.
.
.
.
.
1
6
5
6
1
3
2
3
1
3
2
3
0.0
1.0
1.50
1.0
19
12
1.383
Flip Three
The Bayesian revision associated with the third ip of the coin is as follows:
175
E
c
O
c,t
O
c, f
E
f
E
f
O
f ,t
O
f ,h
O
f ,t
O
f ,h
E
f
O
f ,t
O
f ,h
E
c
E
c
O
c,t
O
c, f
O
c,t
O
c, f
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
4
5
1
5
0.00
1.00
0.50
0.50
0.00
1.00
8
9
1
9
0.00
4
5
1
10
1
10
0.00
1
10
4
5
1
10
0.10
0.90
1.00
The decision sub-tree associated with the third ip of the coin is as follows:
D
f
# 3
`
_
E
f
A
f ,1
A
f ,0
O
f ,t
O
f ,h
0.20
2
`
`
`
`
`
`
`
`
``
`
`
`
`
`
`
`
`
``
/
/
/
/
/
/
/
/
//
/
/
/
/
/
/
/
/
//
`
`
`
`
`
`
.
.
.
.
.
.
D
c
A
c,t
A
c, f
`
`
`
`
`
`
`
`
`
`
`
`
.
.
.
.
.
.
.
.
.
.
.
.
2
1
2
1
`
_
E
c
O
c, f
O
c,t
.
.
.
.
.
.
`
_
E
c
O
c, f
O
c,t
.
.
.
.
.
.
D
c
A
c,t
A
c, f
`
`
`
`
`
`
`
`
`
`
`
`
.
.
.
.
.
.
.
.
.
.
.
.
2
1
2
1
`
_
E
c
O
c, f
O
c,t
.
.
.
.
.
.
`
_
E
c
O
c, f
O
c,t
.
.
.
.
.
.
0.10
0.90
1
5
4
5
1
5
4
5
1
9
8
9
1
9
8
9
2
3
5
3
0.40
1.4
1.667
1.4
1.700
1.500
Thus one should ip until a tail comes up or all three ips are done. If three
heads are observed, then say the coin is two-headed; the ranking payoff is $1.34.
177
27.
The source problem facing the company is the uncertain market for the new prod-
uct.
A simplifying feature of this situation is that survey A will either precede survey
B or not be done. This will give rise to three situations involving survey B with the
only difference between them being the estimates of uncertainty associated with
the demand levels. Thus we will rst set up the base tree involving survey A and
then the three trees (identical in structure) associated with survey B.
D
m
Decision to market the product
A
m,0
abandon the product
A
m,1
market the product
D
A
Survey A decision
A
A,0
do not do survey A
A
A,1
do survey A (cost $10,000)
D
B
Survey B decision
A
B,0
do not do survey B
A
B,1
do survey B (cost $50,000)
E
m
Market event
O
m,1
demand is low (prob. 0.4)
O
m,2
demand is medium (prob. 0.4)
O
m,3
demand is high (prob. 0.2)
E
A
Survey A results
O
A,n
survey A recommends no go
O
A,g
survey A recommends go
E
B
Survey B event
O
B,1
survey B predicts low demand
O
B,2
survey B predicts medium demand
O
B,3
survey B predicts high demand
Since the tree is large, we will rst give the base of the tree, then the three
trees associated with survey B.
D
A
D
B
# 1
D
B
# 2
D
B
# 3
`
_
E
A
A
A,1
A
A,0
O
A,n
O
A,g
10
`
`
`
`
`
`
`
`
`
`
`
`
.
.
.
.
.
.
.
.
.
.
.
.
`
`
`
`
`
`
0.54
0.46
The Bayesian revision associated with survey A is as follows:
179
`
_
E
A
O
A,n
O
A,g
`
_
E
m
`
_
`
_
`
_
O
m,1
O
m,2
O
m,3
`
`
`
`
`
`
`
_
E
m
`
_
`
_
`
_
O
m,1
O
m,2
O
m,3
`
`
`
`
`
`
`
_
E
m
O
m,1
O
m,2
O
m,3
`
_
E
A
`
_
`
_
O
A,n
O
A,g
.
.
.
.
.
.
`
_
E
A
`
_
`
_
O
A,n
O
A,g
.
.
.
.
.
.
`
_
E
A
`
_
`
_
O
A,n
O
A,g
.
.
.
.
.
.
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
0.40
0.40
0.20
14
27
10
27
3
27
6
23
10
23
7
23
0.70
0.30
0.50
0.50
0.30
0.70
0.28
0.20
0.06
0.12
0.20
0.14
0.28
0.12
0.20
0.20
0.06
0.14
0.54
0.46
1.00
For emphasis we will give a table showing the prior probabilities for E
m
which
change depending on the usage and outcomes of survey A.
E
m
Survey A Result
Not Used O
A,n
O
A,g
O
m,1
0.40
14
27
6
23
O
m,2
0.40
10
27
10
23
O
m,3
0.20
3
27
7
23
D
B
node # 1 # 3 # 2
D
B
# 1
The Bayesian revision if survey A is not done is as follows:
`
_
`
_
`
_
`
_
`
_
`
`
`
`
`
`
.
.
.
.
.
.
`
_
`
_
`
_
`
_
`
`
`
`
`
`
.
.
.
.
.
.
`
_
`
_
`
_
`
_
`
`
`
`
`
`
.
.
.
.
.
.
\
\
\
\
\
\
\
\
\
\
\
\
\
\
\\
/
/
/
/
/
/
/
/
/
/
/
/
/
/
//
`
_
`
_
`
_
`
_
`
_
`
`
`
`
`
`
.
.
.
.
.
.
`
_
`
_
`
_
`
_
`
`
`
`
`
`
.
.
.
.
.
.
`
_
`
_
`
_
`
_
`
`
`
`
`
`
.
.
.
.
.
.
\
\
\
\
\
\
\
\
\
\
\
\
\
\
\\
/
/
/
/
/
/
/
/
/
/
/
/
/
/
//
E
m
O
m,1
O
m,2
O
m,3
E
B
O
B,1
O
B,2
O
B,3
E
B
O
B,1
O
B,2
O
B,3
E
B
O
B,1
O
B,2
O
B,3
E
B
O
B,1
O
B,2
O
B,3
E
m
O
m,1
O
m,2
O
m,3
E
m
O
m,1
O
m,2
O
m,3
E
m
O
m,1
O
m,2
O
m,3
0.40
0.40
0.20
0.50
0.40
0.01
0.20
0.50
0.30
0.00
0.10
0.90
0.20
0.16
0.04
0.08
0.20
0.12
0.00
0.02
0.18
5
7
2
7
0
8
19
10
19
1
19
2
17
6
17
9
17
0.20
0.08
0.00
0.16
0.20
0.02
0.04
0.12
0.18
0.28
0.38
0.34
1.00
The decision tree for survey B with no survey A is as follows:
181
D
B
# 1
`
_
E
B
A
B,1
A
B,0
O
B,1
O
B,2
O
B,3
50
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
D
m
`
_
E
m
A
m,1
A
m,0
O
m,3
O
m,2
O
m,1
300
100
500
0
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
D
m
`
_
E
m
A
m,1
A
m,0
O
m,3
O
m,2
O
m,1
300
100
500
0
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
D
m
`
_
E
m
A
m,1
A
m,0
O
m,3
O
m,2
O
m,1
300
100
500
0
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
D
m
`
_
E
m A
m,1
A
m,0
O
m,3
O
m,2
O
m,1
300
100
500
0
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
0.40
0.40
0.20
5
7
2
7
0
8
19
10
19
1
19
2
17
6
17
9
17
0.28
0.38
0.34
1300
7
900
19
4500
17
0
0
4500
17
20
90
20
40
D
B
# 2
The Bayesian revision, if survey A is done and the result is a go, is as fol-
lows:
`
_
`
_
`
_
`
_
`
_
`
`
`
`
`
`
.
.
.
.
.
.
`
_
`
_
`
_
`
_
`
`
`
`
`
`
.
.
.
.
.
.
`
_
`
_
`
_
`
_
`
`
`
`
`
`
.
.
.
.
.
.
\
\
\
\
\
\
\
\
\
\
\
\
\
\
\\
/
/
/
/
/
/
/
/
/
/
/
/
/
/
//
`
_
`
_
`
_
`
_
`
_
`
`
`
`
`
`
.
.
.
.
.
.
`
_
`
_
`
_
`
_
`
`
`
`
`
`
.
.
.
.
.
.
`
_
`
_
`
_
`
_
`
`
`
`
`
`
.
.
.
.
.
.
\
\
\
\
\
\
\
\
\
\
\
\
\
\
\\
/
/
/
/
/
/
/
/
/
/
/
/
/
/
//
E
m
O
m,1
O
m,2
O
m,3
E
B
O
B,1
O
B,2
O
B,3
E
B
O
B,1
O
B,2
O
B,3
E
B
O
B,1
O
B,2
O
B,3
E
B
O
B,1
O
B,2
O
B,3
E
m
O
m,1
O
m,2
O
m,3
E
m
O
m,1
O
m,2
O
m,3
E
m
O
m,1
O
m,2
O
m,3
6
23
10
23
7
23
0.50
0.40
0.01
0.20
0.50
0.30
0.00
0.10
0.90
30
230
24
230
6
230
2
23
5
23
3
23
0
7
230
63
230
3
5
2
5
0
24
81
50
81
7
81
2
33
10
33
21
33
3
23
2
23
0
24
230
50
230
7
230
6
230
30
230
63
230
50
230
81
230
99
230
1.00
The decision tree for survey B, if survey A is done and the result is a go, is
as follows:
183
D
B
# 2
`
_
E
B
A
B,1
A
B,0
O
B,1
O
B,2
O
B,3
50
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
D
m
`
_
E
m
A
m,1
A
m,0
O
m,3
O
m,2
O
m,1
300
100
500
0
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
D
m
`
_
E
m
A
m,1
A
m,0
O
m,3
O
m,2
O
m,1
300
100
500
0
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
D
m
`
_
E
m
A
m,1
A
m,0
O
m,3
O
m,2
O
m,1
300
100
500
0
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
D
m
`
_
E
m A
m,1
A
m,0
O
m,3
O
m,2
O
m,1
300
100
500
0
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
6
23
10
23
7
23
3
5
2
5
0
24
81
50
81
7
81
2
33
10
33
21
33
50
230
81
230
99
230
700
5
1300
81
10900
33
0
1300
81
10900
33
2700
23
3400
23
2700
23
2700
23
D
B
# 3
The Bayesian revision, if survey A is done and the result is a no go, is as
follows:
`
_
`
_
`
_
`
_
`
_
`
`
`
`
`
`
.
.
.
.
.
.
`
_
`
_
`
_
`
_
`
`
`
`
`
`
.
.
.
.
.
.
`
_
`
_
`
_
`
_
`
`
`
`
`
`
.
.
.
.
.
.
\
\
\
\
\
\
\
\
\
\
\
\
\
\
\\
/
/
/
/
/
/
/
/
/
/
/
/
/
/
//
`
_
`
_
`
_
`
_
`
_
`
`
`
`
`
`
.
.
.
.
.
.
`
_
`
_
`
_
`
_
`
`
`
`
`
`
.
.
.
.
.
.
`
_
`
_
`
_
`
_
`
`
`
`
`
`
.
.
.
.
.
.
\
\
\
\
\
\
\
\
\
\
\
\
\
\
\\
/
/
/
/
/
/
/
/
/
/
/
/
/
/
//
E
m
O
m,1
O
m,2
O
m,3
E
B
O
B,1
O
B,2
O
B,3
E
B
O
B,1
O
B,2
O
B,3
E
B
O
B,1
O
B,2
O
B,3
E
B
O
B,1
O
B,2
O
B,3
E
m
O
m,1
O
m,2
O
m,3
E
m
O
m,1
O
m,2
O
m,3
E
m
O
m,1
O
m,2
O
m,3
14
27
10
27
1
9
0.50
0.40
0.01
0.20
0.50
0.30
0.00
0.10
0.90
70
270
56
270
14
270
2
27
5
27
3
27
0
1
90
9
90
7
9
2
9
0
56
109
50
109
3
109
14
71
30
71
27
71
7
27
2
27
0
56
270
50
270
3
270
14
270
30
270
27
270
1
3
109
270
71
270
1.00
The decision tree for survey B, if survey A is done and the result is a no go,
is as follows:
185
D
B
# 1
`
_
E
B
A
B,1
A
B,0
O
B,1
O
B,2
O
B,3
50
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
D
m
`
_
E
m
A
m,1
A
m,0
O
m,3
O
m,2
O
m,1
300
100
500
0
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
D
m
`
_
E
m
A
m,1
A
m,0
O
m,3
O
m,2
O
m,1
300
100
500
0
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
D
m
`
_
E
m
A
m,1
A
m,0
O
m,3
O
m,2
O
m,1
300
100
500
0
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
D
m
`
_
E
m A
m,1
A
m,0
O
m,3
O
m,2
O
m,1
300
100
500
0
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
14
27
10
27
3
27
7
9
2
9
0
56
109
50
109
3
109
14
71
30
71
27
71
1
3
109
270
71
270
1900
9
10300
109
12300
71
0
0
12300
71
1700
27
1230
27
0
0
D
A
D
B
# 1
D
B
# 2
D
B
# 3
`
_
E
A
A
A,1
A
A,0
O
A,n
O
A,g
10
`
`
`
`
`
`
`
`
`
`
`
`
.
.
.
.
.
.
.
.
.
.
.
.
`
`
`
`
`
`
0.54
0.46
2700
23
0
40
54
44
The recommendation would be to perform survey A. If the result is go, then
market the product. Otherwise, do not market the product for a ranking payoff of
$44,000. Survey B should not be used.
187
28.
The source problem is the uncertain nature of the urn. An appropriate objective is
to maximize the benet from playing the game.
(a) A simplifying feature of this situation is that if two balls are drawn of the same
colour, then the type of urn is determined with certainty. Two blue balls guarantee
that the urn will be type II, whereas two red balls guarantee that the urn will be
type I. Thus there is no need to put a decision on the tree if either of these results
has occurred; all that is needed is the payoff.
(b) As before, we will use the Laplace criterion to estimate the initial uncertainty
associated with each type of urn.
D
p
Decision to play the game
A
p,0
do not play
A
p,1
play the game (cost $5.75)
D
u
Decision on the type of urn
A
u,I
say the urn is type I
A
u,II
say the urn is type II
D
d
Decision to draw a ball
A
d,0
do not draw a ball
A
d,1
draw a ball (cost $2)
E
u
Urn event
O
u,I
urn is type I (prob. 0.5)
O
u,II
urn is type II (prob. 0.5)
E
t
The test event
O
t,r
the ball is red
O
t,b
the ball is blue
Since the tree is large, we will rst give an enlarged base tree, then the two
trees which result from testing the urn. The two sub-trees will be identical in form.
D
p
D
d
D
u
D
d
# 2
D
d
# 1
`
_
E
d
A
p,0
A
p,1
A
d,1
A
d,0
A
u,II
A
u,I
O
d,1
O
d,2
5.75
2
`
`
`
`
`
`
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
Z
Z
Z
Z
Z
Z
`
`
`
`
`
`
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
Z
Z
Z
Z
Z
Z

.
.
.
.
.
.
.
.
.
.
.
.
`
`
`
`
`
`
.
.
.
.
.
.
`
_
E
u
O
u,II
O
u,I
0.50
0.50
.
.
.
.
.
.
`
_
E
u
O
u,II
O
u,I
0.50
0.50
.
.
.
.
.
.
10
0
0
10
0
5
5
5
The Bayesian revision associated with drawing the rst ball is as follows:
189
E
u
O
u,II
O
u,I
E
d
E
d
O
d,b
O
d,r
O
d,b
O
d,r
E
d
O
d,b
O
d,r
E
u
E
u
O
u,II
O
u,I
O
u,II
O
u,I
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
0.50
0.50
0.75
0.25
0.20
0.80
15
19
4
19
5
21
16
21
0.375
0.125
0.200
0.400
0.375
0.100
0.125
0.400
0.475
0.525
1.00
To emphasize the effect of obtaining additional information, we will give a
table showing the prior probabilities for E
u
which change depending on the usage
and outcomes of drawing a ball.
E
u
Result of drawing a ball
Not Drawn O
t,r
O
t,b
O
u,I
0.50
16
21
4
19
O
u,II
0.50
5
21
15
19
D
d
node # 1 # 2
D
d
# 1
The Bayesian revision if the ball drawn is red is as follows:
E
u
O
u,II
O
u,I
E
d
E
d
O
d,b
O
d,r
O
d,b
O
d,r
E
d
O
d,b
O
d,r
E
u
E
u
O
u,II
O
u,I
O
u,II
O
u,I
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
5
21
16
21
1.00
0.00
0.25
0.75
5
9
4
9
0.00
1.00
5
21
0.00
4
21
12
21
5
21
4
21
0.00
12
21
3
7
4
7
1.00
The decision sub-tree if the ball drawn is red is as follows:
191
D
d
# 2
`
_
E
t
A
d,0
A
d,1
O
t,b
O
t,r
0.40
`
`
`
`
`
`
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
Z
Z
Z
Z
Z
Z
.
.
.
.
.
.
D
u
A
u,II
A
u,I
`
_
E
u
O
u,II
O
u,I
.
.
.
.
.
.
`
_
E
u
O
u,II
O
u,I
.
.
.
.
.
.
10
0
0
10
.
.
.
.
.
.
.
.
.
.
.
.
D
u
A
u,II
A
u,I
`
_
E
u
O
u,II
O
u,I
.
.
.
.
.
.
`
_
E
u
O
u,II
O
u,I
.
.
.
.
.
.
10
0
0
10
.
.
.
.
.
.
.
.
.
.
.
.
5
9
4
9
5
9
4
9
5
21
16
21
5
21
16
21
3
7
4
7
10
50
9
40
9
50
9
50
21
160
21
160
21
170
21
1616
210
D
d
# 2
The Bayesian revision if the ball drawn is blue is as follows:
E
u
O
u,II
O
u,I
E
d
E
d
O
d,b
O
d,r
O
d,b
O
d,r
E
d
O
d,b
O
d,r
E
u
E
u
O
u,II
O
u,I
O
u,II
O
u,I
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
15
19
4
19
1.00
0.00
1
3
2
3
1.00
0.00
5
9
4
9
10
19
5
19
0.00
4
19
10
19
0.00
5
19
4
19
10
19
9
19
1.00
The decision sub-tree if the ball drawn is blue is as follows:
193
D
d
# 2
`
_
E
t
A
d,0
A
d,1
O
t,r
O
t,b
0.40
`
`
`
`
`
`
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
Z
Z
Z
Z
Z
Z
.
.
.
.
.
.
D
u
A
u,II
A
u,I
`
_
E
u
O
u,II
O
u,I
.
.
.
.
.
.
`
_
E
u
O
u,II
O
u,I
.
.
.
.
.
.
10
0
0
10
.
.
.
.
.
.
.
.
.
.
.
.
D
u
A
u,II
A
u,I
`
_
E
u
O
u,II
O
u,I
.
.
.
.
.
.
`
_
E
u
O
u,II
O
u,I
.
.
.
.
.
.
10
0
0
10
.
.
.
.
.
.
.
.
.
.
.
.
5
9
4
9
5
9
4
9
15
19
4
19
15
19
4
19
9
19
10
19
10
50
9
40
9
50
9
150
19
40
19
150
19
150
19
150
19
Note that we have switched the order of the O
t,r
and O
t,b
branches in order to
make this sub-tree identical in form to the previous one.
D
p
D
d
D
u
D
d
# 2
D
d
# 1
`
_
E
d
A
p,0
A
p,1
A
d,1
A
d,0
A
u,II
A
u,I
O
d,1
O
d,2
5.75
2
`
`
`
`
`
`
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
Z
Z
Z
Z
Z
Z
`
`
`
`
`
`
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
Z
Z
Z
Z
Z
Z

.
.
.
.
.
.
.
.
.
.
.
.
`
`
`
`
`
`
.
.
.
.
.
.
`
_
E
u
O
u,II
O
u,I
0.50
0.50
.
.
.
.
.
.
`
_
E
u
O
u,II
O
u,I
0.50
0.50
.
.
.
.
.
.
10
0
0
10
0.475
0.525
0
5
5
150
19
1616
210
5
7.79
5.79
0.04
The recommendation would be to play the game and draw a ball. If the ball is
blue, then say the urn is type II. If the ball is red, then draw a second ball. If the
second ball is blue, then say the urn is type II; if it is red then say it is type I. The
ranking payoff is $0.04.
195
29.
The problem facing Pleasure Craft Inc. is the production of lemons. An appro-
priate objective is to minimize the costs associated with the lemons. The $2,000
warranty related costs can be treated as a sunk cost, if we let the cost of a lemon
be $38,000. This will simplify the calculations and the trees.
D
r
Decision to rework the boat
A
r,0
do nothing
A
r,1
rework the boat ($1500)
E
L
The lemon event
O
L,1
boat is a lemon (prob. = 0.05)
O
L,2
boat is normal (prob. = 0.95)
model.
D
r
E
L
E.V.
O
L,1
O
L,2
A
r,0
38, 000 0 1900
A
r,1
1500 1500 1500
Prob. 0.05 0.95
Thus one would recommend reworking every boat for an actual cost of $1,500
per boat.
Outcome O
L,1
O
L,2
Prob. 0.05 0.95
Alternative A
r,1
A
r,0
Payoff 1500 0
E.V. with P.I. = 15000.05+00.95
= 75
EVPI = 75(1500)
= 1, 425 (per boat)
(c) The rst modication adds two additional factors for this problem:
D
I
Decision to inspect the boat
A
I,0
do nothing
A
I,1
inspect the boat ($200)
E
I
O
I,1
boat looks bad
O
I,2
inconclusive
O
I,3
boat looks good
The Bayesian revision associated with an initial inspection is given in the fol-
lowing set of probability trees:
`
_
E
L
O
L,1
O
L,2
`
_
E
I
`
_
`
_
`
_
O
I,3
O
I,2
O
I,1
`
`
`
`
`
`
`
_
E
I
`
_
`
_
`
_
O
I,3
O
I,2
O
I,1
`
`
`
`
`
`
`
_
E
I
O
I,3
O
I,2
O
I,1
`
_
E
L
`
_
`
_
O
L,1
O
L,2
.
.
.
.
.
.
`
_
E
L
`
_
`
_
O
L,1
O
L,2
.
.
.
.
.
.
`
_
E
L
`
_
`
_
O
L,1
O
L,2
.
.
.
.
.
.
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
0.05
0.95
0.01
0.20
0.79
0.80
0.15
0.05
5
7605
7600
7605
100
1525
1425
1525
395
870
475
870
0.0005
0.0100
0.0395
0.7600
0.1425
0.0475
0.0005
0.7600
0.0100
0.1425
0.0395
0.0475
0.7605
0.1525
0.0870
1.00
197
An appropriate decision tree would be as follows:
D
I
`
_
E
I
A
I,1
A
I,0
O
I,3
O
I,2
O
I,1
200
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
D
r
`
_
E
L
A
r,0
A
r,1
O
L,1
O
L,2
1500
38, 000
0
0
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
D
r
`
_
E
L
A
r,0
A
r,1
O
L,1
O
L,2
1500
38, 000
0
0
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
D
r
`
_
E
L
A
r,0
A
r,1
O
L,1
O
L,2
1500
38, 000
0
0
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
5
7605
7600
29
100
1525
1425
1525
395
890
475
890
0.7605
0.1525
0.0870
24.98
24.98
2492
1500
17253
1500
1500
(part a)
378.25
578.25
The recommendation would be to perform an inspection. If the boat looks
good, then do not rework the boat. Otherwise, rework the boat for a ranking cost
of $578.25 per boat.
(d) If a second inspection station is available, then another decision and event are
allowed.
D
i
Decision to inspect the boat a second time
A
i,0
do nothing
A
i,1
inspect the boat ($200)
E
i
O
i,1
boat fails
O
i,2
boat passes
The tree given in part (c) now becomes the base tree with the D
r
decisions
replaced by the D
i
decisions as follows:
D
I
`
_
E
I
A
I,1
A
I,0
O
I,3
O
I,2
O
I,1
200
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
/
/
/
/
/
/
/
/
/
/
D
i
D
i
D
i
# 3
# 2
# 1
0.7605
0.1525
0.0870
1500
(part a)
Each of the D
i
nodes is identical in form to the other nodes. The main difference
is the information which is available at the time the decision is made.
A table showing the prior probabilities for the outcomes associated with E
L
,
which change depending on the usage and outcomes of the rst inspection, is as
follows:
199
E
L
Result of rst inspection
O
I,1
O
I,2
O
I,3
O
L,1
475
870
100
1525
5
7605
O
L,2
395
870
1425
1525
7600
7605
D
i
node # 1 # 2 # 3
D
i
# 1
The Bayesian revision for second inspection given the rst inspection was
looks bad is as follows:
E
L
O
L,1
O
L,2
E
i
E
i
O
i,1
O
i,2
O
i,1
O
i,2
E
i
O
i,1
O
i,2
E
L
E
L
O
L,1
O
L,2
O
L,1
O
L,2
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
`
`
`
`
`
Z
Z
Z
Z
Z
Z
`
_
`
_
`
_
.
.
.
.
.
.
`
_
`
_
`
_
.
.
.
.
.
.
475
870
395
870
0.98
0.02
0.10
0.90
3871
4346
475
4346
79
4354
4275
4354
3871
8700
79
8700
475
8700
4275
8700
3871
8700
475
8700
79
8700
4275
8700
4346
8700
4354
8700
1.00
The sub-tree associated with the D
i
# 1 decision is
D
i
# 1
`
_
E
i
A
i,1
A
i,0
O
i,1
O
i,2
200
.
.
.
.
.
.
.
.
.
.
.
.
`
`
`
`
`
`
D
r
A
r,0
A
r,1
1500
`
_
E
L
O
L,1
O
L,2
38,000
0
0
~
~
~
~
~
~
~
~
~
~
~
~
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
D
r
A
r,0
A
r,1
1500
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_
E
L
O
L,1
O
L,2
38,000
0
0
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~
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3871
4346
475
4346
79
4354
4275
4354
33,847
689
1500
689
0.4995
0.5005
1500 (above)
1,094
1,204
D
i
# 2
The Bayesian revision for second inspection given the rst inspection was
inconclusive is as follows:
201
E
L
O
L,1
O
L,2
E
i
E
i
O
i,1
O
i,2
O
i,1
O
i,2
E
i
O
i,1
O
i,2
E
L
E
L
O
L,1
O
L,2
O
L,1
O
L,2
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_
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Z
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Z
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Z
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100
1525
1425
1525
0.98
0.02
0.10
0.90
980
2405
1425
2405
20
12845
12825
12845
980
1525
2
1525
1425
15250
12825
15250
98
1525
1425
15250
2
1525
12825
15250
2405
15250
12845
15250
1.00
The sub-tree associated with the D
i
# 2 decision is
D
i
# 2
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i
A
i,1
A
i,0
O
i,1
O
i,2
200
.
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r
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r,0
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r,1
1500
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O
L,1
O
L,2
38,000
0
0
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r,0
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r,1
1500
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O
L,1
O
L,2
38,000
0
0
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980
2405
1425
2405
2
12845
12825
12845
15,784
59
1500
59
0.1577
0.8423
1500 (above)
286
486
D
i
# 3
The Bayesian analysis does not have to be done for this node. The existing
ranking payoff without further information is $24.98 from part (c), whereas the
information will cost $200.
D
I
`
_
E
I
A
I,1
A
I,0
O
I,3
O
I,2
O
I,1
200
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D
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D
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D
i
# 3
# 2
# 1
0.7605
0.1525
0.0870
24.98
486
1,294
1500
(part a)
206
406
Thus the recommendation would be to perform the rst inspection. If the
result is looks good, then sell the boat as it is. Otherwise, perform the second
inspection. If the result is fail, then rework the boat. Otherwise sell the boat as it
is for a ranking cost of $406 per boat.
Chapter 5
Linear Optimization
1.
Analysis
Problem: Efcient use of resources.
Objective: Maximize daily contribution to prot.
Factors Under Control
Number of units of each product produced.
Number of units of each resource used.
Factors Beyond Control
Number of units of each resource available constraint.
Product requirements structural parameter.
Prots per unit objective function coefcients.
Given the nature of how the situation is described, it is useful to set up a
resource (or parameter) table to summarize the data before proceeding with the
model formulation.
Resource Used for Availability
Product 1 Product 2
Machine A 10 min 8 min 7.0 hrs = 420 min
Machine B 6 min 15 min 7.5 hrs = 450 min
Prot $45 $30
Requirements 20 15
203
204 CHAPTER 5. LINEAR OPTIMIZATION
(a) Model Formulation
The variables which give rise to the simplest objective function are
X
i
= number of units of product i produced each day (i = 1, 2).
The model
1
is
max 45X
1
+ 30X
2
subject to
(1) 10X
1
+ 8X
2
420 Machine A
(2) 6X
1
+ 15X
2
450 Machine B
(3) X
1
20 Product 1
(4) X
2
15 Product 2
X
1
, X
2
0
(b) Solution
To determine the scale for the graph we rst set up the intercept table
Equation X
1
X
2
(1) 42 52.5
(2) 75 30.0
(3) 20
(4) 15
Thus an appropriate range appears to be (0 to 80) for X
1
and (0 to 60) for X
2
.
1
Equations (1) and (2) could be written in terms of hours but this would introduce fractions into
the equation. Whenever possible it is better to avoid fractions since they usually require rounding
when converting them to real numbers which are required for solution programs such as LINDO.
205
0 10 20 30
X
1
40 50 60 70 80
0
10
20
30
X
2
40
50
60
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(4)
(2)
(3)
(1)
Trial Isovalue Line
-
Feasible Region
>
>
>
>
>
>.
Optimal Point
Estimate (30,15)
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t
-
-
-
-
-
-
t t
From the graph we see that the optimal point occurs at the intersection of the
boundaries of constraints (1) and (4). Namely
(1) 10X
1
+ 8X
2
= 420
(4) X
2
= 15
These can be trivially solved to obtain X
2
= 15 and X
1
= 30. In this case
it turns out that the estimate from the graph is exactly the same. Normally, the
estimate will not equal the calculated values. The objective function value (OFV)
at this optimal point is
OFV
= 45X
1
+30X
2
= 4530+3015
= $1, 800
Thus the recommendation would be to produce 30 units of product 1 and 15
units of product 2 for a daily contribution to the prot of $1,800.
2.
The set of variables which are appropriate to this decision situation are
X
i
= number of dollars invested in stock type i.
(a)
10
i=1
X
i
100, 000
(b) X
i
2, 000 i = 1, . . . , 10
(c) X
i
20, 000 i = 1, . . . , 10
(d)
4
i=1
X
i
21, 000
7
i=5
X
i
18, 000
10
i=8
X
i
15, 000
(e)
4
i=1
X
i
60, 000
7
i=5
X
i
50, 000
10
i=8
X
i
40, 000
(f)
4
i=1
X
i

1
2
10
i=5
X
i
or 2
4
i=1
X
i
+
10
i=5
X
i
0
(g)
7
i=5
X
i

10
i=8
X
i
+ 20, 000
or
7
i=5
X
i

10
i=8
X
i
20, 000
207
3.
Analysis
Problem: Need to feed the cats.
Objective: Minimize the cost of supplying the cats with enough nutrition.
Number of units of each product purchased.
Number of units of each nutritional requirement used.
Requirements for each type of nutrition constraint.
Product characteristics structural parameters.
Cost per kg of each product objective function coefcients.
Summarizing the data before proceeding with the model formulation.
Resource Product Characteristic Requirement
Product 1 Product 2
Protein 20% 50% 80 g/day = 0.080 kg/day
Carbohydrates 25% 30% 75 g/day = 0.075 kg/day
Cost/kg $0.60 $1.20
X
i
= number of kg/day of product i purchased (i = 1, 2).
The model is
min 0.60X
1
+ 1.20X
2
subject to
(1) 0.20X
1
+ 0.50X
2
0.080 Protein
(2) 0.25X
1
+ 0.30X
2
0.075 Carbohydrate
X
1
, X
2
0
(b) Solution
Equation X
1
X
2
(1) 0.40 0.16
(2) 0.30 0.25
Thus an appropriate range appears to be (0 to 0.40) for X
1
and (0 to 0.25) for
X
2
.
0.00 0.05 0.10 0.15
X
1
0.20 0.25 0.30 0.35 0.40
0.00
0.05
0.10
0.15
X
2
0.20
0.25
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(2)
(1)
-
Trial Isovalue Line (Part b)
Trial Isovalue Line (Part c)

Feasible Region
Optimal Point (Part b)

Estimate (0.21,0.075)
Optimal Point (Part c)

Estimate (0.4,0.0)
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(1) 0.20X
1
+ 0.50X
2
= 0.080
(2) 0.25X
1
+ 0.30X
2
= 0.075
To solve these equations we can either calculate 0.25 (1) 0.20 (2) or
0.30(1) +0.50(2). Using the rst one we have
0.25(1) 0.05X
1
+ 0.125X
2
= 0.020
0.20(2) 0.05X
1
+ 0.060X
2
= 0.015
0.00X
1
+ 0.065X
2
= 0.005
X
2
=
1
13
kg 77 grams
209
Equation (1) can be used to solve for X
1
as follows
0.05X
1
+ 0.125
1
13
= 0.020
0.05X
1
= 0.020
.125
13
0.05X
1
=
.135
13
X
1
=
27
130
kg 208 grams
This solution is in good agreement with the estimate from the graph. The
objective function value (OFV
) at this optimal point is

OFV
= 0.60X
1
+1.20X
2
= 0.60
27
130
+1.20
10
130
=
28.2
130
$0.22 per day
Thus the recommendation would be to use
27
130
kg of product 1 and
1
13
kg of
product 2 for a daily cost of $0.22.
(c) The revised model is
min 0.60X
1
+ 1.80X
2
subject to
(1) 0.20X
1
+ 0.50X
2
0.080 Protein
(2) 0.25X
1
+ 0.30X
2
0.075 Carbohydrate
X
1
, X
2
0
The solution can be obtained by inspection from the graph. Namely
X
1
= 0.40 and X
2
= 0.00 for a total daily cost of $0.24.
4.
(a) The model is
min 2X
1
+ 5X
2
subject to
(1) 6X
1
+ 3X
2
24
(2) 3X
1
+ 5X
2
30
(3) 4X
1
3X
2
12
(4) 2X
1
1X
2
0
X
1
, X
2
0
First we determine the scale for the graph we rst set up the intercept table
Equation X
1
X
2
(1) 4 8
(2) 10 6
(3) 3 4
(4) 0 0
1
and (0 to 8) for X
2
.
0 1 2 3
X
1
4 5 6 7 8 9 10 11 12
0
1
2
3
X
2
4
5
6
7
8
9
10
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(1)
(2)
(3)
(4)
-
Trial Isovalue Line
Feasible Region
Optimal Point
Estimate (10,0)
211
This exact optimal solution is found by inspection from the graph to be X
1
=
10 and X
2
= 0. The objective function value (OFV) at this optimal point is
OFV
= 2X
1
+5X
2
= 210+50
= 20
(b) Constraints (1) and (4) are redundant and non-binding, constraint (3) is non-
binding, and constraints (2) and the non-negativity of X
1
are binding.
5.
(a) The model is
min 2X
1
+ 2X
2
subject to
(1) X
1
+ 3X
2
12
(2) 3X
1
+ 1X
2
13
(3) X
1
X
2
3
X
1
, X
2
0
Equation X
1
X
2
(1) 12 4
(2) 4.3 13
(3) 3 3
1
and (0 to 13) for X
2
.
0 1 2 3
X
1
4 5 6 7 8 9 10 11 12
0
1
2
3
X
2
4
5
6
7
8
9
10
11
12
13
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/-
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/-
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(1)
(2)
(3)
-
Trial Isovalue Line
-
Feasible Region
>
>
>
>
>
> >.
Optimal Point
Estimate (4,1)
A
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Z
Z
Z
(b) From the graph we see that the optimal point occurs at the intersection of the
(2) 3X
1
+ 1X
2
= 13
(3) X
1
X
2
= 3
To solve these equations we can either calculate 1(2) 3(3) or 1(2) +
1(3). Using the second one since it is less work, we have
4X
1
+ 0X
2
= 16
X
1
= 4
2
as follows
14 1X
2
= 3
X
2
= 1
The objective function value (OFV) at this optimal point is
213
OFV
= 2X
1
+2X
2
= 24+21
= 10
(c) Point A on the graph occurs at the intersection of the boundaries of constraints
(1) and (2). Thus
(1) X
1
+ 3X
2
= 12
(2) 3X
1
+ 1X
2
= 13
To solve these equations we can either calculate 3(1) 1(2) or 1(1)
3(2). Arbitrarily choosing the rst one, we have
3(1) 3X
1
+ 9X
2
= 36
1(2) 3X
1
+ 1X
2
= 13
0X
1
+ 8X
2
= 23
X
2
=
23
8
= 2.875
1
as follows
1X
1
+ 3X
2
= 12
X
1
+ 3
23
8
= 12
X
1
= 12
69
8
X
1
=
27
8
= 3.375
OFV = 2X
1
+2X
2
= 2
27
8
+2
23
8
=
50
4
= 12.5
Point B on the graph occurs at the intersection of the boundaries of constraints (1)
and (3). Thus
(1) X
1
+ 3X
2
= 12
(3) X
1
X
2
= 3
3(3). Choosing the rst one because it is less work, we have
0X
1
+ 4X
2
= 9
X
2
= 2.25
1
as follows
1X
1
X
2
= 3
X
1
2.25 = 3
X
1
= 5.25
OFV = 2X
1
+2X
2
= 25.25+22.25
= 15
In summary, the corner points have the following values
Corner X
1
X
2
OFV
Optimal 4.000 1.000 10.0
A 3.375 2.875 12.5
B 5.250 2.250 15.0
6.
(a) The model is
min 4X
1
+ 8X
2
subject to
(1) 2X
1
+ 5X
2
20
(2) 14X
1
+ 7X
2
35
(3) 4X
1
+ 6X
2
60
(4) X
2
8
X
1
, X
2
0
215
Equation X
1
X
2
(1) 10 4
(2) 2.5 5
(3) 15 10
(4) 8
1
and (0 to 10) for X
2
.
0 1 2 3
X
1
4 5 6 7 8 9 10 11 12 13 14 15
0
1
2
3
X
2
4
5
6
7
8
9
10
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(1) (2)
(3)
(4)
Trial Isovalue Line

Feasible Region
-
Optimal Point
Estimate (0.6,3.7)
E
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(b) The corner points have the following values
Corner Binding X
1
X
2
OFV
Constraints
Optimal (1), (2)
5
8
= 0.625 3
3
4
= 3.75 32.5
A (2), X
2
axis 0 5 40
B (4), X
2
axis 0 8 64
C (3), (4) 3 8 76
D (3), X
1
axis 15 0 60
E (1), X
1
axis 10 0 40
The points on the axes are trivial to calculate and hence we will show the
explicit calculations for the optimal point and point C.
Optimal Point
(1) 2X
1
+ 5X
2
= 20
(2) 14X
1
+ 7X
2
= 35
5(2). Using the rst one since it is less work, we have
14X
1
+ 35X
2
= 140
14X
1
+ 7X
2
= 35
0X
1
+ 28X
2
= 105
X
2
=
15
4
= 3.75
1
as follows
2X
1
+ 5
15
4
= 20
2X
1
= 20
150
8
X
1
=
5
8
= 0.625
OFV
= 4X
1
+8X
2
= 4
5
8
+8
15
4
= 32.5
Point C
(3) 4X
1
+ 6X
2
= 60
(4) + X
2
= 8
Since equation (4) gives the value for X
2
, we use equation (3) to solve for X
1
as
follows
4X
1
+ 68 = 60
4X
1
= 6048
X
1
= 3
217
The objective function value (OFV) at this point is
OFV = 4X
1
+8X
2
= 43+88
= 76
(c) When this constraint is added, the feasible region shrinks to the feasible line
joining F and the new optimal point.
0 1 2 3
X
1
4 5 6 7 8 9 10 11 12 13 14 15
0
1
2
3
X
2
4
5
6
7
8
9
10
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(1) (2)
(3)
(4)
(5c)
Trial Isovalue Line
Feasible Line
-
Optimal Point
Estimate (3.2,2.7)
F
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The optimal point occurs at the intersection of the new constraint and the
boundary of (1)
(1) 2X
1
+ 5X
2
= 20
(5c) 3X
1
+ 2X
2
= 15
To solve these equations we can either calculate 3(1)2(5c) or 2(1)
5(5c). Arbitrarily choosing the rst one, we have
3(1) 6X
1
+ 15X
2
= 60
2(2) 6X
1
+ 4X
2
= 30
0X
1
+ 11X
2
= 30
X
2
=
30
11
1
as follows
2X
1
+ 5X
2
= 20
2X
1
+ 5
30
11
= 20
X
1
= 10
75
11
X
1
=
35
11
The objective function value (OFV

OFV
= 4X
1
+8X
2
= 4
35
11
+8
30
11
=
380
11
34.5
(d) When this constraint is added, the feasible region shrinks to the feasible line
joining G and the new optimal point.
0 1 2 3
X
1
4 5 6 7 8 9 10 11 12 13 14 15
0
1
2
3
X
2
4
5
6
7
8
9
10
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(1) (2)
(3)
(4)
(5d)
Trial Isovalue Line

>
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Feasible Line
.
Optimal Point
Estimate (6.0,1.5)
G
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The optimal point occurs at the intersection of the new constraint and the
boundary of (1)
(1) 2X
1
+ 5X
2
= 20
(5d) 3X
1
2X
2
= 15
219
To solve these equations we can either calculate 3(1)2(5c) or 2(1)+
5(5c). Arbitrarily choosing the rst one, we have
3(1) 6X
1
+ 15X
2
= 60
2(2) 6X
1
4X
2
= 30
0X
1
+ 19X
2
= 30
X
2
=
30
19
1.58
1
as follows
2X
1
+ 5X
2
= 20
2X
1
+ 5
30
19
= 20
X
1
= 10
75
19
X
1
=
115
19
6.05

OFV
= 4X
1
+8X
2
= 4
115
19
+8
30
19
=
700
19
36.8
7.
Analysis
Objective: Maximize daily contribution to prot.
Number of units of each product produced.
Maximum possible demands constraint.
Product requirements structural parameter.
model formulation.
Regular Deluxe
Dough 750 g 600 g 75 kg = 75,000 g
Toppings 200 g 500 g 40.4kg = 40,400 g
Prot $0.50 $0.75
Requirements 80 75
X
1
= number of regular pizzas produced.
X
2
= number of deluxe pizzas produced.
The model is
max 0.50X
1
+ 0.75X
2
subject to
(1) 750X
1
+ 600X
2
75, 000 Dough Mix
(2) 200X
1
+ 500X
2
40, 400 Toppings
(3) X
1
80 Regular
(4) X
2
70 Deluxe
X
1
, X
2
0
(b) Solution
Equation X
1
X
2
(1) 100 125
(2) 202 80.8
(3) 80
(4) 70
221
Thus an appropriate range
2
appears to be (0 to 130) for X
1
and (0 to 130) for
X
2
.
0 10 20 30 40 50 60
X
1
70 80 90 100 110 120 130
0
10
20
30
40
50
60
X
2
70
80
90
100
110
120
130
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(4)
(2)
(3)
(1)
Trial Isovalue Line

Feasible Region
Optimal Point
Estimate (52,60)
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g g
g g
g
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(1) 750X
1
+ 600X
2
= 75, 000
(2) 200X
1
+ 500X
2
= 40, 400
Dividing (1) by 750, and dividing (2) by 200, we obtain:
(1
) X
1
+ 0.8X
2
= 100
(2
) X
1
+ 2.5X
2
= 202
Subtracting (1
) from (2
) gives
0X
1
+1.7X
2
= 102
2
The maximum value of 202 for X
1
is not chosen since this will make the feasible region a
smaller portion of the graph. 130 is chosen to make the base the same length as the height.
from which it follows that X
2
= 60. Substituting this value into (1
) gives X
1
=
52. These values are in good agreement with the estimate from the graph. The
objective function value (OFV

OFV
= 0.50X
1
+0.75X
2
= 0.5052+0.7560
= $71.00
Thus the recommendation would be to produce 52 regular pizzas and 60 deluxe
pizzas for a daily contribution to the prot of $71.00.
8.
Analysis
Objective: Maximize weekly contribution to prot.
Number of litre of each brand produced.
Product requirements structural parameters.
Given the nature of how the situation is described, it is useful to summarize the
situation using a resource (or parameter) table before proceeding with the model
formulation.
223
Dark Horse Wholesome
Yeast 5 g 3 g 51 kg = 51,000 g
Hops 8 g 6 g 96 kg = 96,000 g
Barley 18 g 15 g 243 kg = 243,000 g
Water 1.1 l 1.1 l unlimited
Prot $0.24 $0.30
Requirements 80% 80%
(Part c)
The requirements for water do not give rise to any constraint and hence will
be ignored.
X
1
= number of litres of Dark Horse produced.
X
2
= number of litres of Wholesome Light produced.
The objective function and constraints are
max 0.24X
1
+ 0.30X
2
subject to
(1) 5X
1
+ 3X
2
51, 000 Yeast
(2) 8X
1
+ 6X
2
96, 000 Hops
(3) 18X
1
+ 15X
2
243, 000 Barley
X
1
, X
2
0
(b) Solution
Equation X
1
X
2
(1) 10,200 17,000
(2) 12,000 16,000
(3) 13,500 16,200
1
and (0 to 18) for X
2
where the units are in 1,000s of litres.
0 1 2 3 4 5 6
X
1
7 8 9 10 11 12 13 14
0
1
2
3
4
5
6
X
2
7
8
9
10
11
12
13
14
15
16
17
18
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(1) (2) (3)
Trial Isovalue Line

Feasible Region
Optimal Point
Estimate (0,16)
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The optimal solution is trivially X
1
= 0 and X
2
= 16. The objective function
value (OFV

OFV
= 0.24X
1
+0.30X
2
= 0.240+0.3016
= $4, 800
Thus the recommendation would be to produce 0 litres of Dark Horse and
16,000 litres of Wholesome Light for a weekly contribution to the prot of $4,800.
225
(c) Modication
The production of either brand cannot exceed 80% of the total production
(X
1
+X
2
). Thus we have two additional constraints
X
1
0.80(X
1
+X
2
)
X
2
0.80(X
1
+X
2
)
which reduce to
+0.2X
1
0.80X
2
0
0.8X
1
+0.20X
2
0
Adding these constraints to our previous model, the new model is
max 0.24X
1
+ 0.30X
2
subject to
(1) 5X
1
+ 3X
2
51, 000 Yeast
(2) 8X
1
+ 3X
2
96, 000 Hops
(3) 18X
1
+ 15X
2
243, 000 Barley
(4) 0.2X
1
0.80X
2
0
(5) 0.8X
1
+ 0.20X
2
0
X
1
, X
2
0
The graph now becomes
0 1 2 3 4 5 6
X
1
7 8 9 10 11 12 13 14
0
1
2
3
4
5
6
X
2
7
8
9
10
11
12
13
14
15
16
17
18
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(1) (2) (3) (4) (5)
Trial Isovalue Line

Feasible Region
Optimal Point
Estimate (2.9,11.8)
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boundaries of constraints (1), (2) and (5).
3
We will use (1) and (5) to solve for the
optimal point. Namely
(1) 5X
1
+ 3X
2
= 51, 000
(5) 0.8X
1
0.20X
2
= 0
To solve these equations we can either calculate 0.8(1) 5(6) or 0.20
(1) +3(6). Using the second one we have
3
Hence, the optimal point is degenerate.
227
0.2(1) 1X
1
+ 0.6X
2
= 10, 200
3.0(6) 2.4X
1
0.6X
2
= 0
3.4X
1
+ 0.0X
2
= 10, 200
X
1
= 3, 000 litres
2
as follows
0.803, 000 0.20X
2
= 0.0
0.20X
2
= 2, 400
X
2
= 12, 000 litres
OFV
= 0.24X
1
+0.30X
2
= 0.243, 000+0.3012, 000
= $4, 320
Thus the recommendation would be to produce 3,000 litres of Dark Horse and
12,000 litres of Wholesome Light for a weekly contribution to the prot of $4,320.
9.
(a) The model is
max 7X
1
+ 2.8X
2
subject to
(1) 2X
1
+ X
2
6
(2) X
1
+ 2X
2
4
(3) 2X
1
+ 3X
2
12
(4) 5X
1
+ 2X
2
10
X
1
, X
2
0
First we determine the scale for the graph. Setting up the intercept table, we have
Equation X
1
X
2
(1) 3 6
(2) 4 2
(3) 6 4
(4) 2 5
Thus an appropriate range appears to be (0 to 6) for both X
1
and X
2
.
0.0 0.5 1.0 1.5
X
1
2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0
0.0
0.5
1.0
1.5
X
2
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
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>
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(1)
(2) (3) (4)
Trial Isovalue Line
Feasible Region
Optimal Point
Estimate (2.7,0.7)
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(1) 2X
1
+ X
2
= 6
(2) X
1
+ 2X
2
= 4
2(2). Using the rst one we have
2(1) 4X
1
+ 2X
2
= 12
1(2) X
1
+ 2X
2
= 4
3X
1
+ 0.0X
2
= 8
X
1
=
8
3
2.67
229
2
as follows
2
8
3
+ X
2
= 6
X
2
= 6
16
3
X
2
=
2
3
0.67

OFV
= 7X
1
+2.8X
2
= 7
8
3
+2.8
2
3
=
61.6
3
20.5
(b) The new model is
max 7X
1
+ 2.8X
2
subject to
(1) 2X
1
+ X
2
6
(2) X
1
+ 2X
2
4
(3) 2X
1
+ 3X
2
12
(4) 5X
1
+ 2X
2
10
(5) 5X
1
2X
2
= 0
X
1
, X
2
0
Modifying the graph from part (a), we have
0.0 0.5 1.0 1.5
X
1
2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0
0.0
0.5
1.0
1.5
X
2
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
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//
(1)
(2) (3) (4)
(5)
Trial Isovalue Line

Feasible Line
Optimal Point
Estimate (1.25,3.3)
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(3) 2X
1
+ 3X
2
= 12
(5) 5X
1
2X
2
= 0
To solve these equations we can either calculate 5(3) 2(5) or 2(1) +
3(2). Using the second one we have
2(1) 4X
1
+ 6X
2
= 24
1(2) 15X
1
6X
2
= 0
19X
1
+ 0.0X
2
= 24
X
1
=
24
19
1.26
2
as follows
5
24
19
2X
2
= 0
2X
2
=
120
19
X
2
=
60
19
3.16
231

OFV
= 7X
1
+2.8X
2
= 7
24
19
+2.8
60
19
=
336
19
17.7
10.
(a) The model is
max 2X
1
+ 1X
2
subject to
(1) 4X
1
+ 2X
2
24
(2) 3X
1
+ 2X
2
27
(3) 3X
1
+ 4X
2
40
(4) 3X
1
4X
2
0
X
1
, X
2
0
Equation X
1
X
2
(1) 6.0 12.0
(2) 9.0 13.5
(3) 13.3 10.0
(4) 0 0
1
and X
2
.
0 1 2 3 4 5 6 7
X
1
8 9 10 11 12 13 14
0
1
2
3
4
5
6
7
X
2
8
9
10
11
12
13
14
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(1) (2) (3) (4)
Trial Isovalue Line
Feasible Region
Optimal Point
Estimate (6.0,4.5)
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(2) 3X
1
+ 2X
2
= 27
(4) 3X
1
4X
2
= 0
To solve these equations we can either calculate 2(2) +1(4) or 1(2)
1(4). Using the second one and performing the subtraction, we have
0X
1
+ 6X
2
= 27
X
2
=
27
6
= 4.5
1
as follows
3X
2
44.5 = 0
X
1
= 6
233

OFV
= 2X
1
+1X
2
= 26+14.5
= 16.5
(b) The new model is
min 6X
1
2X
2
subject to
(1) 4X
1
+ 2X
2
24
(2) 3X
1
+ 2X
2
27
(3) 3X
1
+ 4X
2
40
(4) 3X
1
4X
2
0
X
1
, X
2
0
Modifying the previous graph, we have
0 1 2 3 4 5 6 7
X
1
8 9 10 11 12 13 14
0
1
2
3
4
5
6
7
X
2
8
9
10
11
12
13
14
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(1) (2) (3) (4)
Trial Isovalue Line
Feasible Region
Optimal Point
Estimate (1.6,8.8)
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(1) 4X
1
+ 2X
2
= 24
(3) 3X
1
+ 4X
2
= 40
4(3). Using the rst one, we have
2(1) 8X
1
+ 4X
2
= 48
1(3) 3X
1
+ 4X
2
= 40
5X
1
+ 0X
2
= 8
X
1
= 1.6
2
as follows
41.6 + 2X
2
= 24
2X
2
= 246.4
X
2
= 8.8

OFV
= 6X
1
2X
2
= 61.628.8
= 8
11.
The model is
max 3X
1
+ 2X
2
subject to
(1) 2X
1
+ 5X
2
10
(2) 4X
1
+ 3X
2
= 12
(3) 1X
1
+ 4X
2
4
X
1
, X
2
0
235
Equation X
1
X
2
(1) 5 2
(2) 3 4
(3) 4 1
1
and X
2
.
0 1 2 3 4 5
X
1
0
1
2
3
4
5
X
2
-
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(1)
(2)
(3)
Trial Isovalue Line
Feasible Line
>
>
>
>
>
>
>.
Optimal Point
Estimate (2.75,0.3)
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(2) 4X
1
+ 3X
2
= 12
(3) 1X
1
+ 4X
2
= 4
To solve these equations we can either calculate 4 (2) 3 (3) or 1
(2) +4(3). Using the second one we have
4X
1
3X
2
= 12
4X
1
+ 16X
2
= 16
0X
1
+ 13X
2
= 4
X
2
=
4
13
0.31
1
as follows
X
1
+ 4
4
13
= 4
X
1
= 4
16
13
X
1
=
36
13
2.77

OFV
= 3X
1
+2X
2
= 3
36
13
+2
4
13
=
116
13
8.92
12.
(a) The model is
max 3X
1
+ 4X
2
subject to
(1) X
1
8
(2) + X
2
10
(3) X
1
+ 2X
2
22
(4) 3X
1
+ 5X
2
15
X
1
, X
2
0
Equation X
1
X
2
(1) 8
(2) 10
(3) 22 11
(4) 5 3
In order to make the feasible region larger, we will exclude the X
1
value of 22
from the range for X
1
. Instead we will use a range of (0 to 10) for X
1
and a range
of (0 to 12) for X
2
.
237
0 1 2 3 4 5
X
1
6 7 8 9 10
0
1
2
3
4
5
X
2
6
7
8
9
10
11
12
(1)
(2)
(3)
(4)
Trial Isovalue Line Feasible Region
Optimal Point
Estimate (8,7)
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(1) X
1
= 8
(3) X
1
+ 2X
2
= 22
These equations trivially give X
1
= 8 and X
2
= 7.

OFV
= 3X
1
+4X
2
= 38+47
= 52
(b) For the model
max 3X
1
+ 4X
2
subject to
(1) X
1
8
(2) + X
2
10
(3) X
1
+ 2X
2
22
(4) 3X
1
+ 5X
2
15
X
1
, X
2
0
we modify the previous graph as follows:
0 1 2 3 4 5
X
1
6 7 8 9 10
0
1
2
3
4
5
X
2
6
7
8
9
10
11
12
(1)
(2)
(3)
(4)
Trial Isovalue Line Feasible Region

Optimal Point
Estimate (0,3)
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boundaries of constraints (4) and the X
2
axis. Namely
(4) 3X
1
+ 5X
2
= 15
X
2
axis X
1
= 0
239
These equations trivially give X
1
= 0 and X
2
= 3.

OFV
= 3X
1
+4X
2
= 30+43
= 12
13.
Analysis
Problem: Efcient use of resources in satisfying the special order.
Objective: Maximize prot contribution from the special order.
Number of litres of the blended whisky produced.
Number of litres of each ingredient used.
Order size restrictions constraint.
Number of litres of each ingredient available constraints.
Blend requirements constraints.
Selling price of blend per litre objective function coefcient.
Cost per litre of each ingredient objective function coefcient.
X
0
= number of litres of the blend produced.
X
1
= number of litres of the barley whisky used.
X
2
= number of litres of the grain whisky used.
Since these variables are related, using these variables gives rise to the rela-
tionship
X
0
= X
1
+X
2
The objective function can now be written as
max 2.25X
0
0.75X
1
0.45X
2
(The xed cost of 2800 is an irrelevance as far as the linear optimization
model is concerned.)
The order size requirements are:
X
0
2, 000
X
0
3, 000
The availability of the ingredients give rise to the following two conditions:
X
1
1, 250
X
2
1, 250
The volume requirement can be written as
X
1
0.40X
0
The mix requirement of no more than two parts barley to one part grain means
that if X
2
= 1 then X
1
2. The constraint which reects this is
X
1
2X
2
Putting the constraints in the proper format, the model becomes
max 2.25X
0
0.75X
1
0.45X
2
subject to
(0) X
0
X
1
X
2
= 0 Denition
(1) X
0
2, 000 Minimum Size
(2) X
0
3, 000 Maximum Size
(3) X
1
1, 250 Barley
(4) X
2
1, 250 Grain
(5) 0.4X
0
X
1
0 Volume
(6) X
1
2X
2
0 Mix
X
0
, X
1
, X
2
0
241
(b) Solution
The above model cannot be solved using the graphical procedure. In order to
obtain a model which can be solved using the graphical procedure, we will use
equation (0) to substitute for X
0
and hence reduce the model to one which has
only two variables.
max 1.50X
1
+ 1.80X
2
subject to
(1) X
1
+ X
2
2, 000 Minimum Size
(2) X
1
+ X
2
3, 000 Maximum Size
(3) X
1
1, 250 Barley
(4) X
2
1, 250 Grain
(5) 0.6X
1
+ 0.4X
2
0 Volume
(6) X
1
2X
2
0 Mix
X
1
, X
2
0
Equation X
1
X
2
(1) 2,000 2,000
(2) 3,000 3,000
(3) 1,250
(4) 1,250
(5) 0 0
(6) 0 0
Thus an appropriate range appears to be (0 to 3,000) for both X
1
and X
2
.
0 1,000 2,000 3,000
X
1
0
1,000
2,000
3,000
X
2
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(1)
(2)
(3)
(4)
(5)
(6)
Trial Isovalue Line
-
Feasible Region
.
Optimal Point
Estimate (1,250,1,250)
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From the graph we see that the optimal point occurs at the intersection of
the boundaries of constraints (3) and (4) which can be trivially solved to obtain
X
1
= 1, 250 and X
2
= 1, 250. The objective function value (OFV) at this optimal
point is
OFV
= 1.5X
1
+1.8X
2
= 1.51, 250+1.81, 250
= 4, 125
Thus the recommendation would be to produce 2,500 litres of the blended
whisky using 1,250 litres of barley whisky and 1,250 litres of grain whisky for a
contribution to the prot of 4,125.
243
14.
Analysis
Problem: Reactivation of a plant.
Objective: Maximize energy output from the reactivated plant.
Number of tonnes of the each type of coal used.
Conveyor belt capacity constraint.
Government regulations constraints.
Grinding capacities structural parameters.
Grinder usage constraints.
Thermal values of each type of coal objective function coefcients.
Sulphur oxide emissions structural parameters.
Particulate emissions structural parameters.
X
1
= number of tonnes per hour of Anthracite coal used.
X
2
= number of tonnes per hour of Bituminous coal used.
The objective function can now be written as
max 24, 000X
1
+20, 000X
2
The conveyor belt restriction is simply
X
1
+ X
2
20
The total particulate emissions per hour is 0.4X
1
+1.0X
2
. This must be less
than the government maximum of 12.8 kg/hr. Thus
0.4X
1
+1.0X
2
12.8
The oxide emission is not by weight or volume. This represent a ongoing
characteristic of the emission which depends on the mix of the coal being used.
If two types of coal are being burned together, than the oxide emission is the
weighted average of the amount of each type of coal being burned. To simplify
the expressions, we will introduce a variable to represent the total amount of coal
being burned in an hour.
X
0
= number of tonnes per hour of coal used.
X
0
= X
1
+X
2
Hence the conveyor constraint can be written as X
0
20. The oxide require-
ment can now be written as:
1, 800
X
1
X
0
+ 3, 800
X
2
X
0
2, 600
1, 800X
1
+ 3, 800X
2
2, 600X
0
2, 600X
0
+ 1, 800X
1
+ 3, 800X
2
0
To handle the grinder constraint, we note that the 18 and 24 are number of
tonnes which can be processed each hour if the grinding mill grinds only one type
of coal for the complete hour. The fraction of each hour taken to grind the X
1
and
X
2
tonnes of coal are
X
1
18
and
X
2
24
, respectively. Since the total fraction of each hour
used cannot exceed 100% (which is 1), we have the constraint
1
18
X
1
+
1
24
X
2
1
Putting the constraints in the proper format, the model becomes
max 0X
0
+ 24, 000X
1
+ 20, 000X
2
subject to
(0) X
0
X
1
X
2
= 0 Denition
(1) X
0
20 Conveyor
(2) 0.4X
1
+ 1.0X
2
12.8 Particulate
(3) 2600X
0
+ 1, 800X
1
+ 3, 800X
2
0 Sulphur Oxide
(4)
1
18
X
1
+
1
24
X
2
1 Grinding Mill
X
0
, X
1
, X
2
0
(b) Solution
The above model cannot be solved using the graphical procedure. In order to
obtain a model which can be solved using the graphical procedure, we will use
equation (0) to substitute for X
0
and hence reduce the model to one which has
only two variables.
245
max 24, 000X
1
+ 20, 000X
2
subject to
(1) X
1
+ X
2
20 Conveyor
(2) 0.4X
1
+ 1.0X
2
12.8 Particulate
(3) 800X
1
+ 1, 200X
2
0 Sulphur Oxide
(4)
1
18
X
1
+
1
24
X
2
1 Grinding Mill
X
1
, X
2
0
Equation X
1
X
2
(1) 20 20
(2) 32 12.8
(3) 0 0
(4) 18 24
1
and (0 to 24) for
X
2
.
0 2 4 6 8 10 12 14
X
1
16 18 20 22 24 26 28 30 32
0
2
4
6
8
10
12
X
2
14
16
18
20
22
24
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(3)
(4) (2)
Trial Isovalue Line

Feasible
Region
Optimal Point
Estimate (12,8)
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boundaries of constraints (1), (2), (3), and (4). Although any two of these could
be used to solve for the variables, we will choose (3) and (4), since they form part
of the boundary of the feasible region.
4
(3) 800X
1
+ 1, 200X
2
= 0
(4)
1
18
X
1
+
1
24
X
2
= 1
One way to solve these equations is calculate 1(3) +14, 400(4).
1(3) 800X
1
+ 1, 200X
2
= 0
14, 400(4) 800X
1
+ 600X
2
= 14, 400
0X
1
+ 1, 800X
2
= 14, 400
X
2
= 8
Using equation (3) to solve for X
1
we have
800X
1
+ 1, 2008 = 0
800X
1
= 9, 600
X
1
= 12
OFV
= 24, 000X
1
+20, 000X
2
= 24, 00012+20, 0008
= 448, 000 megajoules/hour
Thus the recommendation would be to use 12 tonnes of anthracite and 8 tonnes
of bituminous coal per hour for a power production of 448,000 megajoules per
hour.
5
15.
Before doing anything with the equations, we rst must ensure that all of the
decision variables are non-negative. Thus we must replace X
2
with X
2
=X
2
and
obtain:
4
The optimal point is degenerate.
5
1 joule = 1 watt 1 second, and there are 3,600 seconds/hour. Therefore,
448, 000 megajoules per hour 124.4 megawatts
247
min 2X
1
5X
2
+3X
3
subject to
(1) 7X
1
3X
2
402X
2
2X
3
(2) 2X
1
4X
2
+X
3
20
(3)
9X
1
5X
2
2X
3
X
1
+X
3
+1
2
(4) 3X
1
X
2
+2X
3
= 28+X
3
(5) 10X
1
+5X
2
1
+4X
1
X
2
6X
3
3X
1
X
3
8X
2
X
1
0 X
2
0 X
3
0
The objective function is ne as it is. We now take each constraint in turn.
Constraint (1) All variables must appear on the left hand side and no constant
terms of the left hand side.
7X
1
X
2
+2X
3
40
Constraint (2) The right hand side value must be non-negative. Multiplying the
constraint by 1 changes the signs and changes the direction of the inequality.
2X
1
+4X
2
X
3
20
Constraint (3) Non-linear terms such as those created by division are not allowed.
Thus we must multiply through by the denominator. This is allowed since it is
guaranteed to be greater than zero.
9X
1
5X
2
2X
3
2(X
1
+X
3
+1)
7X
1
5X
2
4X
3
2
Constraint (4) A variable is not allowed on the right hand side. Subtracting X
3
from both sides we have
3X
1
X
2
+X
3
= 28
Constraint (5) Non-linear terms are not allowed. Bringing all the variables to the
left hand side, we have
10X
1
+5X
2
1
+4X
1
X
2
+8X
2
3X
1
X
3
6X
3
0
Rearranging
X
1
(10+5X
1
) +X
2
(4X
1
+8) X
3
(3X
1
+6) 0
Factoring out (2+X
1
), we have
(2+X
1
)(5X
1
+4X
2
3X
3
) 0
Since X
1
0, (2+X
1
) > 0 and hence above condition reduces to
5X
1
+4X
2
3X
3
0
or 5X
1
4X
2
+3X
3
0
Putting all the above conditions together, the correct model formulation is
min 2X
1
5X
2
+ 3X
3
subject to
(1) 7X
1
X
2
+ 2X
3
40
(2) 2X
1
+ 4X
2
X
3
20
(3) 7X
1
5X
2
4X
3
4
(4) 3X
1
X
2
+ X
3
= 28
(5) 5X
1
4X
2
+ 3X
3
0
X
1
, X
2
, X
3
0
Chapter 6
Markov Chains
1.
Let state 1 represent up, and state 2 represent down.
P =
_
0.9 0.1
0.8 0.2
_
(a) Fourth order transitions
P
2
=
_
0.9 0.1
0.8 0.2
_
_
0.9 0.1
0.8 0.2
_
=
_
0.89 0.11
0.88 0.12
_
P
4
=
_
0.89 0.11
0.88 0.12
_
_
0.89 0.11
0.88 0.12
_
=
_
0.8889 0.1111
0.8888 0.1112
_
The P(up after 4 transitions/up now) is 0.8889 (row 1 column 1).
Similarly, P(down after 4 transitions/down now) is 0.1112 (row
2 column 2).
(b) Expected rst passage time for 1,2
i j
= 1+
k=j
p
ik
k j
1,2
= 1+ p
1,1
1,2
249
250 CHAPTER 6. MARKOV CHAINS
1,2
=
1
1p
1,1
1,2
=
1
p
1,2
=
1
0.1
= 10
(c) Expected rst passage time for 2,1
2,1
=
1
p
2,1
=
1
0.8
= 1.25
2.
State 1 - catch is good; State 2 - catch is bad
P =
_
0.8 0.2
0.4 0.6
_
(a) Eighth order transitions
P
2
=
_
0.8 0.2
0.4 0.6
_
_
0.8 0.2
0.4 0.6
_
=
_
0.72 0.28
0.56 0.44
_
P
4
=
_
0.72 0.28
0.56 0.44
_
_
0.72 0.28
0.56 0.44
_
=
_
0.6752 0.3248
0.6496 0.3504
_
P
8
=
_
0.6752 0.3248
0.6496 0.3504
_
_
0.6752 0.3248
0.6496 0.3504
_
=
_
0.6669 0.3331
0.6662 0.3338
_
Thus P(bad in eight days/good now) = 0.3331.
251
(b) Long run market share
1
=
p
2,1
p
1,2
+ p
2,1
=
.4
.2+.4
=
2
3
Thus the catch is good
2
3
(or 66.67%) of the time.
3.
State 1 NF brand tea; State 2 all other brands combined.
P =
_
0.90 0.10
0.02 0.98
_
(a) Long run market share
1
=
p
2,1
p
1,2
+ p
2,1
=
.02
.10+.02
=
1
6
Thus NF Tea has one sixth (16.67 %) of the market.
(b) (i) We wish to determine f
(2)
2,1
. Since there are only two states, f
(2)
2,1
is
simply
f
(2)
2,1
= p
(21)
2,2
p
2,1
= .98.02
= 0.0196
(b) (ii) We wish to determine f
(3)
2,1
. Since there are only two states,
f
(3)
2,1
is simply
f
(3)
2,1
= (p
2,2
)
(31)
p
2,1
= (.98)
2
.02
= 0.0192
(c) New NF Tea product
State 1 NF Tea brand A; State 2 NF Tea brand B; State 3 other
brands
P =
_
_
0.88 0.05 0.07
0.10 0.70 0.20
0.01 0.03 0.96
_
_
(
1
,
2
,
3
) = (
1
,
2
,
3
)
_
_
0.88 0.05 0.07
0.10 0.70 0.20
0.01 0.03 0.96
_
_
1
= .88
1
+.10
2
+.01
3
(1)
2
= .05
1
+.70
2
+.03
3
(2)
3
= .07
1
+.20
2
+.96
3
(3) and
1 = 1.0
1
+1.0
2
+1.0
3
(4)
Arbitrarily removing equation (3) from the list, we can remove
3
from equations (1) and (2) using equation (4) to obtain
.13
1
.09
2
= .01 (1
)
.02
1
+.33
2
= .03 (2
)
Multiplying equation (2
) by
9
33
and adding the result to equation (1
)
we eliminate
2
to obtain
253
411
3300
1
=
60
3300
1
=
60
411
Substituting this result for
1
in (1
) we have
.13
60
411
.09
2
= .01
2
=
41
411
and nally
3
= 1
1
2
=
310
411
The market share for NF Tea is now
1
+
2
which is
1
+
2
=
60
411
+
41
411
=
101
411
= 24.6%
(d) We wish to determine f
(2)
3,2
and f
(3)
3,2
. The destination state is state 2,
hence we have
P
2
=
_
_
0.88 0.05 0.07
0 0 0
0.01 0.03 0.96
_
_
Therefore
P
2
2
=
_
_
0.88 0.05 0.07
0 0 0
0.01 0.03 0.96
_
_
_
_
0.88 0.05 0.07
0 0 0
0.01 0.03 0.96
_
_
=
_
_
0.7751 0.0461 0.1288
0 0 0
0.0184 0.0293 0.9223
_
_
From the above matrix we see that
f
(2)
3,2
= 0.0293
By multiplying the third row of P
2
2
by the second column of P
2
we
obtain
f
(3)
3,2
= .0184.05+0.02930+.9223.03
= 0.028589
4.
(a) The long-term market shares of ESSOH, URVING, and SEA-SHELL are rep-
resented by
1
,
2
, and
3
respectively.
P =
_
_
0.8 0.1 0.1
0.2 0.7 0.1
0.2 0.3 0.5
_
_
(
1
,
2
,
3
) = (
1
,
2
,
3
)
_
_
0.8 0.1 0.1
0.2 0.7 0.1
0.2 0.3 0.5
_
_
1
= .8
1
+.2
2
+.2
3
(1)
2
= .1
1
+.7
2
+.3
3
(2)
3
= .1
1
+.1
2
+.5
3
(3) and
1 = 1.0
1
+1.0
2
+1.0
3
(4)
Arbitrarily removing equation (3) from the list, we can remove
3
from equations
(1) and (2) using equation (4) (
3
= 1
1
2
) to obtain
0.4
1
+0.0
2
= 0.2 (1
)
0.2
1
+0.6
2
= 0.3 (2
)
255
Thus from equation (1
1
=
0.2
0.4
=
1
2
Substituting this result for
1
in (2
) we have
0.2
1
2
+0.6
2
= 0.3
0.6
2
= 0.2
2
=
1
3
and nally
3
= 1
1
2
= 1
1
2
1
3
=
1
6
Thus the solution is
Company Market share
ESSOH 50.00%
URVING 33.33%
SEA-SHELL 16.67%
(b) We are seeking the expected rst passage time from URVING to ESSOH,
which is
2,1
.
i j
= 1+
k=j
p
ik
k j
2,1
= 1+ p
2,2
2,1
+ p
2,3
3,1
3,1
= 1+ p
3,2
2,1
+ p
3,3
3,1
2,1
= 1+.7
2,1
+.1
3,1
3,1
= 1+.3
2,1
+.5
3,1
.3
2,1
.1
3,1
= 1
.3
2,1
+.5
3,1
= 1
Adding the two equations together, we obtain
0
2,1
+.4
3,1
= 2
or
3,1
= 5
and
.3
2,1
.15 = 1
2,1
=
1+.5
.3
= 5
On average, it takes ve weeks for a consumer to switch from URVING to ES-
SOH.
5.
The transition matrix is
23 24 25 26 27 28
23 1 0 0 0 0 0
24 .15 .65 .2 0 0 0
25 0 .15 .65 .2 0 0
26 0 0 .15 .65 .2 0
27 0 0 0 .15 .65 .2
28 0 0 0 0 0 1
Putting the absorbing states rst, the transition matrix becomes
257
23 28 24 25 26 27
23 1 0 0 0 0 0
28 0 1 0 0 0 0
24 .15 0 .65 .20 0 0
25 0 0 .15 .65 .20 0
26 0 0 0 .15 .65 .20
27 0 .20 0 0 .15 .65
Thus
Q =
_
_
0.65 0.20 0 0
0.15 0.65 0.20 0
0 0.15 0.65 0.20
0 0 0.15 0.65
_
_
and R =
_
_
0.15 0
0 0
0 0
0 0.20
_
_
I
(4)
Q =
_
_
1 0 0 0
0 1 0 0
0 0 1 0
0 0 0 1
_
_
0.65 0.20 0 0
0.15 0.65 0.20 0
0 0.15 0.65 0.20
0 0 0.15 0.65
_
_
=
_
_
0.35 0.20 0 0
0.15 0.35 0.20 0
0 0.15 0.35 0.20
0 0 0.15 0.35
_
_
(I
(4)
Q)
1
=
_
_
4.481 3.790 2.868 1.639
2.843 6.633 5.019 2.868
1.613 3.764 6.633 3.790
0.691 1.613 2.843 4.481
_
_
F = (I
(4)
Q)
1
R
=
_
_
4.481 3.790 2.868 1.639
2.842 6.633 5.019 2.868
1.613 3.764 6.633 3.790
0.691 1.613 2.843 4.481
_
_
0.15 0
0 0
0 0
0 0.20
_
_
=
_
_
0.672 0.328
0.426 0.574
0.242 0.758
0.104 0.896
_
_
If the initial price is $25 (the second initial state), then the expected return is
0.42623+0.57428 =25.8. Therefore the expected gain is 25.8725 =$.87
per share or $870 in total.
6.
We are given
P =
_
_
0.2 0.3 0.4 0.1
0.5 0.2 0.1 0.2
0.1 0.2 0.3 0.4
0.2 0.3 0.2 0.3
_
_
(a) Arbitrarily removing the fourth equation, the remaining set of equa-
tions are
1
= .2
1
+.5
2
+.1
3
+.2
4
(1)
2
= .3
1
+.2
2
+.2
3
+.3
4
(2)
3
= .4
1
+.1
2
+.3
3
+.2
4
(3) and
1 = 1.0
1
+1.0
2
+1.0
3
+1.0
4
(4)
Simplifying and multiplying the rst three equations by 10 to remove
the decimals, we obtain
8
1
+5
2
+1
3
+2
4
= 0 (1
(1)
)
3
1
8
2
+2
3
+3
4
= 0 (2
(1)
)
4
1
+1
2
7
3
+2
4
= 0 (3
(1)
) and
1
1
+1
2
+1
3
+1
4
= 1 (4)
The matrix which we wish to invert is
A =
_
_
8 5 1 2
3 8 2 3
4 1 7 2
1 1 1 1
_
_
259
Because = A
1
b, where b is all zeroes except for the nal 1, the vec-
tor is simply the nal column of A
1
. Inverting A using a spread-
sheet package we nd = (0.25,0.25,0.25,0.25).
Alternatively, the manual solution proceeds with the Gaussian elimi-
nation procedure. We rst eliminate
4
from (1
(1)
) to (3
(1)
).
10
1
3
2
+1
3
+0
4
= 2 (1
(2)
)
0
1
+11
2
+1
3
+0
4
= 3 (2
(2)
)
2
1
+1
2
+9
3
+0
4
= 2 (3
(2)
) and
1
1
+1
2
+1
3
+1
4
= 1 (4)
Next we eliminate
3
from equations (1
(2)
) and (3
(2)
).
10
1
+14
2
+0
3
+0
4
= 1 (1
(3)
)
0
1
+11
2
+1
3
+0
4
= 3 (2
(2)
)
2
1
+98
2
+0
3
+0
4
= 25 (3
(3)
) and
1
1
+1
2
+1
3
+1
4
= 1 (4)
Finally we use (3
3
) to remove
1
from (1
3
).
0
1
+504
2
+0
3
+0
4
= 126 (1
(4)
)
0
1
+11
2
+1
3
+0
4
= 3 (2
(2)
)
2
1
+98
2
+0
3
+0
4
= 25 (3
(3)
) and
1
1
+1
2
+1
3
+1
4
= 1 (4)
Thus the nal solution is
2
=
126
504
=
1
4
1
= (2598
1
4
)/2 =
1
4
3
= 311
1
4
=
1
4
4
= 1
1
4
1
4
1
4
=
1
4
Hence
= (
1
4
,
1
4
,
1
4
,
1
4
)
(b) This result of equal market shares is due to the columns also summing
to 1. Going back to equations (1) to (3), we see that
1
=
2
=
3
=
4
is an obvious solution; from (4) it follows that each must be
1
4
or 0.25.
261
7.
The elements of the problem are as follows
Population all the vehicles owned by U-Drive.
Trials of process weekly
States location of rental facility (W, X, Y, and Z)
Transition matrix P
P =
_
_
74
150
30
150
26
150
20
150
30
150
86
150
20
150
14
150
15
150
20
150
90
150
25
150
35
150
15
150
30
150
70
150
_
_
(a) Arbitrarily discarding the fourth equation, the long run equations are
1
=
74
150
1
+
30
150
2
+
15
150
3
+
35
150
4
(1)
2
=
30
150
1
+
86
150
2
+
20
150
3
+
15
150
4
(2)
3
=
26
150
1
+
20
150
2
+
90
150
3
+
30
150
4
(3) and
1 = 1.0
1
+1.0
2
+1.0
3
+1.0
4
(4)
Simplifying and multiplying the rst three equations by 150 to re-
move the fractions, we obtain
76
1
+30
2
+15
3
+35
4
= 0 (1
(1)
)
30
1
64
2
+20
3
+15
4
= 0 (2
(1)
)
26
1
+20
2
60
3
+30
4
= 0 (3
(1)
) and
1
1
+1
2
+1
3
+1
4
= 1 (4)
The matrix which we wish to invert is
A =
_
_
76 30 15 35
30 64 20 15
26 20 60 30
1 1 1 1
_
_
Because = A
1
b, where b is all zeroes except for the nal 1, the vec-
tor is simply the nal column of A
1
. Inverting A using a spread-
sheet package we nd = (0.2509, 0.2561, 0.2937, 0.1993). The total
number of vehicles is 600. Therefore, the distribution in the long run
is (150, 154, 176, 120).
Alternatively, the manual solution proceeds with the Gaussian elimi-
nation procedure. We rst eliminate
4
from (1
(1)
) to (3
(1)
).
111
1
+ 5
2
+20
3
+0
4
= 35 (1
(2)
)
15
1
+79
2
5
3
+0
4
= 15 (2
(2)
)
4
1
+10
2
+90
3
+0
4
= 30 (3
(2)
) and
1
1
+1
2
+1
3
+1
4
= 1 (4)
Next we eliminate
3
(because the coefcients are simpler) fromequa-
tions (1
(2)
) and (3
(2)
).
51
1
+ 321
2
+0
3
+0
4
= 95 (1
(3)
)
15
1
+79
2
5
3
+0
4
= 15 (2
(2)
)
266
1
+1432
2
+0
3
+0
4
= 300 (3
(3)
)
1
1
+1
2
+1
3
+1
4
= 1 (4)
Finally we use (3
3
) to remove
(2)
from (1
(3)
).
110.6
1
+0
2
+0
3
+0
4
= 27.75 (1
4
)
15
1
+79
2
5
3
+0
4
= 15 (2
(2)
)
266
1
+1432
2
+0
3
+0
4
= 300 (3
(3)
)
1
1
+1
2
+1
3
+1
4
= 1 (4)
Thus the nal solution is
263
1
= 27.75/110.6 = 0.2509
2
= (300+2660.2509)/1432 = 0.2561
3
= (1540.2509100.2561)/(5) = 0.2937
4
= 10.25090.25610.2937 = 0.1993
The total number of vehicles is 600. Therefore the distribution in the
long run is (150, 154, 176, 120).
(b) The repair facility should be located at Y the location with the high-
est market share.
(c) Since they will need (100, 150, 250, 100) they will have to send 50
from W, 4 from X and 20 from Z for a total of 74 to Y.
8.
The elements of the problem are as follows
Population all members of the workforce in the two regions
Trials of process annual
States each region (X and Y)
Transition matrix P
P =
_
0.90 0.10
0.04 0.96
_
The existing population is 500,000 + 1,000,000 = 1,500,000. Presently in X,
92% are working which means that there are .92 500, 000 = 460, 000 jobs in
city X.
In the long run, the fraction of the population which will be in region X is
1
=
.04
.10+.04
=
2
7
Thus the population of region X in the long run will be
2
7
1, 500, 000 = 428, 571
Since
460,000 > 428,571
number of jobs number in workforce
The unemployment rate should be 0%.
(Note: Even if region Y began with full employment, it can be shown that there
will be at least 71,428 people out of work in region Y at steady state. Realistically,
the transfer of people is probably not a true Markovian process.)
9.
The state transition diagram is as follows
'

'

'

'
_
_
_
_
1.0 0.4 0.5 1.0
0.35 0.20
0.25 0.30
fail fail
pass pass
marginal marginal
Rej.
Exam
1
Exam
2
Adm.
An appropriate set of states for this problem is:
State Description Type
1 admitted to the profession absorbing
2 rejected by the profession absorbing
3 candidate for rst exam transient
4 candidate for second exam transient
1 2 3 4
1 1 0 0 0
2 0 1 0 0
3 0 .35 .40 .25
4 .30 0 .20 .50
Q =
_
0.40 0.25
0.20 0.50
_
and R =
_
0 0.35
0.30 0
_
265
I
(2)
Q =
_
1 0
0 1
_
_
0.40 0.25
0.20 0.50
_
=
_
0.60 0.25
0.20 0.50
_
(I
(2)
Q)
1
=
1
(.6.5[.2.25])
_
.50 .25
.20 .60
_
=
_
2 1
.8 2.4
_
F = (I
(2)
Q)
1
R
=
_
2 1
0.8 2.4
_
_
0 0.35
0.30 0
_
=
_
0.30 0.70
0.72 0.28
_
If the candidate is about to write the rst exam, there is a 30% chance of
eventual success and a 70% chance of eventual failure.
If the candidate is about to write the second exam, there is a 72% chance of
eventual success and a 28% chance of eventual failure.
10.
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1
'
1
/
/
/
/
/
/
/
/
/
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`"
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`*
'
.10 .07 .09 .06
0.80 0.85 0.85
0.10 0.08 0.06 0.04 0.90
pass pass pass
repeat repeat repeat repeat
Term
1
Term
2
Term
3
Term
4
Fail
Term
5
Thus an appropriate formulation is
Population all students entering Term 1
Trials of process each semester
States the term the student is in, or departure
State 1 Withdrawal from program absorbing
State 2 promoted to Term 5 absorbing
State 3 in Term 1 transient
Transition matrix P
1 2 3 4 5 6
1 1 0 0 0 0 0
2 0 1 0 0 0 0
3 .10 0 .10 .80 0 0
4 .08 0 0 .07 .85 0
5 .06 0 0 0 .09 .85
6 .04 .90 0 0 0 .06
267
Q =
_
_
0.10 0.80 0 0
0 0.07 0.85 0
0 0 0.09 0.85
0 0 0 0.06
_
_
and R =
_
_
0.10 0
0.08 0
0.06 0
0.06 0.9
_
_
I
(4)
Q =
_
_
1 0 0 0
0 1 0 0
0 0 1 0
0 0 0 1
_
_
0.10 0.80 0 0
0 0.07 0.85 0
0 0 0.09 0.85
0 0 0 0.06
_
_
=
_
_
0.90 0.80 0 0
0 0.93 0.85 0
0 0 0.91 0.85
0 0 0 0.94
_
_
(I
(4)
Q)
1
=
_
_
1.111 0.956 0.893 0.807
0 1.075 1.004 0.908
0 0 1.099 0.994
0 0 0 1.064
_
_
F = (I
(4)
Q)
1
R
=
_
_
1.111 0.956 0.893 0.807
0 1.075 1.004 0.908
0 0 1.099 0.994
0 0 0 1.064
_
_
0.10 0
0.08 0
0.06 0
0.04 0.90
_
_
=
_
_
0.273 0.727
0.183 0.817
0.106 0.894
0.043 0.957
_
_
Therefore if the Term I class has 200 students, then eventually 72.7% or 145
students will eventually be promoted to Term 5.
11.
'

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_
_
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1
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1
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1
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//
.93 .00
0.40
0.02
0.05 0.45 0.10 0.05
Act. Inact.
Closed Legal Gov.
An appropriate set of states for this problem is
State Description Type
1 account is closed absorbing
2 account is given to legal department absorbing
3 account is given to the government absorbing
4 account is active transient
5 account is inactive transient
1 2 3 4 5
1 1 0 0 0 0
2 0 1 0 0 0
3 0 0 1 0 0
4 .05 0 0 .93 .02
5 .45 .10 .05 .40 0
Q =
_
0.93 0.02
0.40 0
_
and R =
_
0.05 0 0
0.45 .10 .05
_
269
I
(2)
Q =
_
1 0
0 1
_
_
0.93 0.02
0.40 0
_
=
_
.07 0.02
0.40 1.00
_
(I
(2)
Q)
1
=
1
(.071[.4.02])
_
1 .02
.40 .07
_
=
1
.062
_
1 .02
.40 .07
_
F = (I
(2)
Q)
1
R
=
1
.062
_
1 .02
.40 .07
_
_
0.05 0 0
0.45 .10 .05
_
=
_
59
62
1
31
1
62
103
124
7
62
7
124
_
=
_
.9516 .0323 .0161
.8306 .1129 .0565
_
Therefore, 1.61% of the active accounts are eventually turned over to the gov-
ernment.
12.
'

'
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'
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.
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//
.20 .10
0.50
0.20 0.10
0.10
0.75
0.05
New 1 Yr
Wreck Sold Ret.
Population all newly purchased vehicles
Trials of process annually
States the condition of the vehicle
State 1 wrecked absorbing
State 2 sold to public absorbing
State 3 returned to manufacturer absorbing
State 4 new vehicle transient
State 5 1 year old vehicle transient
Transition matrix P
1 2 3 4 5
1 1 0 0 0 0
2 0 1 0 0 0
3 0 0 1 0 0
4 .2 0 .10 .2 .5
5 .1 .75 .05 0 .1
Q =
_
0.2 0.5
0 0.1
_
and R =
_
0.2 0 0.10
0.1 0.75 0.05
_
271
I
(2)
Q =
_
1 0
0 1
_
_
0.2 0.5
0 0.1
_
=
_
.80 0.5
0 0.9
_
(I
(2)
Q)
1
=
1
(.8.9[0.5])
_
0.90 0.5
0 0.8
_
=
1
.72
_
.90 0.5
0 0.8
_
F = (I
(2)
Q)
1
R
=
1
.72
_
0.90 0.5
0 0.8
_
_
0.2 0 0.10
0.1 0.75 0.05
_
=
_
23
72
37.5
72
11.5
72
1
9
5
6
1
18
_
The present situation is 60% new vehicles and 40% one year old vehicles.
Thus the initial state is (60,40). The nal distribution is
absorbing
= (60, 40)
_
23
72
37.5
72
11.5
72
1
9
5
6
1
18
_
= (23.61, 64.58, 11.80)
Therefore about 65% of the cars will eventually be sold to the public.
13.
_ _ _
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'
0.4 0.6 0.7
0.6 0.4 0.3 0.2 0.8
Mon.
1
Mon.
2
Mon.
3
Mon.
4
Paid Bad
Population all accounts payable
Trials of process monthly
States the age of the account, paid or bad
State 1 account is written off absorbing
State 2 account is paid in full absorbing
State 3 1 month old transient
State 4 2 months old transient
Transition matrix P
1 2 3 4 5 6
1 1 0 0 0 0 0
2 0 1 0 0 0 0
3 0 .6 0 .4 0 0
4 0 .4 0 0 .6 0
5 0 .3 0 0 0 .7
6 .8 .2 0 0 0 0
273
Q =
_
_
0 0.4 0 0
0 0 .6 0
0 0 0 .7
0 0 0 0
_
_
and R =
_
_
0 .6
0 .4
0 .3
.8 .2
_
_
I
(4)
Q =
_
_
1 0 0 0
0 1 0 0
0 0 1 0
0 0 0 1
_
_
0 0.4 0 0
0 0 .6 0
0 0 0 .7
0 0 0 0
_
_
=
_
_
1 0.4 0 0
0 1 0.6 0
0 0 1 0.7
0 0 0 1
_
_
(I
(4)
Q)
1
=
_
_
1 .4 .24 .168
0 1 .6 .42
0 0 1 .7
0 0 0 1
_
_
F = (I
(4)
Q)
1
R
=
_
_
1 .4 .24 .168
0 1 .6 .42
0 0 1 .7
0 0 0 1
_
_
0 .6
0 .4
0 .3
.8 .2
_
_
=
_
_
0.134 0.866
0.336 0.664
0.560 0.440
0.800 0.200
_
_
The accounts have an existing distribution of (200,150,75,20). Therefore
absorbing
= (200, 150, 75, 20)
_
_
0.134 0.866
0.336 0.664
0.560 0.440
0.800 0.200
_
_
= (135.28, 309.72)
(a) About 135 accounts will be written off as bad debts.
(b) 86.6% of the 1 month old accounts will end up paid. Therefore DEF should
accept the deal.
14.
'

'
_
'
1
'
1
' '
.2
.7 .4
0.1 0.2 0.4
Not r Avail
Spoil Sold
Population all wine bottles in inventory
Trials of process yearly
States status of the wine bottle
State 1 wine is spoiled absorbing
State 2 wine is sold absorbing
State 3 wine is not ready for sale transient
State 4 wine is available for sale transient
Transition matrix P
1 2 3 4
1 1 0 0 0
2 0 1 0 0
3 .1 0 .7 .2
4 .2 .4 0 .4
275
Q =
_
0.7 0.2
0 0.4
_
and R =
_
0.1 0
0.2 0.4
_
I
(2)
Q =
_
1 0
0 1
_
_
0.7 0.2
0 0.4
_
=
_
0.3 0.2
0 0.6
_
(I
(2)
Q)
1
=
1
(.3.6[0.2])
_
0.6 0.2
0 0.3
_
=
1
.18
_
0.6 0.2
0 0.3
_
F = (I
(2)
Q)
1
R
=
1
.18
_
0.6 0.2
0 0.3
_
_
0.1 0
0.2 0.4
_
=
_
5
9
4
9
1
3
2
3
_
The present inventory in wine is (3500,6500). Therefore
absorbing
= (3500, 6500)
_
5
9
4
9
1
3
2
3
_
= (
37000
9
,
53000
9
)
Thus one can expect approximately
53000
9
= 5, 889 bottles to be sold.
15.
'

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Z
Z
Z
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.10
.25 .25 .25
0.35 0.40
0.20 0.20
0.55 0.20 0.05 0.20
30
Day
60
Day
90
Days
Paid Bad
Population all accounts
States status of the account
State 1 fully paid absorbing
State 2 written off as a bad debt absorbing
State 3 130 days old transient
State 4 31-60 days old transient
State 5 61-90 days old transient
Transition matrix P
1 2 3 4 5
1 1 0 0 0 0
2 0 1 0 0 0
3 .55 0 .25 .20 0
4 .20 0 .35 .25 .20
5 .05 .20 .10 .40 .25
Q =
_
_
.25 .20 0
.35 .25 .20
.10 .40 .25
_
_
and R =
_
_
.55 0
.20 0
.05 .20
_
_
277
I
(3)
Q =
_
_
1 0 0
0 1 0
0 0 1
_
_
_
_
.25 .20 0
.35 .25 .20
.10 .40 .25
_
_
=
_
_
0.75 0.20 0
0.35 0.75 0.20
0.10 0.40 0.75
_
_
(I
(3)
Q)
1
=
_
_
1.580 0.491 0.131
0.925 1.842 0.491
0.704 1.048 1.613
_
_
F = (I
(3)
Q)
1
R
=
_
_
1.580 0.491 0.131
0.925 1.842 0.491
0.704 1.048 1.613
_
_
_
_
.55 0
.20 0
.05 .2
_
_
=
_
_
0.974 0.026
0.902 0.098
0.677 0.323
_
_
Thus
P(Paid/ 1-30 days now) = 0.974
P(Paid/31-60 days now) = 0.902
P(Paid/61-90 days now) = 0.677
16.
An appropriate formulation is
Population all new businesses
States level of capitalization remaining
State i The business has i units of capital
Transition matrix P
For space reasons, rows and columns from6 to 14 inclusive have been omitted;
each follows the same pattern for all rows and columns from 0 to 20 inclusive.
21 1 0 1 2 3 4 5 15 16 17 18 19 20
21 1 0 0 0 0 0 0 0 0 0 0 0 0 0
1 0 1 0 0 0 0 0 0 0 0 0 0 0 0
0 0 .5 .3 .2 0 0 0 0 0 0 0 0 0 0
1 0 0 .5 .3 .2 0 0 0 0 0 0 0 0 0
2 0 0 0 .5 .3 .2 0 0 0 0 0 0 0 0
3 0 0 0 0 .5 .3 .2 0 0 0 0 0 0 0
4 0 0 0 0 0 .5 .3 .2 0 0 0 0 0 0
5 0 0 0 0 0 0 .5 .3 0 0 0 0 0 0
.
.
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.
.
15 0 0 0 0 0 0 0 0 .3 .2 0 0 0 0
16 0 0 0 0 0 0 0 0 .5 .3 .2 0 0 0
17 0 0 0 0 0 0 0 0 0 .5 .3 .2 0 0
18 0 0 0 0 0 0 0 0 0 0 .5 .3 .2 0
19 0 0 0 0 0 0 0 0 0 0 0 .5 .3 .2
20 .2 0 0 0 0 0 0 0 0 0 0 0 .5 .3
Using the Q from the above matrix, I Q is
0 1 2 3 4 5 15 16 17 18 19 20
0 .7 .2 0 0 0 0 0 0 0 0 0 0
1 .5 .7 .2 0 0 0 0 0 0 0 0 0
2 0 .5 .7 .2 0 0 0 0 0 0 0 0
3 0 0 .5 .7 .2 0 0 0 0 0 0 0
4 0 0 0 .5 .7 .2 0 0 0 0 0 0
5 0 0 0 0 .5 .7 0 0 0 0 0 0
.
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.
.
.
15 0 0 0 0 0 0 .7 .2 0 0 0 0
16 0 0 0 0 0 0 .5 .7 .2 0 0 0
17 0 0 0 0 0 0 0 .5 .7 .2 0 0
18 0 0 0 0 0 0 0 0 .5 .7 .2 0
19 0 0 0 0 0 0 0 0 0 .5 .7 .2
20 0 0 0 0 0 0 0 0 0 0 .5 .7
279
Taking the inverse we have
0 1 2 3 4 5 6 7 8 9 10
0 2.00 0.80 0.32 0.13 0.05 0.02 0.01 0 0 0 0
1 2.00 2.80 1.12 0.45 0.18 0.07 0.03 0.01 0 0 0
2 2.00 2.80 3.12 1.25 0.50 0.20 0.08 0.03 0.01 0.01 0
3 2.00 2.80 3.12 3.25 1.30 0.52 0.21 0.08 0.03 0.01 0.01
4 2.00 2.80 3.12 3.25 3.30 1.32 0.53 0.21 0.08 0.03 0.01
5 2.00 2.80 3.12 3.25 3.30 3.32 1.33 0.53 0.21 0.08 0.03
6 2.00 2.80 3.12 3.25 3.30 3.32 3.33 1.33 0.53 0.21 0.09
7 2.00 2.80 3.12 3.25 3.30 3.32 3.33 3.33 1.33 0.53 0.21
8 2.00 2.80 3.12 3.25 3.30 3.32 3.33 3.33 3.33 1.33 0.53
9 2.00 2.80 3.12 3.25 3.30 3.32 3.33 3.33 3.33 3.33 1.33
10 2.00 2.80 3.12 3.25 3.30 3.32 3.33 3.33 3.33 3.33 3.33
11 2.00 2.80 3.12 3.25 3.30 3.32 3.33 3.33 3.33 3.33 3.33
12 2.00 2.80 3.12 3.25 3.30 3.32 3.33 3.33 3.33 3.33 3.33
13 2.00 2.80 3.12 3.25 3.30 3.32 3.33 3.33 3.33 3.33 3.33
14 2.00 2.80 3.11 3.24 3.29 3.31 3.32 3.33 3.33 3.33 3.33
15 1.99 2.80 3.11 3.23 3.29 3.31 3.31 3.32 3.32 3.32 3.32
16 1.98 2.79 3.09 3.21 3.27 3.29 3.30 3.30 3.30 3.30 3.30
17 1.95 2.73 3.04 3.16 3.21 3.23 3.24 3.25 3.25 3.25 3.25
18 1.87 2.62 2.92 3.04 3.09 3.11 3.11 3.12 3.12 3.12 3.12
19 1.68 2.35 2.62 2.73 2.77 2.79 2.80 2.80 2.80 2.80 2.80
20 1.20 1.68 1.87 1.95 1.98 1.99 2.00 2.00 2.00 2.00 2.00
11 12 13 14 15 16 17 18 19 20
0 0 0 0 0 0 0 0 0 0 0
1 0 0 0 0 0 0 0 0 0 0
2 0 0 0 0 0 0 0 0 0 0
3 0 0 0 0 0 0 0 0 0 0
4 0.01 0 0 0 0 0 0 0 0 0
5 0.01 0.01 0 0 0 0 0 0 0 0
6 0.03 0.01 0.01 0 0 0 0 0 0 0
7 0.09 0.03 0.01 0.01 0 0 0 0 0 0
8 0.21 0.09 0.03 0.01 0.01 0 0 0 0 0
9 0.53 0.21 0.09 0.03 0.01 0.01 0 0 0 0
10 1.33 0.53 0.21 0.09 0.03 0.01 0.01 0 0 0
11 3.33 1.33 0.53 0.21 0.09 0.03 0.01 0.01 0 0
12 3.33 3.33 1.33 0.53 0.21 0.08 0.03 0.01 0 0
13 3.33 3.33 3.33 1.33 0.53 0.21 0.08 0.03 0.01 0
14 3.33 3.33 3.33 3.33 1.33 0.53 0.21 0.08 0.03 0.01
15 3.32 3.32 3.32 3.32 3.32 1.32 0.52 0.20 0.07 0.02
16 3.30 3.30 3.30 3.30 3.30 3.30 1.30 0.50 0.18 0.05
17 3.25 3.25 3.25 3.25 3.25 3.25 3.25 1.25 0.45 0.13
18 3.12 3.12 3.12 3.12 3.12 3.12 3.12 3.12 1.12 0.32
19 2.80 2.80 2.80 2.80 2.80 2.80 2.80 2.80 2.80 0.80
20 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00
281
The F matrix is given by
21 1
0 0 1.000
1 0 1.000
2 0 1.000
3 0 1.000
4 0 1.000
5 0 1.000
6 0 1.000
7 0 1.000
9 0 1.000
10 0 1.000
11 0.001 0.999
14 0.002 0.998
15 0.004 0.996
16 0.010 0.990
17 0.026 0.974
18 0.064 0.936
19 0.160 0.840
20 0.400 0.600
The required graph is just the plot of the initial state versus the probability in
the 21 column.
The expected number of periods that the system will be one of the transient
states is the sum of the elements of the inverse matrix in the row corresponding
with the initial state. If the company starts out with 0 units of capital, summing
the 0 row of the inverse matrix gives 3.33 months (the exact value is 3
1
3
). If the
company begins with 20 units, summing the 20 row gives 40.67 months (the
exact value is 40
2
3
).
The calculations for (c) and (d) are analogous to the above, and will not be
given here.
17.
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//
.55 .77
0.12
0.20
0.10 0.05
0.15
0.04 0.02
Min. Maj.
Ret. Rel. Coach
Population all players
Trials of process annually
States status of player
State 1 Retired from baseball absorbing
State 2 Released from playing absorbing
State 3 Become a Coach or Manager absorbing
State 4 player in the Minor League transient
State 5 player in the Major League transient
Transition matrix P
1 2 3 4 5
1 1 0 0 0 0
2 0 1 0 0 0
3 0 0 1 0 0
4 .10 .15 0 .55 .20
5 .05 .04 .02 .12 .77
Q =
_
0.55 0.20
0.12 0.77
_
and R =
_
0.10 0.15 0
0.05 0.04 0.02
_
283
I
(2)
Q =
_
1 0
0 1
_
_
0.55 0.20
0.12 0.77
_
=
_
0.45 0.20
0.12 0.23
_
(I
(2)
Q)
1
=
1
(.45.23[.20.12])
_
.23 .20
.12 .45
_
=
1
0.0795
_
.23 .20
.12 .45
_
F = (I
(2)
Q)
1
R
=
1
0.0795
_
.23 .20
.12 .45
_
_
0.10 0.15 0
0.05 0.04 0.02
_
=
_
330
795
425
795
40
795
345
795
360
795
90
795
_
(a) If there are 80 new minor league players, then
Career End Total
Retired
330
795
80 = 33.2
Released
425
795
80 = 42.8
Coach or Manager
40
795
80 = 4.0
Total 80.0
(b) In the re-formulated model, the major league will be an absorbing state and
the coach or manager state will disappear. Since this leaves us an example of only
one transient state, there is a simple way to solve the problem.
In each year, 20% of those in the minor league are promoted to the major
leagues. Another 55% stay in the minors and these may be promoted eventually.
The probability of eventual promotion to the majors can be represented as p. Thus
p = 0.2+0.55p
.45p = 0.2
p =
4
9
0.444
Therefore of the 80 who begin in the minor league,
4
9
80 or about 35.5 can
be expected to reach the major leagues.
(c) Let n represent the expected number of consecutive years in the major leagues.
We use the conditioning argument to obtain:
n = 1+0.77(1+n)
0.23n = 1.77
n = 7.696 years
18.
'
Term
'
Term
'
Term
'
Term
'
Term
'
Term
'
Term
_ _ _ _ _ _
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' '
.1 .1 .1
0.05
0.05
0.05 0.05 0.99
0.15 0.15 0.10 0.10 0.10 0.05 0.01
0.70 0.70 0.75 0.85 0.90 0.95
1 2 3 4 5 6 7
Vol. Req. Grad.
If this had been a rst-passage time problem, then we would have to add 7
2 = 14 waiting states; since students who repeat a term have to wait two terms
before continuing in the program. However, we are only interested in the steady-
state behaviour, so ten states will sufce.
285
Population all students entering Term 1
Trials of process each semester
States status of student
State 1 Voluntary withdrawal from program absorbing
State 2 Required to withdraw from program absorbing
State 3 Graduated with a degree absorbing
State 3+i Student is in Term i transient
Transition matrix P
1 2 3 4 5 6 7 8 9 10
1 1 0 0 0 0 0 0 0 0 0
2 0 1 0 0 0 0 0 0 0 0
3 0 0 1 0 0 0 0 0 0 0
4 .10 .05 0 .15 .70 0 0 0 0 0
5 .10 .05 0 0 .15 .70 0 0 0 0
6 .10 .05 0 0 0 .10 .75 0 0 0
7 0 .05 0 0 0 0 .10 .85 0 0
8 0 0 0 0 0 0 0 .10 .90 0
9 0 0 0 0 0 0 0 0 .05 .95
10 0 0 .99 0 0 0 0 0 0 .01
Q =
_
_
.15 .70 0 0 0 0 0
0 .15 .70 0 0 0 0
0 0 .10 .75 0 0 0
0 0 0 .10 .85 0 0
0 0 0 0 .10 .90 0
0 0 0 0 0 .05 .95
0 0 0 0 0 0 .01
_
_
and R =
_
_
.10 .05 0
.10 .05 0
.10 .05 0
0 .05 0
0 0 0
0 0 0
0 0 .99
_
_
I
(7)
Q =
_
_
.85 .70 0 0 0 0 0
0 .85 .70 0 0 0 0
0 0 .90 .75 0 0 0
0 0 0 .90 .85 0 0
0 0 0 0 .90 .90 0
0 0 0 0 0 .95 .95
0 0 0 0 0 0 .99
_
_
(I
(7)
Q)
1
=
_
_
1.176 0.969 0.754 0.628 0.593 0.562 0.539
0 1.176 0.915 0.763 0.720 0.682 0.655
0 0 1.111 0.926 0.874 0.828 0.795
0 0 0 1.111 1.049 0.954 0.954
0 0 0 0 1.111 1.053 1.010
0 0 0 0 0 1.053 1.010
0 0 0 0 0 0 1.010
_
_
F = (I
(2)
Q)
1
R
=
_
_
0.290 0.176 0.534
0.209 0.142 0.648
0.111 0.102 0.787
0 0.056 0.944
0 0 1
0 0 1
0 0 1
_
_
(a) Of those who enter Term 1, 53.4% will eventually graduate.
(a) Of those who enter Term 1, 17.6% will eventually be required to withdraw
permanently from the program.
Note: Although the modelling of the system requires 10 states, questions (a)
and (b) could have been answered by considering Term 5 to be a trapping state,
since all students who enter Term V will eventually graduate. Thus the questions
could have been answered with a 7 state model.
19.
(a) An appropriate formulation is
287
Population the parliament
Trials of process every election
States membership of the parliament
State 1 All three from party P
State 2 2 from party P and 1 from party Q
State 3 1 from party P and 2 from party Q
State 4 All three from party Q
Transition matrix P
(b) When calculating the probabilities, one must note that there are often more
ways than one in performing a transition and hence the probability will be the
sum of the probabilities for each way. For example, if the three members are PPQ
(i.e. state 2), then after a transition, the members could be PPQ, PQP, or QPP
all still in state 2. The transition matrix is
1 2 3 4
1 p
3
p
2
(1p) p(1p)
2
(1p)
3
2 p
2
(1q) p
2
q+2p(1p)(1q) 2p(1p)q+(1p)
2
(1q) (1p)
2
q
3 p(1q)
2
2p(1q)q+(1p)(1q)
2
pq
2
+2q(1p)(1q) (1p)q
2
4 (1q)
3
(1q)
2
q (1q)q
2
q
3
(c) Because the elections in each constituency are, under the given assumptions,
independent, we can model the election for each seat as a two-state Markov chain.
state 1 party P controls the seat
state 2 party Q controls the seat
The transition matrix will be
P =
_
p 1p
1q q
_
for which
1
=
p
2,1
p
1,2
+ p
2,1
=
1q
(1p) +(1q)
The probability that party P controls all three seats is just
3
1
.
P(Party P has all 3 seats) =
_
1q
(1p) +(1q)
_
3
The probability that party P controls the parliament is the sum of the probabil-
ities of controlling either two or three seats.
P(Party P controls parliament) =
3
1
+3
2
1
(1
1
)
=
2
1
(
1
+3(1
1
))
=
2
1
(32
1
)
=
_
1q
(1p) +(1q)
_
2
_
3
2(1q)
(1p) +(1q)
_
Chapter 7
Utility Theory
The problems of this chapter are not formulation oriented. Thus we will discuss
the numerical solution but we will not go through the more complete analysis
which we performed in the earlier chapters. In order to obtain unique answers
to problems, all of the graphs will be drawn by connecting the determined points
with straight lines.
1.
The two reference points are arbitrary. However, the dollar amounts must be any
two payoffs in one of the situations. We will arbitrarily set U(1, 000, 000) = 100
and U(100, 000) = 0.
The basic equation to use is
P(W) U(W) +P(L) U(L) =U(CE)
where W is the amount to be won, L is the amount which is lost and CE is the
certainty equivalent amount.
Situation 1
0.5U(1, 000, 000) +0.5U(100, 000) = U(200, 000)
50+0 = U(200, 000)
U(200, 000) = 50
289
290 CHAPTER 7. UTILITY THEORY
Situation 2
0.5U(200, 000) +0.5U(100, 000) = U(0)
25+0 = U(0)
U(0) = 25
Situation 3
0.4U(1, 000, 000) +0.6U(200, 000) = U(400, 000)
40+30 = U(400, 000)
U(400, 000) = 70
The three situations plus the two arbitrary reference points give us ve points to
plot on the utility curve. The three required points must be determined from the
curve which we obtained by linearly joining the known points as follows:
Wealth in $100,000
Utility
/
/
/
/
//
Z
Z
Z
Z
.
.
.
.
.
.
.
.
.
.
.
.
0 5 10
0
50
100
(b) The problem has the following main elements
291
D
g
Decision to gamble
A
g,0
do nothing
A
g,1
take the gamble
E
g
Gambling Event
O
g,1
gamble is unsuccessful (prob. = 0.50)
O
g,2
gamble is successful (prob. = 0.50)
Setting the problem up as a payoff matrix and the corresponding utility matrix
we have
Payoff Utility
Alternative O
g,1
O
g,2
Alternative O
g,1
O
g,2
E.U.
A
g,0
100,000 100,000 A
g,0
37.5 37.5 37.50
A
g,1
50, 000 300,000 A
g,1
12.5 60 36.25
Prob. 0.5 0.5 0.5 0.5
Thus the businessman would prefer the $100,000 for certain rather than take
part in the risky venture.
2.
(a) The graph of the utility curve is as follows:
Wealth in $1,000
Utility
.
.
.
.
.
.
.
.
.
.
.
.
.
/
/
/
/
/
/
/
/
/
/
//
/
/
/
/
100 50 0 50 100
0.2
0.4
0.6
0.8
1.0
The problem requires that we use the graph to determine the utility values for
50, 10, 15, 40, 50, 90; these have been indicated in the above graph. Numerical
values for the utilities of these quantities are as follows
1
:
Payoff Utility
50 0.0625
10 0.165
15 0.245
40 0.395
50 0.478
90 0.928
1
We have used linear interpolation to obtain the three gure accuracy. Normally when reading
from a graph two gure accuracy is obtained.
293
D
p
Planting decision
A
p,20
plant 20 hectares
A
p,40
plant 40 hectares
A
p,80
plant 80 hectares
E
w
Weather Event
O
w,1
weather is bad (prob. = 0.20)
O
w,2
weather is average (prob. = 0.30)
O
w,3
weather is good (prob. = 0.50)
Setting the problem up as a payoff matrix and the corresponding utility matrix
we have
Payoff Utility
Alt. O
w,1
O
w,2
O
w,3
Alt. O
w,1
O
w,2
O
w,3
E.U.
A
p,20
10 15 25 A
p,20
0.165 0.240 0.270 0.240
A
p,40
50 25 50 A
p,40
0.063 0.270 0.478 0.333
A
p,80
100 40 90 A
p,80
0.000 0.395 0.928 0.583
Prob. 0.2 0.3 0.5 0.2 0.3 0.5
Based on maximizing the expected utility, the recommendation is to plant 80
hectares for an expected utility of 0.583.
(c) The certainty equivalent is found by drawing a horizontal line at U = 0.583,
and then a vertical line from where the horizontal line intersects the utility curve.
This is indicated on the above graph. The certainty equivalent is therefore about
$59,000.
3.
(a) The problem has the following main elements
D
c
Capacity decision
A
c,0
do nothing
A
c,1
expand the plant
E
d
Demand Event
O
d,1
demand is low (prob. = 0.30)
O
d,2
demand is moderate (prob. = 0.40)
O
d,3
demand is high (prob. = 0.30)
Setting the problem up as a payoff matrix we have
Alternative O
d,1
O
d,2
O
d,3
E.V.
A
c,0
5 50 70 42
A
c,1
10 70 90 52
Prob. 0.3 0.4 0.3
Thus the recommendation would be to enlarge now for a ranking payoff of
$52,000.
(b) The two reference points are normally arbitrary. However, in this case they
have been specied to be U(100, 000) = 100 and U(10, 000) = 0.
Situation 1
0.90U(100, 000) +0.1U(10, 000) = U(80, 000)
90+0 = U(80, 000)
U(80, 000) = 90
Situation 2
2
3
U(100, 000) +
1
3
U(60, 000) = U(80, 000)
200
3
+
1
3
U(60, 000) = 90
U(60, 000) =
70
3
/
1
3
= 70
295
Situation 3
0.75U(80, 000) +0.25U(10, 000) = U(60, 000)
67.5+0.25U(10, 000) = 70
U(10, 000) =
2.5
0.25
= 10
(a) The three situations plus the arbitrary reference points give us ve points to
plot on the utility curve as follows:
Wealth in $10,000
Utility
.
.
.
.
Z
Z
Z
Z
.
.
.
.
0 5 10
0
50
100
The utilities for ve of the required points must be determined from the above
curve which we obtained by linearly joining the known points as follows:
Payoff Utility
5 7.5
50 58
70 80
90 95
Setting the problem up as a utility matrix we have
Alternative O
d,1
O
d,2
O
d,3
E.U.
A
c,0
7.5 58 80 49.5
A
c,1
0.0 80 95 60.5
Prob. 0.3 0.4 0.3
Thus the recommendation would be to enlarge now for a utility of 60.5.
(c) From the graph, the certainty equivalent of 60.5 utiles is $52,000. By coinci-
dence this also happens to be the expected monetary value of the alternative.
4.
(a) U(x) =
x
x+6000
, U = 0.63
x
x +6000
= 0.63
x = 0.63x +3, 780
x =
3, 780
0.37
= $10, 216
(b) U(x) =
x
4x+10000
, U = 0.85
x
4x +10000
= 0.85
x = 3.4x +8, 500
x =
8, 500
2.40
=$3, 541
(c) U(x) = 1e
x
1000
, U = 0.57
1e
x
1000
= 0.57
x
1000
= ln(0.43) =0.844
x = $844
297
(d) U(x) = 1e
3x
2000
, U = 0.45
1e
3x
2000
= 0.45
3x
2000
= ln(0.55) =0.598
x = 20000.598/3 = $398
(e) U(x) = 3ln
x+1
5000
, U = 0.52
3ln(
x+1
5000
) = 0.52
ln(
x+1
5000
) = 0.173
x +1
5000
= e
0.173
= 1.189
x +1 = 50001.189 = 5, 946
x = $5, 945
5.
(a) The problem has the following main elements
D
i
Investment decision
A
i,1
choose investment 1
A
i,2
choose investment 2
E
i
Investment Event
O
i,1
payoff is 0 (prob. =
1
3
)
O
i,2
1
3
)
O
i,3
1
3
)
Alternative O
i,1
O
i,2
O
i,3
E.V.
A
i,1
50 50 50 50.0
A
i,2
0 40 100 46.7
Prob.
1
3
1
3
1
3
Thus the recommendation would be to choose investment 1 for a payoff of
$50.
(b) The two reference points are normally arbitrary. However, the dollar amounts
must be any two payoffs in one of the situations. We will arbitrarily set U(100) =
100 and U(0) = 0.
299
Situation 1
0.50U(100) +0.50U(0) = U(40)
50+0 = U(40)
U(40) = 50
Situation 2
0.50U(40) +0.50U(0) = U(25)
25+0 = U(25)
U(25) = 25
Situation 3
0.50U(100) +0.50U(40) = U(50)
50+25 = U(50)
U(50) = 75
Situation 4
0.50U(100) +0.50U(50) = U(62.5)
50+37.5 = U(62.5)
U(62.5) = 87.5
(c) The three situations plus the arbitrary reference points give us ve points to
plot on the utility curve as follows:
Wealth in $
Utility
Z
Z
Z
Z
Z
/
/
/
/
/
/
/
/
/
//
Z
Z
Z
.
.
.
.
.
.
.
.
0 50 100
0
50
100
(d) No utilities have to be determined from the graph. Thus we can directly set up
the problem using a utility matrix as follows
Alternative O
i,1
O
i,2
O
i,3
E.U.
A
i,1
75 75 75 75
A
i,2
0 50 100 50
Prob.
1
3
1
3
1
3
Thus the recommendation is still to choose investment 1 for a utility of 75.
This trivially has a certainty equivalent of $50.
301
6.
(a) Plotting the known points and connecting them, the utility function is as fol-
lows:
Wealth in $1,000
Utility
/
/
/
/
/
/
/
/
/
/
/
Z
.
.
Z
Z
.
.
.
.
.
.
.
.
.
.
.
.
.
200 100 0 100 200 300 400

0.2
0.4
0.6
0.8
1.0
D
c
Contract decision
A
c,A
buy contract A
A
c,B
buy contract B
E
A
Contract A Event
O
A,1
contract A loses money (prob. = 0.40)
O
A,2
contract A earns money (prob. = 0.60)
E
B
Contract B Event
O
B,1
both contracts lose money (prob. = 0.16)
O
B,2
one contract loses money and the other earns money (prob. = 0.48)
O
B,3
both contracts earn money (prob. = 0.36)
Setting the problem up as a decision tree and obtaining the utility equivalents
for the payoffs from the graph
2
, we have
D
c
`
_
E
B
`
_
E
A
A
c,B
A
c,A
O
A,1
O
A,2
O
B,1
O
B,2
O
B,3
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
0.16
0.48
0.36
0.40
0.60
$45,000 or 0.54 utiles
$17,500 or 0.73 utiles
$80,000 or 0.85 utiles
$45,000 or 0.54 utiles
$80,000 or 0.85 utiles
0.743
0.726
0.743
Thus the recommendation would be to buy contract B for an expected utility
of 0.743.
(b) From the graph the certainty equivalent is about $21,000.
2
It is also possible to obtain the utilities using linear interpolations between the known points.
303
7.
(a) Plotting the known points and connecting them, the utility function is as fol-
lows:
Wealth in $1,000
Utility
/
/
/
/
/
/
/
/
Z
Z
Z
Z
.
.
.
.
.
.
/
/
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
..
200 100 0 100 200 300 400

0.2
0.4
0.6
0.8
1.0
D
c
Contract decision
A
c,0
do nothing
A
c,1
buy the contract
E
c
Contract Event
O
c,1
contract loses money (prob. = 0.45)
O
c,2
contract earns money (prob. = 0.55)
Setting the problem up rst as a payoff matrix in units of $1,000, and then as
a utility matrix, we have
Payoff Utility
Alt. O
c,1
O
c,2
Alt. O
c,1
O
c,2
E.U.
A
c,0
0 0 A
c,0
0.65 0.65 0.65
A
c,1
100 200 A
c,1
0.45 0.92 0.7085
Prob. 0.45 0.55 0.45 0.55
Thus the businessman would buy the contract for a utility of 0.7085 which has
a certainty equivalent of about $40,000.
(c) The revised problem has the following main elements
D
c
Contract decision
A
c,0
do nothing
A
c,1
buy both contracts
E
c
Contract Event
O
c,1
both contracts lose money (prob. = 0.45
2
= 0.2025)
O
c,2
one contract earns money and the other loses money
(prob. =20.550.45 = 0.4950)
O
c,3
both contracts gain money (prob. = 0.55
2
= 0.3025)
Setting the problem up rst as a payoff matrix in units of $1,000, and then as
a utility matrix, we have
Payoff Utility
Alt. O
c,1
O
c,2
O
c,3
Alt. O
c,1
O
c,2
O
c,3
E.U.
A
c,0
0 0 0 A
c,0
0.65 0.65 0.65 0.650
A
c,1
200 100 400 A
c,1
0.00 0.85 1.00 0.723
Prob. 0.2025 0.4950 0.3025 0.2025 0.4950 0.3025
Therefore, the businessman would buy both contracts for an expected utility
of 0.723 which has a certainty equivalent of about $50,000. The second contract
is therefore worth only an additional $10,000.
305
8.
D
i
Insurance decision
A
i,0
do nothing
A
i,1
buy the insurance
E
t
Theft Event
O
t,1
there is a major theft (prob. = 0.01)
O
t,2
there is a minor theft (prob. = 0.04)
O
t,3
there is no theft (prob. = 0.95)
Alternative O
t,1
O
t,2
O
t,3
E.V.
A
i,0
1, 000 100 0 14
A
i,1
20 20 20 20
Prob. 0.01 0.04 0.95
(a) The two reference points are normally arbitrary. However, in this case they
have been specied to be U(1, 000, 000) = 100 and U(0) = 0.
Situation 1
0.80U(1, 000, 000) +0.2U(1, 000, 000) = U(0)
80+0.20U(1, 000, 000) = 0
U(1, 000, 000) = 400
Situation 2
0.9U(0) +0.1U(1, 000, 000) = U(250, 000)
040 = U(250, 000)
U(250, 000) = 40
Situation 3
0.9U(0) +0.1U(250, 000) = U(20, 000)
04 = U(20, 000)
U(20, 000) = 4
Situation 4
0.75U(0) +0.25U(100, 000) = U(20, 000)
0+0.25U(100, 000) = 4
U(100, 000) = 16
(a) The four situations plus the arbitrary reference points give us six points to plot
on the utility curve as follows:
307
Wealth in $1,000 units
Utility
/
/
/
/
/
/
/
/
//
/
/
/
/
/
/
/
/
Z
Z
.
.
.
.
.
.
.
.
.
.
.
1000 500 500 1000
400
300
200
100
100
(b) The utilities for required payoffs have been determined from the four situations
and hence do not need to be estimated from the utility curve.
Setting the problem up as a utility matrix we have
Alternative O
t,1
O
t,2
O
t,3
E.U.
A
i,0
400 16 0 4.64
A
i,1
4 4 4 4
Prob. 0.01 0.04 0.95
Thus the recommendation would be to buy the insurance for a utility of 4
with a certainty equivalent of $20,000.
(c) Suppose that the utility function is linear between $100,000 and $20,000.
Letting U(X) = mX +b, we have
16 = m(100) +b
4 = m(20) +b
Subtracting the second equation from the rst, we obtain 12 = 80m, and
therefore m = 0.15. Substituting we obtain b =1. Therefore,
U(X) = 0.15X 1
To nd the maximum amount the president is willing to pay, we just set the
above function equal to 4.64 as follows:
0.15X 1 = 4.64
0.15X = 3.64
X = 24.27
Thus the president would be willing to pay up to $24,270 for the insurance.
309
9.
D
i
Investment decision
A
i,0
do nothing
A
i,1
invest in the venture
E
v
Venture Event
O
v,0
venture pays $0 (prob. = 0.20)
O
v,1
venture pays $80,000 (prob. = 0.30)
O
v,2
(a) Setting up the payoff matrix in terms of wealth level, we have
Alternative O
v,0
O
v,1
O
v,2
A
i,0
100,000 100,000 100,000
A
i,1
50,000 130,000 250,000
Prob. 0.2 0.3 0.5
Converting to utilities we have
Alternative O
v,0
O
v,1
O
v,2
E.U.
A
i,0
1 1 1 1
A
i,1
0.5 = 0.707

1.3 = 1.140

2.50 = 1.581 1.274
Prob. 0.2 0.3 0.5
Thus, the recommendation would be to buy the investment for an expected
utility of 1.274 which has a certainty equivalent of $162,000. Of this, $100,000
is her current level of wealth, and therefore the investment itself has a certainty
equivalent of $62,000.
(b) To nd the EVPI, we need to proceed as follows:
Outcome O
v,0
O
v,1
O
v,2
Alternative A
i,0
A
i,1
A
i,1
Final Wealth Level 100,000 130,000 250,000
Prob. 0.2 0.3 0.5
Thus we need to solve the equation
0.2
1F +0.3
1.3F +0.5
2.5F = 1.274
where F is in units of $100,000. This equation can be solved by trial and error, or
by using a spreadsheet solver. Taking an initial guess of $10,000 (F =0.1) (which
is 20% of the possible savings of $50,000) we would nd
F LHS
0.10 1.293 > 1.274
0.20 1.252 < 1.274
0.15 1.273 1.274
Thus the EVPI for her is about $15,000.
10.
D
i
Investment decision
A
i,0
do nothing
A
i,1
invest in the venture
E
v
Venture Event
O
v,0
venture pays $0 (prob. = 0.20)
O
v,1
O
v,2
(a) Setting up the payoff matrix in terms of wealth level and assuming the cost
of the venture is y in units of $100,000, we have
Alternative O
v,0
O
v,1
O
v,2
A
i,0
1 1 1
A
i,1
1.0y 1.8y 3.0y
Prob. 0.2 0.3 0.5
Converting to utilities we have
311
Alternative O
v,0
O
v,1
O
v,2
E.U.
A
i,0
1 1 1 1
A
i,1
1.0y

1.8y

3.0y 1
Prob. 0.2 0.3 0.5
Thus we need to solve the equation
0.2
_
1.0y +0.3
_
1.8y +0.5
_
3.0y = 1
This equation can be solved by trial and error, or bu using a spreadsheet solver.
Taking an initial guess of $75,000 (y = 0.75) which is close to the increase in the
certainty equivalent of the nal wealth level, we have
y LHS
0.75 1.157 > 1
1.00 0.975 < 1
0.90 1.072 > 1
0.98 1.011 > 1
0.99 0.999 1
Thus she should be willing to pay up to $99,000 to take part in the venture.
11.
The solution is completely personalized and there is no unique result.
12.
D
t
Topic decision
A
t,A
study topic A
A
t,B
study topic B
E
e
Exam Event
O
e,1
A is heavily weighted (prob. = 0.4)
O
e,2
A and B are equally weighted (prob. = 0.25)
O
e,3
B is heavily weighted (prob. = 0.35)
(a) For the sake of discussion we will assume the student chose A
e,1
because the
95% looked good and he/she felt lucky.
Setting the arbitrary reference points to be 0 utiles for 0% and 100 utiles for
100%, a hypothetical utility curve for grades in a course is as follows:
%
Utility
.
.
.
.
.
.
.
.
Z
Z
'
'
'
|
|
|
|
/
/
/
/
//
/
/
/
/
.
.
.
.
.
0 50 100
0
50
100
Setting the problem up as a payoff matrix with the payoffs in terms of percent-
ages, we have
Alternative O
t,1
O
t,2
O
t,3
A
e,A
85 70 55
A
e,B
50 65 95
Prob. 0.40 0.25 0.35
Using the above curve to convert the payoffs to utilities, we have
Alternative O
t,1
O
t,2
O
t,3
E.U.
A
e,A
97 85 50 77.55
A
e,B
30 75 99 65.40
Prob. 0.40 0.25 0.35
(b) Utility theory says that A
e,A
should be preferred. It is equivalent to 66%.
313
(c) Ideally the results from (a) and (b) should agree. However, if it does happen
that your initial guess in (a) does not agree with the result from (b) as is the case
here, then you should either re-evaluate your original decision or re-evaluate your
utility curve.
13.
The two reference points are arbitrary. However, the payoffs must be any two
payoffs in one of the situations. We will arbitrarily set U(A) = 1 and U(D) = 0.
Situation 1
0.2U(A) +0.8U(D) = U(C)
0.2+0 = U(C)
U(C) = 0.2
Situation 2
0.6U(A) +0.4U(C) = U(B)
0.6+0.08 = U(B)
U(B) = 0.68
Setting the problem up as a probability matrix with the payoffs in terms of
utilities, we have
Alternative D C B A E.U.
Statistics 0.0 0.5 0.3 0.2 0.504
Management 0.1 0.3 0.5 0.1 0.500
Utility 0 0.2 0.68 1
Thus, the student is virtually indifferent between the two courses. However,
given no other criterion, Statistics should be chosen since it has a slightly higher
utility.
14.
This is a simple calculation exercise.
(a) U(X) = 100
10,000
100+X
, X =20
U(20) = 100
10, 000
10020
= 100125
= 25
(a) U(X) = 100
10,000
100+X
, U = 40
40 = 100
10, 000
100+x
10, 000
100+x
= 60
6000+60x = 10, 000
60x = 4000
x = 66
2
3
or $66, 667
315
15.
The utilities are determined from the utility function as follows:
/
/
/
/
//
Z
Z
Z
Z
.
.
.
.
|
|
|
|
|
|
|
|
.
.
.
Wealth in $ 100,000
Utility
100
(a) Since he/she has $10,000 already, and each investment costs this amount, the
nal wealth levels are just the outcomes given by those in the payoff matrix. Set-
ting the problem up as a payoff matrix and the corresponding utility matrix (with
the utilities determined above) we have
Payoff Utility
Alt. O
1
O
2
O
3
O
4
Alt. O
1
O
2
O
3
O
4
E.U.
A
1
20 30 80 10 A
1
50 87 93 38 8.5
A
2
30 90 40 30 A
2
60 97 92 60 10.1
Prob. 0.1 0.3 0.4 0.2 0.1 0.3 0.4 0.2
The utility of doing nothing is U(10) = 22 > 10 and hence he/she shouldnt
invest in either alternative.
(b) Since he/she has $10,000 already, and each investment costs $20,000, the nal
wealth levels are just $10,000 less than the outcomes given in the above payoff
matrix. Setting the problem up as a payoff matrix and the corresponding utility
matrix (with the utilities determined above) we have
Payoff Utility
Alt. O
1
O
2
O
3
O
4
Alt. O
1
O
2
O
3
O
4
E.U.
A
1
10 40 70 20 A
1
22 92 93 80 4.2
A
2
20 80 50 20 A
2
50 95 100 50 3.5
Prob. 0.1 0.3 0.4 0.2 0.1 0.3 0.4 0.2
The utility of doing nothing is U(10) = 22 > 3.5 and hence he/she shouldnt
invest in either alternative.
Chapter 8
Game Theory
1.
Let the alternatives for Fast Track and Quick Trip be denoted as F
1
, F
2
, F
3
and
Q
1
, Q
2
, Q
3
respectively. The payoff matrix is
Q
1
Q
2
Q
3
F
1
0 40 100
F
2
45 0 10
F
3
90 0 0
(a) Comparing Quick Trip payoffs rst we have Q
2
dominating Q
1
, then Q
3
dom-
inating Q
2
which reduces the payoff matrix to
Q
3
F
1
100
F
2
10
F
3
0
F
3
clearly dominates the other two so we would recommend serving soft drinks
for Fast Track and for Quick Trip for a payoff of 0.
(b) Applying the Criterion of Pessimism we have
Q
1
Q
2
Q
3
Row Minima
F
1
0 40 100 100
F
2
45 0 10 10
F
3
90 0 0 0
Column Maxima 90 0 0
317
318 CHAPTER 8. GAME THEORY
The recommendation would be serving soft drinks for Fast Track and either
serving soft drinks or lower fare for Quick Trip for the same payoff as in (a). Since
there are two available alternatives for Quick Trip they should be compared; in this
case, Q
2
is eliminated since it is dominated by Q
3
.
2.
Applying the Criterion of Pessimism, we have
M
1
M
2
M
3
M
4
Row Minima
U
1
22 17 21 7 7
U
2
27 15 10 12 10
U
3
42 5 14 7 5
U
4
8 7 13 2 8
Column Maxima 42 17 21 12
There is no saddle point, so we proceed to using dominance for possible re-
duction in the problem size. There is no dominance immediately for management,
so going to the union point of view we nd that U
1
dominates U
4
.
M
1
M
2
M
3
M
4
U
1
22 17 21 7
U
2
27 15 10 12
U
3
42 5 14 7
Now M
2
1
dominates M
1
M
2
M
3
M
4
U
1
17 21 7
U
2
15 10 12
U
3
5 14 7
NowU
1
dominates U
3
.
M
2
M
3
M
4
U
1
17 21 7
U
2
15 10 12
1
M
3
and M
4
also dominate M
1
, but as soon as an alternative is dominated by one other, no
further considerations are necessary.
319
Finally, M
4
dominates M
2
, which reduces the problem to a 2 2 situation which
can be solved using the DARS algorithm as follows
M
3
M
4
Difference Ratio Switch
U
1
21 7 14
14
16
1
8
U
2
10 12 2
2
16
7
8
Difference 11 5 16
Ratio
11
16
5
16
Switch
5
16
11
16
Thus the Union chooses U
1
with probability
1
8
= 0.125, and U
2
with proba-
bility
7
8
= 0.875. Management chooses M
3
with probability
5
16
= 0.3125, and M
4
with probability
11
16
= 0.6875 for a Union gain of $11,375,000.
3.
Letting A
0
, A
1
, A
2
and B
0
, B
1
, B
2
be the three alternatives (no ad, Plan I, Plan II)
for players A and B respectively, we rst apply the Criterion of Pessimism.
B
0
B
1
B
2
Row Minima
A
0
0 25 20 25
A
1
5 5 15 15
A
2
5 10 15 10
There is no saddle point, and hence we proceed with possible reduction using
dominance. One easily sees that B
1
dominates B
0
and that A
1
dominates A
0
which
reduces the problem to a 22 matrix which can be solved using the DARS algo-
rithm.
B
1
B
2
A
1
5 15 10
10
35
5
7
A
2
10 15 25
25
35
2
7
Difference 5 30 35
Ratio
5
35
30
35
Switch
6
7
1
7
Thus player A should choose Plan I with probability
5
7
, and Plan II with prob-
ability
2
7
. Player B should choose Plan I with probability
6
7
, and Plan II with
probability
1
7
for a payoff to player A of
5
7
(5) +
2
7
10 =6
3
7
.
The expected value of the game is a 6
3
7
% loss in market share for player A.
4.
The alternatives available to the environmentalists are to allocate (0,4), (1,3), (2,2),
(3,1) and (4,0) millions to (acid rain, water treatment). Similarly the alternatives
available to the industry group are (0,5), (1,4), (2,3), (3,2), (4,1) and (5,0) millions
to (acid rain, water treatment). As an example of a calculation, if the environ-
mentalists choose (2,2) and industry chooses (4,1), then the probabilities of the
environmentalists winning the acid rain and water treatment issues are calculated
as follows:
Acid Rain
Total allocated to acid rain = 2 + 4 = 6. Probability =
2
6
=
1
3
.
Water Treatment
Total allocated to water treatment = 2 + 1 = 3. Probability =
2
3
.
Expected Number of Issues Won
1
3
1+
2
3
1 = 1
If neither party allocates any funds to the same issue, then the probability of
winning that issue is
1
2
.
The complete payoff matrix is
(0,5) (1,4) (2,3) (3,2) (4,1) (5,0)
(0,4)
1
2
+
4
9
0
1
+
4
8
0
2
+
4
7
0
3
+
4
6
0
4
+
4
5
0
5
+
4
4
(1,3)
1
1
+
3
8
1
2
+
3
7
1
3
+
3
6
1
4
+
3
5
1
5
+
3
4
1
6
+
3
3
(2,2)
2
2
+
2
7
2
3
+
2
6
2
4
+
2
5
2
5
+
2
4
2
6
+
2
3
2
7
+
2
2
(3,1)
3
3
+
1
6
3
4
+
1
5
3
5
+
1
4
3
6
+
1
3
3
7
+
1
2
3
8
+
1
1
(4,0)
4
4
+
0
5
4
5
+
0
4
4
6
+
0
3
4
7
+
0
2
4
8
+
0
1
4
9
+
1
2
Expressing the results in decimal form and applying the Criterion of Pes-
simism, we have
321
(0,5) (1,4) (2,3) (3,2) (4,1) (5,0) Row Minima
(0,4) 0.944 0.500 0.571 0.667 0.800 1.000 0.500
(1,3) 1.375 0.929 0.833 0.850 0.950 1.167 0.833
(2,2) 1.286 1.000 0.900 0.900 1.000 1.286 0.900
(3,1) 1.167 0.950 0.850 0.833 0.929 1.375 0.833
(4,0) 1.000 0.800 0.667 0.571 0.500 0.944 0.500
Column Maxima 1.375 1.000 0.900 0.900 1.000 1.375
There is a saddle point with a value 0.900. Thus the environmentalists would
allocate 2 million to both acid rain and water treatment, whereas the industry
group can allocate either 2 million to acid rain and 3 million to water treatment or
3 million to acid rain and 2 million to water treatment.
5.
This problem is similar to problem 4. The alternatives available to the environ-
mentalists are still to allocate (0,4), (1,3), (2,2), (3,1) and (4,0) millions to (acid
rain, water treatment). Similarly the alternatives available to the industry group
are (0,5), (1,4), (2,3), (3,2), (4,1) and (5,0) millions to (acid rain, water treatment).
However instead of using these alternatives one can use the effective amounts
of (0,4), (0.8,3.2), (1.6,2.4), (2.4,1.6), (3.2,0.8) and (4,0) If the environmentalists
choose (2,2) and industry chooses (3.2,0.8), then the probabilities of the envi-
ronmentalists winning the acid rain and water treatment issues are calculated as
follows:
Acid Rain
Total allocated to acid rain = 2 + 3.2 = 5.2. Probability =
2
5.2
=
5
13
.
Water Treatment
Total allocated to water treatment = 2 + 0.8 = 2.8. Probability =
2
2.8
=
5
7
.
Expected Number of Issues Won
5
13
1+
5
7
1 =
100
91
If neither party allocates any funds to the same issue, then the probability of
winning that issue is
1
2
.
The complete payoff matrix is
(0,4) (0.8,3.2) (1.6,2.4) (2.4,1.6) (3.2,0.8) (4,0)
(0,4)
1
2
+
4
4+4
0
0+0.8
+
4
4+3.2
0
0+1.6
+
4
4+2.4
0
0+2.4
+
4
4+1.6
0
0+3.2
+
4
4+0.8
0
0+4.0
+
4
4+0.0
(1,3)
1
1+0
+
3
3+4
1
0+0.8
+
3
3+3.2
1
1+1.6
+
3
3+2.4
1
1+2.4
+
3
3+1.6
1
1+3.2
+
3
3+0.8
1
1+4.0
+
3
3+0.0
(2,2)
2
2+0
+
2
2+4
2
0+0.8
+
2
2+3.2
2
2+1.6
+
2
2+2.4
2
2+2.4
+
2
2+1.6
2
2+3.2
+
2
2+0.8
2
2+4.0
+
2
2+0.0
(3,1)
3
3+0
+
1
1+4
3
0+0.8
+
1
1+3.2
3
3+1.6
+
1
1+2.4
3
3+2.4
+
1
1+1.6
3
3+3.2
+
1
1+0.8
3
3+4.0
+
1
1+0.0
(4,0)
4
4+0
+
0
0+4
4
0+0.8
+
0
0+3.2
4
4+1.6
+
0
0+2.4
4
4+2.4
+
0
0+1.6
4
4+3.2
+
0
0+0.8
4
4+4.0
+
1
2
Expressing the results in decimal form and applying the Criterion of Pes-
simism, we have
(0,4) (0.8,3.2) (1.6,2.4) (2.4,1.6) (3.2,0.8) (4,0) Row Minima
(0,4) 1.00 0.56 0.63 0.71 0.83 1.00 0.56
(1,3) 1.43 1.04 0.94 0.95 1.03 1.20 0.94
(2,2) 1.33 1.10 1.01 1.01 1.10 1.33 1.01
(3,1) 1.20 1.03 0.95 0.94 1.04 1.43 0.94
(4,0) 1.00 0.83 0.71 0.63 0.56 1.00 0.56
Column Maxima 1.43 1.10 1.01 1.01 1.10 1.43
The saddle point now has a value of 1.01, but it has not changed location,
thus the recommendations would remain the same. The environmentalists would
allocate 2 million to both acid rain and water treatment whereas the industry group
can allocate either 2 million to acid rain and 3 million to water treatment or 3
million to acid rain and 2 million to water treatment.
6.
The alternatives for each player can be expressed as either their nal position or
the change from their original position. Since the payoffs depend on the change
from the original position it is better to choose the changes from the original po-
sition as the alternatives. Thus each player has alternatives of 0, 0.25, 0.50, 0.75,
1.00, 1.25. The payoff matrix with the Criterion of Pessimism applied to it is as
follows:
323
Company
Union 0.00 0.25 0.50 0.75 1.00 1.25 Row Minima
0.00 T C C C C C
1.625 1.25 1.50 1.75 2.00 2.25 1.25
0.25 U T C C C C
2.00 1.625 1.50 1.75 2.00 2.25 1.50
0.50 U U T C C C
1.75 1.75 1.625 1.75 2.00 2.25 1.625
0.75 U U U T C C
1.50 1.50 1.50 1.625 2.00 2.25 1.50
1.00 U U U U T C
1.25 1.25 1.25 1.25 1.625 2.25 1.25
1.25 U U U U U T
1.00 1.00 1.00 1.00 1.00 1.625 1.00
Column Maxima 2.00 1.75 1.625 1.75 2.00 2.25
In each cell is indicated the winner and the resultant payoff.
There is a saddle point with a value of 1.625. Thus the union should decrease
its demand by 0.50 to 1.75 and the company should increase its offer by 0.50 to
1.50 for a payoff of 1.625 increase in the wage rate.
7.
No payoffs are indicated. Thus we may arbitrarily let winning have a payoff of 1,
losing a payoff of 1 and a tie a payoff of zero.
Player 2
Player 1 Paper Scissors Rock
Paper T (2) (1)
0 1 1
Scissors (1) T (2)
1 0 1
Rock (2) (1) T
1 1 0
The winner and resulting payoff is indicated in the table. T stands for tied.
Due to the symmetry of the payoffs, each player will have the same strategy.
There is trivially no saddle point so we have to nd the mixed strategy.
To solve the problem
2
, we will let the probabilities for player 1 be as follows:
p
1
probability of choosing paper
p
2
probability of choosing scissors
1p
1
p
1
probability of choosing rock
Looking at the problem from player 2s point of view, his payoffs will be
Alternative Payoff to player 2
Paper p
1
0+ p
2
(1) +(1p
1
p
2
) 1 = p
1
+2p
2
1
Scissors p
1
1+ p
2
0+(1p
1
p
2
) (1) = 12p
1
+ p
2
Rock p
1
(1) + p
2
1+(1p
1
p
2
) 0 = p
1
p
2
From considering which alternatives dominate or equal others we have the
following
Paper is no worse than Scissors p
1
+2p
2
1 12p
1
+ p
2
p
1
+ p
2
2
3
Paper is no worse than Rock p
1
+2p
2
1 p
1
p
2
p
2
1
3
Scissors is no worse than Rock 12p
1
+ p
2
p
1
p
2
p
1
1
3
Plotting these regions of strict preference we have
Regions of Preference
`
`
`
`
`
`
`
` P
R
R S
P
S
P
R S
1
3
2
3
1
1
3
2
3
1
p
1
p
2
Since we know from the symmetry of the problem that there is no strategy
which dominates, the only possible solution is where the three lines of indifference
meet. Namely p
1
=
1
3
and p
2
=
1
3
. Thus all three alternatives have probability
1
3
.
2
Since each alternative has the same set of payoffs the intuitive solution is that each alternative
should be played with equal probability.
325
8.
The relative locations of the hotels can be considered to be as follows:
Map of the Bay
West
1000
East
1500
Centre
500
\
\
\
\
\\
-
-.
.
/
/
/
/
//
Each vendor has the same set of alternatives - locate at West Hotel, Centre
Hotel or East Hotel. Locating between the hotels need not be considered since
they can always be considered to be in the hotel to which they are closer.
Setting up the payoff matrix in terms of number (in 100s) of customers, we
have
Vendor 2
Vendor 1 West Centre East
West 15 0.7510+0.255+0.2515 0.7510+0.505+0.2515
Centre 0.2510+0.755+0.7515 15 0.7510+0.755+0.2515
East 0.2510+0.505+0.7515 0.2510+0.255+0.7515 15
which reduces to
Vendor 2
Vendor 1 West Centre East Row Minima
West 1500 1250 1375 1250
Centre 1750 1500 1500 1500
East 1625 1500 1500 1500
There is a saddle point with value of 1500 which indicates either Centre or
East Hotels should be used. Applying dominance we can reduce the choice to
only the Centre Hotel for both players.
9.
The alternatives for each player is just the type of coin selected.
Wendy
Alison 1p 5p 10p
2p Odd Odd Even
2 2 10
5p Even Even Odd
1 5 5
10p Odd Odd Even
10 10 10
Applying the Criterion of Pessimism we have
Wendy Row
Alison 1p 5p 10p Minima
2p 2 2 10 2
5p 1 5 5 5
10p 10 10 10 10
Since there is no saddle point, we apply the principles of dominance to reduce
the size of the problem. Clearly 1p dominates 5p for Wendy and 2p dominates
10p for Alison. Using the DARS algorithm, the resulting 22 matrix gives
1p 10p Difference Ratio Switch
2p 2 10 12
12
18
1
3
5p 1 5 6
6
18
2
3
Difference 3 15 18
Ratio
3
18
15
18
Switch
5
6
1
6
Thus Alison should play the 2p coin with probability
1
3
and the 5p coin with
probability
2
3
. Wendy should play the 1p coin with probability
5
6
and the 10p coin
with probability
1
6
for a payoff to Alison of
2
1
3
+1
2
3
= 0
327
10.
B
1
B
2
B
3
B
4
Row Minima
A
1
1 6 5 0 1
A
2
3 2 2 4 2
A
3
0 2 3 3 0
A
4
0 5 4 1 1
There is no saddle point and hence we proceed with dominance.
(a) Examining the alternatives for player B, we see that B
1
dominates B
4
which
reduces the matrix to
B
1
B
2
B
3
A
1
1 6 5
A
2
3 2 2
A
3
0 2 3
A
4
0 5 4
With B
4
gone, A
4
dominates A
3
which reduces the matrix to
B
1
B
2
B
3
A
1
1 6 5
A
2
3 2 2
A
4
0 5 4
We can now remove B
2
since it is dominated by B
3
to obtain
B
1
B
3
A
1
1 5
A
2
3 2
A
4
0 4
No further dominance exists.
(b) Since there are three alternatives for A and only two for B, we will look at the
payoffs from Bs perspective. Letting q be the probability of choosing B
1
we have
the following graph
Plot of Expected Payoff to A versus q
3
2
1
0
1
2
3
4
5
6
3
2
1
0
1
2
3
4
5
6
`
0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9
q
>
>
>
>
>
>
>
>
>
>
>
>
>
>
>
>
>
>
>
>
A
4
A
1
A
2
-
-
-
-.
.
.
.
.
.
.
A
1
is locally dominated at the minimum of the upper boundary. Applying the
DARS algorithm to the reduced matrix we have
B
1
B
3
A
2
3 2 5
5
9
4
9
A
4
0 4 4
4
9
5
9
Difference 3 6 9
Ratio
3
9
6
9
Switch
2
3
1
3
Thus Player A should choose A
2
with probability
4
9
and A
4
with probability
5
9
. Player B should choose B
1
with probability
2
3
and B
3
with probability
1
3
for a
payoff to player A
3
4
9
+0
5
9
= 1
1
3
11.
The total population is 7, 500 +12, 500 +20, 000 = 40, 000 persons. We are not
told the exact number who buy hot dogs but it is reasonable to assume that it will
be a fraction of the total population and uniform throughout the pubs. Thus we
can ignore the fraction and just use the total population.
329
Setting up the payoff matrix in terms of number of customers (in 1,000s), we
have
Vendor 2
Vendor 1 Westland Northland Eastland
Westland 22 0.807.5+0.30(12.5+20) 0.80(7.5+12.5) +0.3020
Northland 0.80(12.5+20) +0.307.5 22 0.80(12.5+7.5) +0.3020
Eastland 0.8020+0.30(7.5+12.5) 0.8020+0.30(7.5+12.5) 22
which reduces to
Vendor 2
Vendor 1 Westland Northland Eastland Row Minima
Westland 22.00 15.75 22.00 15.75
Northland 28.25 22.00 22.00 22.00
Eastland 22.00 22.00 22.00 22.00
Column Maxima 28.25 22.00 22.00
Thus using the Criterion of Pessimism, both Northland and Eastland would be
acceptable to both vendors. However the alternative Northland dominates East-
land and hence both vendors should go to Northland for a payoff of 22,000 to Jack
and 18,000 to Jill.
12.
Prisoners Dilemma I. This is the rst example of a minimization problem. Both
prisoners wish to obtain a minimum sentence. Setting up the payoff matrix in
terms of jail sentence to prisoner 1, we have
Prisoner 2
Prisoner 1 Do not confess Confess Row Maxima
Do not confess 5 10 10
Confess 0 5 5
Column Minima 0 5
The Criterion of Pessimism requires us to minimize the maximum sentence
for each prisoner rather than maximize the minimum payoff as we normally have
done. There is a saddle point with value 5. Thus both prisoners would confess.
If we wished we could have set this up as a minimization problem by multi-
plying the payoffs by 1. Namely
Prisoner 2
Prisoner 1 Do not confess Confess Row Minima
Do not confess 5 10 10
Confess 0 5 5
Column Maxima 0 5
which has a saddle point value of 5.
13.
Prisoners Dilemma II. This is not a constant sum game since the combined sen-
tence is either 0 or 10. Each prisoner wishes to minimize his sentence. Setting up
the payoff matrix in terms of jail sentence to (prisoner 1, prisoner 2), we have
Prisoner 2
Prisoner 1 Do not confess Confess Row
1
Maxima
Do not confess (0,0) (10,0) 10
Confess (0,10) ( 5,5) 5
Column
2
Maxima 10 5
We have used the subscript 1 and 2 to indicate which of the pair of numbers is
to be considered. The Criterion of Pessimism for prisoner 1 would cause him to
confess whereas the Criterion of Pessimism for prisoner 2 would also cause him
to confess. Thus there is a saddle point with value 5 and both prisoners should
confess.
331
14.
The alternatives for each player is just the type of coin selected.
Player 2
Player 1 1 2 3 4 5
1 2 2 2 3 3
0 1 2 3 4
2 2 2 2 2 3
1 0 1 2 3
3 2 2 2 2 2
2 1 0 1 2
4 3 2 2 2 2
3 2 1 0 1
5 3 3 2 2 2
4 3 2 1 0
(a) Applying the Criterion of Pessimism we have
Player 2
Player 1 1 2 3 4 5 Row Minima
1 0 1 2 3 4 2
2 1 0 1 2 3 2
3 2 1 0 1 2 2
4 3 2 1 0 1 3
5 4 3 2 1 0 4
Column Maxima 2 2 2 3 4
(b) There is no saddle point and hence a mixed strategy would have to be found.
15.
B
1
B
2
B
3
B
4
Row Minima
A
1
12 4 8 15 4
A
2
10 5 6 10 5
A
3
11 6 6 12 6
A
4
6 10 12 8 6
A
5
5 13 15 9 5
There is no saddle point and hence we proceed with dominance. Examining
the alternatives for player B, we see that B
1
dominates B
4
, and B
2
dominates B
3
which reduces the matrix to
B
1
B
2
A
1
12 4
A
2
10 5
A
3
11 6
A
4
6 10
A
5
5 13
Since we have reduced the problem to a 2N matrix we do not need to consider
dominance any further. However, if we did, we would see that A
3
dominates A
2
.
Since there are four remaining alternatives for A and only two for B, we will
look at the payoffs from Bs perspective. Letting q be the probability of choosing
B
1
we have the following graph
333
Plot of Expected Payoff to A versus q
0
2
4
6
8
10
12
14
0
2
4
6
8
10
12
14
`
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
q
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
A
1
A
3
A
4
A
5
A
2
-
-
-
-
-
-
-
-
-
-
-.
.
.
.
.
.
.
.
.
.
As noted earlier A
2
is globally dominated by A
3
. In addition, A
4
is globally domi-
nated by the combination of A
1
, A
3
, and A
5
. Finally, A
1
is locally dominated at the
minimum of the upper boundary. Applying the DARS algorithm to the reduced
matrix we have
B
1
B
2
A
3
11 6 5
5
13
8
13
A
5
5 13 8
8
13
5
13
Difference 6 7 13
Ratio
6
13
7
13
Switch
7
13
6
13
Thus Player A should choose A
3
with probability
8
13
and A
4
with probability
5
13
. Player B should choose B
1
with probability
7
13
and B
2
with probability
6
13
for
a payoff to player A of
11
8
13
+5
5
13
= 8
9
13
Advanced Problems
1.
The same set of alternatives is available to each player. Namely
A
1
or W
1
show 1 nger
A
2
or W
2
show 2 ngers
A
4
or W
4
show 4 ngers
The payoff matrix in terms of payoffs to Alf is as follows:
Welf
Alf W
1
W
2
W
4
A
1
E O O
2 3 5
A
2
O E E
3 4 6
A
4
O E E
5 6 8
An E means the result was even and Alf wins whereas an O means the result
was odd and Welf wins. Due to the symmetry of the payoffs, each player will have
the same strategy. There is trivially no saddle point so we have to nd the mixed
strategy.
To solve the problem, we will let the probabilities for Alf be as follows:
p
1
probability of choosing A
1
p
2
2
p
4
4
Looking at the problem from Welfs point of view, his payoffs will be
Alternative Payoff to player 2
W
1
p
1
3p
2
5p
4
W
2
3p
1
+4p
2
+6p
4
W
4
5p
1
+6p
2
+8p
4
From considering which alternatives dominate or equal others we have the
following
335
W
1
is no worse than W
2
2p
1
3p
2
5p
4
3p
1
+4p
2
+6p
4
5p
1
7p
2
11p
4
0
W
1
is no worse than W
4
2p
1
3p
2
5p
4
5p
1
+6p
2
+8p
4
7p
1
9p
2
13p
4
0
W
2
is no worse than W
4
3p
1
+6p
2
+8p
4
5p
1
+6p
2
+8p
4
p
1
+ p
2
+ p
4
0
In order to plot the regions we need to remove one of the variables from the
equations using the requirement that they sum to 1. We will rst let p
4
= 1p
1
p
2
which reduces the equations to
W
1
is no worse than W
2
16p
1
4p
2
11
W
2
is no worse than W
4
20p
1
4p
2
13
W
2
is no worse than W
4
p
1
1
2
Plotting these regions we have
Regions of Dominance using p
1
and p
2
'
'
'
'
'
'
\
\
\
\
\
\
\
\
\
\
\
\
\
\
W
2
W
4
W
1
W
4
W
1
W
2
W
1
W
4
0.5 1
0.5
1
p
1
p
2
The graph shows that W
1
and W
4
dominate W
2
and hence the payoff matrix
reduces to
Welf
Alf W
1
W
4
A
1
2 5
A
2
3 6
A
4
5 8
There is still no dominance for Alf so we solve using the graphical technique
as follows:
Plot of Expected Payoff to Alf versus q
6
4
2
0
2
4
6
8
6
4
2
0
2
4
6
8
0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9
q
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
A
1
A
2
A
4
`
`
`
`
`
`
`
`
.
.
.
.
.
.
A
4
is dominated by the other two at the local minimum and hence we can solve
using the DARS algorithm.
W
1
W
4
A
1
2 5 7
7
16
9
16
A
2
3 6 9
9
16
7
16
Difference 5 11 16
Ratio
5
16
11
16
Switch
11
16
5
16
Thus Alf should play 1 nger with a probability of
9
16
, and 2 ngers with a
probability of
7
16
. Welf should play 1 nger with a probability of
11
16
, and 4 ngers
with a probability of
5
11
.
If we plot the regions of dominance for other combinations of the p
i
, there is
no difference in the result.
337
Regions of Preference using p
1
and p
3
/
/
/
/
/
/
/
/
|
|
|
|
|
W
2
W
4
W
1
W
4
W
1
W
2
W
1
W
4
0.5 1
0.5
1
p
1
p
3
Regions of Preference using p
2
and p
3
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
W
4
W
2
W
4
W
1
W
2
W
1
W
4
W
1
0.5 1
0.5
1
p
2
p
3
2.
The same set of alternatives is available to each player. Namely
A
11
or B
11
show 1 nger and say opponent has 1 nger
A
12
or B
12
show 1 nger and say opponent has 2 ngers
A
21
or B
21
show 2 ngers and say opponent has 1 nger
A
22
or B
22
show 2 ngers and say opponent has 2 ngers
The payoff matrix in terms of payoffs to player A is as follows:
Player 2
Player 1 B
11
B
12
B
21
B
22
A
11
CC CW WC WW
0 2 2 0
A
12
WC WW CC CW
2 0 0 2
A
21
CW CC WW WC
2 0 0 2
A
22
WW WC CW CC
0 2 2 0
The symbol C means that the player guessed correctly, and W means that the
player guessed incorrectly. Due to the symmetry of the payoffs, each player will
have the same strategy. There is trivially no saddle point so we have to nd the
mixed strategy. There is no dominance.
As with the Paper, Scissors, and Rock problem, the intuitive solution is to
play each alternative 25% of the time since the set of payoffs is the same for each
alternative.
Chapter 9
Appendix E: Applications
1.
Analysis
Problem: Efcient use of resources at a renery.
Objective: Maximize the daily contribution to the prot.
Amount of each output produced.
Amount of each input used.
Amount of each input used for each output.
Output specications constraints.
Renery capacity limitations constraints.
Input characteristics structural parameters.
Price per litre of output objective function coefcients.
Price per litre of input objective function coefcients.
model formulation.
339
340 CHAPTER 9. APPENDIX E: APPLICATIONS
Resource Used for Availability Price % Sulphur Thermal Value
Output 1 Output 2 (in litres) per litre (by mass) (kJ/l)
Input 1 1 1 500,000 $0.42 2.2 15,000
Input 2 1 1 500,000 $0.76 0.4 20,000
Input 3 1 1 500,000 $0.60 1.0 17,000
Price $0.63 $0.91
Sulphur 1.2 0.7
Thermal 16, 000 18, 000
Model Formulation
X
i
= number of litres of output i produced each day (i = 1, 2).
I
i
= number of litres of input i used each day (i = 1, 3).
Using these decision variables the objective function is
max 0.63X
1
+ 0.91X
2
0.42I
1
0.76I
2
0.60I
3
Obviously, the inputs and outputs are related. The total amount used must
equal the total amount produced. Thus we have the balance condition
(0) X
1
+ X
2
= I
1
+ I
2
+ I
3
(0) X
1
+ X
2
I
1
I
2
I
3
= 0
The output characteristics give rise to two sets of conditions one for sulphur
and one for thermal value. In order to deal with these constraints we need to know
how much of each input is used in each output. Thus we need to introduce another
set of decision variables. We therefore dene
U
i, j
= number of litres input i used for output j (i = 1, 2; j = 1, 3).
This gives rise to the following denitional conditions
(1) U
1,1
+ U
1,2
= I
1
Denitional
(2) U
2,1
+ U
2,2
= I
2
Denitional
(3) U
3,1
+ U
3,2
= I
3
Denitional
and
(4) U
1,1
+ U
2,1
+ U
3,1
= X
1
Denitional
(5) U
1,2
+ U
2,2
+ U
3,2
= X
2
Denitional
341
With this new set of variables, if we add constraints (1), (2) and (3) together
and add (4) and (5) together we see that we can derive condition (0). Thus we
are able to drop condition (0) since it is automatically taken into account by con-
straints (1) to (5).
Sulphur Requirements
(6) 2.2
U
1,1
X1
+ 0.4
U
2,1
X1
+ 1.0
U
3,1
X1
1.2 Output 1
(7) 2.2
U
1,2
X2
+ 0.4
U
2,2
X2
+ 1.0
U
3,2
X2
0.7 Output 2
Simplifying we have
(6) 2.2U
1,1
+ 0.4U
2,1
+ 1.0U
3,1
1.2X
1
0 Output 1
(7) 2.2U
1,2
+ 0.4U
2,2
+ 1.0U
3,2
0.7X
2
0 Output 2
Thermal Requirements
(8) 15, 000U
1,1
+ 20, 000U
2,1
+ 17, 000U
3,1
16, 000X
1
Output 1
(9) 15, 000U
1,2
+ 20, 000U
2,2
+ 17, 000U
3,2
18, 000X
2
Output 2
or rearranging and writing in terms of 1,000s
(8) 16X
1
15U
1,1
20U
2,1
17U
3,1
0 Output 1
(9) 18X
2
15U
1,2
20U
2,2
17U
3,2
0 Output 2
The renery capacities give rise to three sets of conditions - one for input, one
for output and one for overall capacity.
Input
(10) I
1
500, 000 Input 1
(11) I
2
500, 000 Input 2
(12) I
3
500, 000 Input 3
Output
(12) X
1
650, 000 Output 1
(13) X
2
650, 000 Output 2
Overall
1
1
This expression could be written either in terms of the X
i
, I
i
, or the U
i, j
. We have chosen to
use the X
i
since it has the fewest terms in the expression.
(14) X
1
+ X
2
1, 000, 000 Overall Capacity
The above set of constraints combine to form the following model
max 0.63X
1
+ 0.91X
2
0.42I
1
0.76I
2
0.60I
3
subject to
(1) I
1
U
1,1
U
1,2
= 0 Denitional
(2) I
2
U
2,1
U
2,2
= 0 Denitional
(3) I
3
U
3,1
U
3,2
= 0 Denitional
(4) X
1
U
1,1
U
2,1
U
3,1
= 0 Denitional
(5) X
2
U
1,2
U
2,2
U
3,2
= 0 Denitional
(6) 1.2X
1
+ 2.2U
1,1
+ 0.4U
2,1
+ 1.0U
3,1
0 Output 1
(7) 0.7X
2
+ 2.2U
1,2
+ 0.4U
2,2
+ 1.0U
3,2
0 Output 2
(8) 16X
1
15U
1,1
20U
2,1
17U
3,1
0 Output 1
(9) 18X
2
15U
1,2
20U
2,2
17U
3,2
0 Output 2
(10) I
1
500, 000 Input 1
(11) I
2
500, 000 Input 2
(12) I
3
500, 000 Input 3
(12) X
1
650, 000 Output 1
(13) X
2
650, 000 Output 2
(14) X
1
+ X
2
1, 000, 000 Overall Capacity
X
i
0; I
j
0; U
i, j
0; i = 1, 2; j = 1, 2, 3
2.
Analysis
Problem: Need a schedule for the employees.
Objective: Minimize the idle time of the employees.
The number of employees beginning their 5 day work week each day.
Union contract constraints.
5 day work week constraint.
Daily requirements constraints.
343
Model Formulation
Instead of minimizing the idle time, we will minimize the total number of
employees which in turn will minimize the idle time. The variables which give
rise to the simplest objective function are
X
i
= number of employees beginning their 5 day work period on day i
We will let the days of the week be number 1 to 7. Sunday will be day 1 and
Saturday will be day 7. Using these decision variables the objective function is
min X
1
+ X
2
+ X
3
+ X
4
+ X
5
+ X
6
+ X
7
The total number of employees working on Sunday are those that begin their
work week on Sunday plus those who began their work week on any of the previ-
ous four days. Thus
(1) X
1
+ X
4
+ X
5
+ X
6
+ X
7
110 Sunday
Using the same logic for the other 6 days we have
(2) X
1
+ X
2
+ X
5
+ X
6
+ X
7
81 Monday
(3) X
1
+ X
2
+ X
3
+ X
6
+ X
7
85 Tuesday
(4) X
1
+ X
2
+ X
3
+ X
4
+ X
7
118 Wednesday
(5) X
1
+ X
2
+ X
3
+ X
4
+ X
5
124 Thursday
(6) X
2
+ X
3
+ X
4
+ X
5
+ X
6
112 Friday
(7) X
3
+ X
4
+ X
5
+ X
6
+ X
7
120 Saturday
Thus the model is
min X
1
+ X
2
+ X
3
+ X
4
+ X
5
+ X
6
+ X
7
subject to
(1) X
1
+ X
4
+ X
5
+ X
6
+ X
7
110 Sunday
(2) X
1
+ X
2
+ X
5
+ X
6
+ X
7
81 Monday
(3) X
1
+ X
2
+ X
3
+ X
6
+ X
7
85 Tuesday
(4) X
1
+ X
2
+ X
3
+ X
4
+ X
7
118 Wednesday
(5) X
1
+ X
2
+ X
3
+ X
4
+ X
5
124 Thursday
(6) X
2
+ X
3
+ X
4
+ X
5
+ X
6
112 Friday
(7) X
3
+ X
4
+ X
5
+ X
6
+ X
7
120 Saturday
X
i
0; i = 1, 7
We also require that the X
i
be integers; this model is naturally integer.
3.
Analysis
Problem: Efcient use of resources at a farm.
Objective: Maximize the prot contribution from his crops.
Amount of each crop planted.
Amount of each resource used.
Amount of land constraint.
Amounts of water available constraint.
Cost of water objective function coefcient.
Revenue for each commodity objective function coefcients.
Water requirement of each crop structural parameters.
Planting restrictions constraints.
model formulation.
Resource Used for Availability Price
Corn Peas Onions per m
3
Water 3,500 6,700 2,000 1,000,000 $0.00
Water (Extra) 3,500 6,700 2,000 300,000 $0.04
Land 1 1 1 500
Revenue $200 $400 $300
Maximum % 50 50 50
Minimum % 10 10 10
Model Formulation
X
i
= number of hectares of commodity i planted (i = 1, 2, 3).
corn i = 1; peas i = 2; onions i = 3
W
0
= number of 1,000 m
3
of free water used.
W
1
= number of 1,000 m
3
of extra water used.
345
max 200X
1
+ 400X
2
+ 300X
3
0W
0
40W
1
equal the total amount produced. Thus we have the resource condition
(1) 3.5X
1
+ 6.7X
2
+ 2.0X
3
= W
0
+ W
1
Water
(1) 3.5X
1
+ 6.7X
2
+ 2.0X
3
W
0
W
1
= 0 Water
The limitations on water availability are simply expressed as
(2) W
0
1, 000 Free Water
(3) W
1
300 Extra Water
Introducing a new variable (X
0
) to represent the total number of hectares
planted, we have
(4) X
1
+ X
2
+ X
3
= X
0
Denitional
(4) X
0
X
1
X
2
X
3
= 0 Denitional
The planting restrictions now can be written as
(5) X
0
500 Land
(6) X
1
0.5X
0
Corn
(7) X
2
0.5X
0
Peas
(8) X
3
0.5X
0
Onions
(9) X
1
0.1X
0
Corn
(10) X
2
0.1X
0
Peas
(11) X
3
0.1X
0
Onions
Rearranging, we would write these equations as
(5) X
0
500 Land
(6) 0.5X
0
+ X
1
0 Corn
(7) 0.5X
0
+ X
2
0 Peas
(8) 0.5X
0
+ X
3
0 Onions
(9) 0.1X
0
X
1
0 Corn
(10) 0.1X
0
X
2
0 Peas
(11) 0.1X
0
X
3
0 Onions
max 200X
1
+ 400X
2
+ 300X
3
0W
0
40W
1
subject to
(1) 3.5X
1
+ 6.7X
2
+ 2.0X
3
W
0
W
1
= 0 Water
(2) W
0
1, 000 Free Water
(3) W
1
300 Extra Water
(4) X
0
X
1
X
2
X
3
= 0 Denitional
(5) X
0
500 Land
(6) 0.5X
0
+ X
1
0 Corn
(7) 0.5X
0
+ X
2
0 Peas
(8) 0.5X
0
+ X
3
0 Onions
(9) 0.1X
0
X
1
0 Corn
(10) 0.1X
0
X
2
0 Peas
(11) 0.1X
0
X
3
0 Onions
X
i
0; W
j
0; i = 1, 3; j = 1, 2
4.
Analysis
Problem: Efcient use of resources in a production process.
Objective: Maximize the prot contribution from the production of coffee.
Amount of each blend of coffee produced.
Amount of each type of bean used in production.
Cost of the beans objective function coefcient.
Revenue for each blend objective function coefcients.
Maximum demand for each type of blend constraints.
model formulation.
347
Resource Used for Price
Regular Premium per kg
Columbian 10 50 $1.20
Peruvian 20 $1.00
Nigerian 15 $0.90
Revenue $1.30 $1.60
Maximum % 200, 000 130, 000
Model Formulation
X
i
= number of kilograms of blend i produced (i = 1, 2).
regular i = 1; premium i = 2;
B
i
= number of kilograms of bean i used (i = 1, 3).
Columbian i = 1; Peruvian i = 2; Nigerian i = 3
max 1.3X
1
+ 1.6X
2
1.2B
1
1.0B
2
0.9B
3
(0) X
1
+ X
2
= B
1
+ B
2
+ B
3
Balance
(0) X
1
+ X
2
B
1
B
2
B
3
= 0 Balance
In order to deal with these constraints on the ingredients, we need to know how
much of each input is used in each output. Thus we need to introduce another set
of decision variables. We therefore dene
U
i, j
= number of kilograms of bean i used for blend j (i = 1, 3; j = 1, 2).
(1) U
1,1
+ U
1,2
= B
1
Denitional
(2) U
2,1
+ U
2,2
= B
2
Denitional
(3) U
3,1
+ U
3,2
= B
3
Denitional
and
(4) U
1,1
+ U
2,1
+ U
3,1
= X
1
Denitional
(5) U
1,2
+ U
2,2
+ U
3,2
= X
2
Denitional
With this set of denitional constraints, the balance constraint (0) is no longer
required. The mix requirements can now be written as
(6) U
1,1
0.10X
1
Columbian
(7) U
2,1
0.20X
1
Peruvian
(8) U
1,2
0.50X
2
Columbian
(9) U
3,2
0.15X
2
Peruvian
which become
(6) 0.10X
1
U
1,1
0 Columbian Regular
(7) 0.20X
1
U
2,1
0 Peruvian Regular
(8) 0.50X
2
U
1,2
0 Columbian Premium
(9) 0.15X
2
+ U
3,2
0 Nigerian Premium
The demand requirements are simply
(10) X
1
200, 000 Regular
(11) X
2
130, 000 Premium
max 1.3X
1
+ 1.6X
2
1.2B
1
1.0B
2
0.9B
3
subject to
(1) B
1
U
1,1
U
1,2
= 0 Denitional
(2) B
2
U
2,1
U
2,2
= 0 Denitional
(3) B
3
U
3,1
U
3,2
= 0 Denitional
(4) X
1
U
1,1
U
2,1
U
3,1
= 0 Denitional
(5) X
2
U
1,2
U
2,2
U
3,2
= 0 Denitional
(6) 0.10X
1
U
1,1
0 Columbian Regular
(7) 0.20X
1
U
2,1
0 Peruvian Regular
(8) 0.50X
2
U
1,2
0 Columbian Premium
(9) 0.15X
2
+ U
3,2
0 Nigerian Premium
(10) X
1
200, 000 Regular
(11) X
2
130, 000 Premium
X
i
0; B
j
0; i = 1, 2; j = 1, 3
349
5.
Analysis
Problem: Need a schedule for the bus drivers.
Objective: Minimize the daily labour cost.
The number of bus drivers working each 3 hour shift.
Wage rates parameters.
5 shift work day constraint.
Shift requirements constraints.
Model Formulation
X
1
= Total number of drivers.
X
2
= Number of drivers working non-consecutive shifts.
min 70X
1
+ 5X
2
In order to handle the situation of drivers working non-consecutive shifts, we
need to introduce the variable
X
i, j
= Number of drivers working shifts i and j ( j > i).
where we will let the shifts be numbered 1 to 5. 5:30 a.m. to 8.59 a.m. will be
shift 1 and 7:30 p.m. to 10.59 p.m. will be shift 5.
The total number of drivers is just
(1) X
1
=
4
i=1
5
j=i+1
X
i, j
Denitional
(1) X
1

4
i=1
5
j=i+1
X
i, j
= 0 Denitional
The number of drivers who work non-consecutive shifts is just the total num-
ber of drivers minus those who work consecutive shifts. Namely
(2) X
2
= X
1

4
i=1
X
i,i+1
Denitional
(2) X
2
X
1
+
4
i=1
X
i,i+1
= 0 Denitional
The minimum number of employees per shift is simply taken care of with the
following set of constraints
(3) X
1,2
+ X
1,3
+ X
1,4
+ X
1,5
150 Shift 1
(4) X
1,2
+ X
2,3
+ X
2,4
+ X
2,5
80 Shift 2
(5) X
1,3
+ X
2,3
+ X
3,4
+ X
3,5
90 Shift 3
(6) X
1,4
+ X
2,4
+ X
3,4
+ X
4,5
160 Shift 4
(7) X
1,5
+ X
2,5
+ X
3,5
+ X
4,5
70 Shift 5
Thus the model
2
is
min 70X
1
+ 5X
2
subject to
(1) X
1

4
i=1
5
j=i+1
X
i, j
= 0 Denitional
(2) X
1
+ X
2
+
4
i=1
X
i,i+1
= 0 Denitional
(3) X
1,2
+ X
1,3
+ X
1,4
+ X
1,5
150 Shift 1
(4) X
1,2
+ X
2,3
+ X
2,4
+ X
2,5
80 Shift 2
(5) X
1,3
+ X
2,3
+ X
3,4
+ X
3,5
90 Shift 3
(6) X
1,4
+ X
2,4
+ X
3,4
+ X
4,5
160 Shift 4
(7) X
1,5
+ X
2,5
+ X
3,5
+ X
4,5
70 Shift 5
X
i
0; X
i, j
0; i = 1, 4; j = 2, 5
We also require that the variables be integers; this model is naturally integer.
2
If one wishes, X
1
and X
2
could be removed, in which case the X
i, j
would appear in the objective
function with coefcients of 70 or 75. The equations involving X
1
and X
2
would disappear.
351
6.
Analysis
Problem: Efcient use of resources in a production process.
Objective: Maximize the prot contribution from the production of wine.
Amount of each blend of wine produced.
Amount of each type of wine used in production.
Cost of the wines objective function coefcients.
Revenue for each blend objective function coefcients.
Resource availability of each type of wine constraints.
model formulation.
Resource Used for Availability Price
Domestic Foreign per litre
Alsace 12 70 15,000 20 FF
Burgundy 50 18,000 15 FF
Marseille 5 21,000 10 FF
Revenue 25 FF 35 FF
Model Formulation
X
i
= number of litres of blend i produce (i = 1, 2).
Domestic i = 1; Foreign i = 2;
W
i
= number of litres of resource wine i used (i = 1, 3).
Alsace i = 1; Burgundy i = 2; Marseille i = 3
max 25X
1
+ 35X
2
20W
1
15W
2
10W
3
(0) X
1
+ X
2
= W
1
+ W
2
+ W
3
Balance
(0) X
1
+ X
2
W
1
W
2
W
3
= 0 Balance
In order to deal with these constraints on the ingredients, we need to know how
much of each input is used in each output. Thus we need to introduce another set
of decision variables. We therefore dene
U
i, j
= number of litres of wine i used for blend j (i = 1, 3; j = 1, 2).
(1) U
1,1
+ U
1,2
= W
1
Denitional
(2) U
2,1
+ U
2,2
= W
2
Denitional
(3) U
3,1
+ U
3,2
= W
3
Denitional
and
(4) U
1,1
+ U
2,1
+ U
3,1
= X
1
Denitional
5) U
1,2
+ U
2,2
+ U
3,2
= X
2
Denitional
With this set of denitional constraints, the balance constraint (0) is no longer
required. The mix requirements can now be written as
(6) U
1,1
0.12X
1
Alsace Domestic
(7) U
2,1
0.50X
1
Burgundy Domestic
(8) U
1,2
0.70X
2
Alsace Foreign
(9) U
3,2
0.05X
2
Marseille Foreign
which become
(6) 0.12X
1
U
1,1
0 Alsace Domestic
(7) 0.50X
1
+ U
2,1
0 Burgundy Domestic
(8) 0.70X
2
+ U
1,2
0 Alsace Foreign
(9) 0.05X
2
U
3,2
0 Marseille Foreign
The supply restrictions are simply
(10) W
1
15, 000 Alsace
(11) W
2
18, 000 Burgundy
(12) W
3
21, 000 Marseille
353
max 25X
1
+ 35X
2
20W
1
15W
2
10W
3
subject to
(1) W
1
U
1,1
U
1,2
= 0 Denitional
(2) W
2
U
2,1
U
2,2
= 0 Denitional
(3) W
3
U
3,1
U
3,2
= 0 Denitional
(4) X
1
U
1,1
U
2,1
U
3,1
= 0 Denitional
(5) X
2
U
1,2
U
2,2
U
3,2
= 0 Denitional
(6) 0.12X
1
U
1,1
0 Alsace Domestic
(7) 0.50X
1
+ U
2,1
0 Burgundy Domestic
(8) 0.70X
2
+ U
1,2
0 Alsace Foreign
(9) 0.05X
2
U
3,2
0 Marseille Foreign
(10) W
1
15, 000 Alsace
(11) W
2
18, 000 Burgundy
(12) W
3
21, 000 Marseille
X
i
0; W
j
0; i = 1, 2; j = 1, 3
7.
Analysis
Problem: Need a schedule for the food service employees.
Objective: Minimize the daily labour cost.
The number of service employees working each 4 hour shift.
Wage rates parameters.
5 shift work day constraint.
Shift requirements constraints.
Model Formulation
X
1
= Total number of service employees.
X
2
= Number of late shifts worked by the employees.
min 40X
1
+ 4.8X
2
In order to handle the situation of employees working non-consecutive shifts,
we need to introduce the variable
X
i, j
= Number of employees working shifts i and j. ( j > i).
where we will let the shifts be numbered 1 to 5. 7:00 a.m. to 10:59 a.m. will
be shift 1 and 11:00 p.m. to 2.59 a.m. will be shift 5. The combination (1,5) is
disallowed by the management.
The total number of employees is just
(1) X
1
=
4
i=1
5
j=i+1
X
i, j
Denitional
(1) X
1

4
i=1
5
j=i+1
X
i, j
= 0 Denitional
The number of employees who work late shifts is
(2) X
2
= X
4,5
+
3
i=1
X
i,4
+
4
i=2
X
i,5
Denitional
(2) X
2
X
4,5

3
i=1
X
i,4

4
i=2
X
i,5
= 0 Denitional
There is an extra X
4,5
term since this group of employees would receive the
bonus for two shifts whereas everyone would receive it for at most one shift. The
minimumnumber of employees per shift is simply taken care of with the following
set of constraints
(3) X
1,2
+ X
1,3
+ X
1,4
+ X
1,5
100 Shift 1
(4) X
1,2
+ X
2,3
+ X
2,4
+ X
2,5
230 Shift 2
(5) X
1,3
+ X
2,3
+ X
3,4
+ X
3,5
110 Shift 3
(6) X
1,4
+ X
2,4
+ X
3,4
+ X
4,5
180 Shift 4
(7) X
2,5
+ X
3,5
+ X
4,5
80 Shift 5
Thus the model
3
is
3
If one wishes, X
1
and X
2
could be removed, in which case the X
i, j
would appear in the ob-
jective function with coefcients of 40, 44.80 or 49.60. The equations involving X
1
and X
2
would
disappear.
355
min 40X
1
+ 4.8X
2
subject to
(1) X
1

3
i=1
5
j=i+1
X
i, j
= 0 Denitional
(2) X
2
X
4,5

3
i=1
X
i,4

4
i=2
X
i,5
= 0 Denitional
(3) X
1,2
+ X
1,3
+ X
1,4
100 Shift 1
(4) X
1,2
+ X
2,3
+ X
2,4
+ X
2,5
230 Shift 2
(5) X
1,3
+ X
2,3
+ X
3,4
+ X
3,5
110 Shift 3
(6) X
1,4
+ X
2,4
+ X
3,4
+ X
4,5
180 Shift 4
(7) X
2,5
+ X
3,5
+ X
4,5
80 Shift 5
X
i
0; X
i, j
0; i = 1, 4; j = 2, 5
We also require that the variables be integers; this model is naturally integer.
8.
Analysis
Problem: Production scheduling at a factory.
Objective: Minimize the total cost of satisfying the demand for the product.
Production level each month.
Amount the production level increases each month.
Amount of production level decreases each month.
Amount of the product in inventory at the end of the month.
Monthly demands constraints.
Production costs objective function parameters.
Inventory holding cost objective function parameter.
Starting inventory level constraint.
Starting production level constraint.
Ending inventory level constraint.
Model Formulation
X
i
= # of units by which production increases for month i (i = 1, 6).
W
i
= # of units by which production decreases for month i (i = 1, 6).
I
i
= # of units in inventory at the end of month i (i = 0, 6).
min 2X
1
+ 2X
2
+ 2X
3
+ 2X
4
+ 2X
5
+ 2X
6
+
5W
1
+ 5W
2
+ 5W
3
+ 5W
4
+ 5W
5
+ 5W
6
+
4I
1
+ 4I
2
+ 4I
3
+ 4I
4
+ 4I
5
+ 4I
6
In order to relate the decision variables in one month to the decision variables
in another month, we will introduce the monthly production variable.
P
i
= # of units of production for month i (i = 0, 6).
This gives rise to the following set of equations:
(1) P
0
= 240 Initial Condition
(2) P
1
= P
0
+ X
1
W
1
Balance
(3) P
2
= P
1
+ X
2
W
2
Balance
(4) P
3
= P
2
+ X
3
W
3
Balance
(5) P
4
= P
3
+ X
4
W
4
Balance
(6) P
5
= P
4
+ X
5
W
5
Balance
(7) P
6
= P
5
+ X
6
W
6
Balance
which simplify to
(1) P
0
(2) P
0
+ P
1
X
1
+ W
1
= 0 Balance
(3) P
1
+ P
2
X
2
+ W
2
= 0 Balance
(4) P
2
+ P
3
X
3
+ W
3
= 0 Balance
(5) P
3
+ P
4
X
4
+ W
4
= 0 Balance
(6) P
4
+ P
5
X
5
+ W
5
= 0 Balance
(7) P
5
+ P
6
X
6
+ W
6
= 0 Balance
In order to satisfy the demands, we need to have the total source of units which
is the production plus previous inventory equal to the use of the units which is the
demand plus the inventory remaining for that month.
357
(8) I
0
(9) P
1
+ I
0
= 200 + I
1
Balance
(10) P
2
+ I
1
= 300 + I
2
Balance
(11) P
3
+ I
2
= 700 + I
3
Balance
(12) P
4
+ I
3
= 500 + I
4
Balance
(13) P
5
+ I
4
= 100 + I
5
Balance
(14) P
6
+ I
5
= 400 + I
6
Balance
(15) I
6
= 0 Final Condition
which simplify to
(8) I
0
(9) P
1
+ I
0
I
1
= 200 Balance
(10) P
2
+ I
1
I
2
= 300 Balance
(11) P
3
+ I
2
I
3
= 700 Balance
(12) P
4
+ I
3
I
4
= 500 Balance
(13) P
5
+ I
4
I
5
= 100 Balance
(14) P
6
+ I
5
I
6
= 400 Balance
(15) I
6
= 0 Final Condition
min 2X
1
+ 2X
2
+ 2X
3
+ 2X
4
+ 2X
5
+ 2X
6
+
5W
1
+ 5W
2
+ 5W
3
+ 5W
4
+ 5W
5
+ 5W
6
+
4I
1
+ 4I
2
+ 4I
3
+ 4I
4
+ 4I
5
+ 4I
6
subject to
(1) P
0
(2) P
0
+ P
1
X
1
+ W
1
= 0 Balance
(3) P
1
+ P
2
X
2
+ W
2
= 0 Balance
(4) P
2
+ P
3
X
3
+ W
3
= 0 Balance
(5) P
3
+ P
4
X
4
+ W
4
= 0 Balance
(6) P
4
+ P
5
X
5
+ W
5
= 0 Balance
(7) P
5
+ P
6
X
6
+ W
6
= 0 Balance
(8) I
0
(9) P
1
+ I
0
I
1
= 200 Balance
(10) P
2
+ I
1
I
2
= 300 Balance
(11) P
3
+ I
2
I
3
= 700 Balance
(12) P
4
+ I
3
I
4
= 500 Balance
(13) P
5
+ I
4
I
5
= 100 Balance
(14) P
6
+ I
5
I
6
= 400 Balance
(15) I
6
= 0 Final Condition
all variables 0
Equations (1), (8) and (15) are not absolutely necessary and can be removed
by substituting these values for P
0
, I
0
and I
6
. It is benecial to retain them as
separate quantities if the model is to be used more than once.
9.
Analysis
Problem: Production scheduling at a factory.
Objective: Minimize the total cost of satisfying the demand for the product.
Production level each quarter.
Amount of the production level increases each quarter.
Amount of the production level decreases each quarter.
Amount of product in inventory at the end of a quarter.
Quarterly demands constraints.
Production costs objective function parameters.
Inventory holding cost objective function parameter.
Starting production level constraint.
Model Formulation
X
i
= # of units by which production increases for quarter i (i = 1, 4).
W
i
= # of units by which production decreases for quarter i (i = 1, 4).
I
i
= # of units in inventory at the end of quarter i (i = 0, 4).
min 3.5X
1
+ 3.5X
2
+ 3.5X
3
+ 3.5X
4
+
6.0W
1
+ 6.0W
2
+ 6.0W
3
+ 6.0W
4
+
4.8I
1
+ 4.8I
2
+ 4.8I
3
+ 4.8I
4
359
In order to relate the decision variables in one quarter to the decision variables
in another quarter, we will introduce the quarterly production variable.
P
i
= # of units of production for quarter i (i = 0, 4).
This gives rise to the following set of equations:
(1) P
0
(2) P
1
= P
0
+ X
1
W
1
Balance
(3) P
2
= P
1
+ X
2
W
2
Balance
(4) P
3
= P
2
+ X
3
W
3
Balance
(5) P
4
= P
3
+ X
4
W
4
Balance
which simplify to
(1) P
0
(2) P
0
+ P
1
X
1
+ W
1
= 0 Balance
(3) P
1
+ P
2
X
2
+ W
2
= 0 Balance
(4) P
2
+ P
3
X
3
+ W
3
= 0 Balance
(5) P
3
+ P
4
X
4
+ W
4
= 0 Balance
In order to satisfy the demands, we need to have the total source of units which
is the production plus inventory from the previous quarter equal to the use of the
units which is the demand plus the inventory remaining for that quarter.
(6) I
0
(7) P
1
+ I
0
= 350 + I
1
Balance
(8) P
2
+ I
1
= 680 + I
2
Balance
(9) P
3
+ I
2
= 275 + I
3
Balance
(10) P
4
+ I
3
= 590 + I
4
Balance
(11) I
4
250 Final Condition
which simplify to
(6) I
0
(7) P
1
+ I
0
I
1
= 350 Balance
(8) P
2
+ I
1
I
2
= 680 Balance
(9) P
3
+ I
2
I
3
= 275 Balance
(10) P
4
+ I
3
I
4
= 590 Balance
(11) I
4
250 Final Condition
min 3.5X
1
+ 3.5X
2
+ 3.5X
3
+ 3.5X
4
+
6.0W
1
+ 6.0W
2
+ 6.0W
3
+ 6.0W
4
+
4.8I
1
+ 4.8I
2
+ 4.8I
3
+ 4.8I
4
subject to
(1) P
0
(2) P
0
+ P
1
X
1
+ W
1
= 0 Balance
(3) P
1
+ P
2
X
2
+ W
2
= 0 Balance
(4) P
2
+ P
3
X
3
+ W
3
= 0 Balance
(5) P
3
+ P
4
X
4
+ W
4
= 0 Balance
(6) I
0
(7) P
1
+ I
0
I
1
= 350 Balance
(8) P
2
+ I
1
I
2
= 680 Balance
(9) P
3
+ I
2
I
3
= 275 Balance
(10) P
4
+ I
3
I
4
= 590 Balance
(11) I
4
250 Final Condition
all variables 0
Equations (1), (6) and (11) are not absolutely necessary and can be removed
by substituting these values for P
0
, I
0
and I
4
. It is benecial to retain them as
separate quantities if the model is to be used more than once.
10.
Analysis
Problem: Supplying the plants with sufcient lumber for their needs.
Objective: Minimize the total cost of supplying the plants with lumber. product.
Number of tonnes of lumber from each mill to each plant.
Total number of tonnes shipped from each mill.
Total number of tonnes supplied to each plant.
Plant demands constraints.
Mill capacities constraints.
Shipping restrictions constraints.
Shipping costs objective function parameters.
361
Purchase price objective function parameter.
Model Formulation
X
i, j
= # of tonnes shipped from mill i to plant j (i = 1, 3; j = 1, 3).
min 2.2X
1,1
+ 5.5X
1,2
+ 4.1X
1,3
+
3.2X
2,1
+ 4.4X
2,2
+ 3.0X
2,3
+
1.5X
3,1
+ 3.6X
3,2
+ 3.5X
3,3
The $240 cost of the lumber is immaterial since it is results in a xed cost
which is independent of how the units are shipped. The requirements for each
plant are simply taken care of by
(1) X
1,1
+ X
2,1
+ X
3,1
474 Plant 1
(2) X
1,2
+ X
2,2
+ X
3,2
620 Plant 2
(3) X
1,3
+ X
2,3
+ X
3,3
870 Plant 3
The capacities of each mill are simply taken care of by
(4) X
1,1
+ X
1,2
+ X
1,3
700 Mill 1
(5) X
2,1
+ X
2,2
+ X
2,3
700 Mill 2
The shipping restrictions on each mill are simply taken care of by
(6) X
1,1
350 Mill 1 Plant 1
(7) X
1,2
350 Mill 1 Plant 2
(8) X
1,3
350 Mill 1 Plant 3
(9) X
3,1
350 Mill 3 Plant 1
(10) X
3,2
350 Mill 3 Plant 2
(11) X
3,3
350 Mill 3 Plant 3
min 2.2X
1,1
+ 5.5X
1,2
+ 4.1X
1,3
+
3.2X
2,1
+ 4.4X
2,2
+ 3.0X
2,3
+
1.5X
3,1
+ 3.6X
3,2
+ 3.5X
3,3
subject to
(1) X
1,1
+ X
2,1
+ X
3,1
474 Plant 1
(2) X
1,2
+ X
2,2
+ X
3,2
620 Plant 2
(3) X
1,3
+ X
2,3
+ X
3,3
870 Plant 3
(4) X
1,1
+ X
1,2
+ X
1,3
700 Mill 1
(5) X
2,1
+ X
2,2
+ X
2,3
700 Mill 2
(6) X
1,1
350 Mill 1 Plant 1
(7) X
1,2
350 Mill 1 Plant 2
(8) X
1,3
350 Mill 1 Plant 3
(9) X
3,1
350 Mill 3 Plant 1
(10) X
3,2
350 Mill 3 Plant 2
(11) X
3,3
350 Mill 3 Plant 3
X
i, j
0; i = 1, 2; j = 1, 2, 3
11.
Analysis
Problem: Supplying the hospital with vaccine.
Objective: Minimize the cost of producing the required vaccine.
Amount of vaccine produced.
Amount of each ingredient used in the vaccine.
Availability of each ingredient constraints.
Cost of each ingredient objective function parameters.
Vaccine requirements constraints.
363
X
i
= # of kg of ingredient i used in the vaccine (i = 1, 4).
min 28X
1
+ 35X
2
+ 52X
3
+ 26X
4
The availability of each ingredient are simply taken care of by
(1) X
1
22 Ingredient 1
(2) X
2
18 Ingredient 2
(3) X
3
20 Ingredient 3
(4) X
4
24 Ingredient 4
To take care of the vaccine requirements, we introduce
V = Total number of kg of vaccine produced.
This immediately gives rise to the denitional constraint
(5) V = X
1
+ X
2
+ X
3
+ X
4
Denitional
(5) V X
1
X
2
X
3
X
4
= 0 Denitional
The restrictions can now be written as
(6) X
1
0.45V Ingredient 1
(7) X
1
0.60V Ingredient 1
(8) X
2
0.10V Ingredient 2
(9) X
3
0.10V Ingredient 3
(10) X
2
+ X
3
0.25V Ingredients 2 and 3
(11) X
4
0.50V Ingredient 1
which simplify to
(6) 0.45V X
1
0 Ingredient 1
(7) 0.60V + X
1
0 Ingredient 1
(8) 0.10V X
2
0 Ingredient 2
(9) 0.10V X
3
0 Ingredient 3
(10) 0.25V + X
2
+ X
3
0 Ingredients 2 and 3
(11) 0.50V + X
4
0 Ingredient 1
min 28X
1
+ 35X
2
+ 52X
3
+ 26X
4
subject to
(1) X
1
22 Ingredient 1
(2) X
2
18 Ingredient 2
(3) X
3
20 Ingredient 3
(4) X
4
24 Ingredient 4
(5) V X
1
X
2
X
3
X
4
= 0 Denitional
(6) 0.45V X
1
0 Ingredient 1
(7) 0.60V + X
1
0 Ingredient 1
(8) 0.10V X
2
0 Ingredient 2
(9) 0.10V X
3
0 Ingredient 3
(10) 0.25V + X
2
+ X
3
0 Ingredients 2 and 3
(11) 0.50V + X
4
0 Ingredient 1
V 0; X
i
0; i = 1, 4;
(b) Model Modication
The new objective function would be either
max V
or
max X
1
+ X
2
+ X
3
+ X
4
12.
Analysis
Problem: Paper requirements for printing.
Objective: Minimize the total cost associated with obtaining paper for printing.
Amount of paper ordered each month.
Amount of the paper in inventory at the end of a month.
Monthly paper requirements constraints.
365
Storage area limitations constraints.
Paper costs objective function parameters.
Spoilage factor structural parameter.
Model Formulation
X
i
= # of tonnes of paper ordered for month i (i = 1, 3).
min 6000X
1
+ 7500X
2
+ 7500X
3
In order to relate the decision variables in one quarter to the decision variables
in another month, we will introduce
I
i
= # of units in inventory at the end of month i (i = 0, 3).
The storage limitations are taken into account by
(1) I
1
500 Month 1
(2) I
2
500 Month 2
(3) I
3
500 Month 3
The effects of the spoilage and month requirements are taken into account
through a set of balance equations as follows:
(4) I
0
(5) X
1
+ I
0
= 300 + I
1
Balance
(6) X
2
+ 0.9I
1
= 400 + I
2
Balance
(7) X
3
+ 0.9I
2
= 450 + I
3
Balance
(8) 0.9I
3
50 Final Condition
We have assumed that the spoilage has already been taken into account for the ini-
tial inventory level. Condition (8) could equally well be interpreted as an equality.
The equations simplify to
(4) I
0
(5) X
1
+ I
0
I
1
= 300 Balance
(6) X
2
+ 0.9I
1
I
2
= 400 Balance
(7) X
3
+ 0.9I
2
I
3
= 450 Balance
(8) 0.9I
3
50 Final Condition
min 6000X
1
+ 7500X
2
+ 7500X
3
subject to
(1) I
1
500 Month 1
(2) I
2
500 Month 2
(3) I
3
500 Month 3
(4) I
0
(5) X
1
+ I
0
I
1
= 300 Balance
(6) X
2
+ 0.9I
1
I
2
= 400 Balance
(7) X
3
+ 0.9I
2
I
3
= 450 Balance
(8) 0.9I
3
50 Final Condition
all variables 0
Equations (4) and (8) are not absolutely necessary and can be removed by
substituting these values for I
0
and I
3
. It is benecial to retain them as separate
quantities if the model is to be used more than once.
13.
Analysis
Problem: Satisfy the contracted requirements.
Objective: Minimize the total cost associated with satisfying the contracts.
Number of components of each type produced each year.
Number of machines purchased each year.
Number of machines leased each year for one or two years.
Number of units carried over in inventory from year to year.
Annual component requirements constraints.
Machine capabilities parameters.
Machine costs objective function parameters.
Inventory cost objective function parameter.
Discount rate structural parameter.
Model Formulation
367
X
i
# of machines purchased in year i (i = 1, 4).
L
i,1
# of machines leased in year i for 1 year (i = 1, 4).
L
i,2
# of machines leased in year i for 2 years (i = 1, 3).
I
i, j
# of units (in 1,000s) carried over from year i to year i +1
of component j (i = 1, 4; j = A, B).
S
j
# of units, j years old, sold at the end of the 4 years
( j = 1, 4)
The X
i
and S
j
are related as follows:
(1) S
1
= X
4
Denitional
(2) S
2
= X
3
Denitional
(3) S
3
= X
2
Denitional
(4) S
4
= X
1
Denitional
Thus the X
i
could be used instead of the S
j
but we will retain them since it
gives a better differentiation of the costs.
Before setting up the objective function, it is useful to rst calculate the present
values of the money (in $1,000) spent or received in subsequent years.
Coefcient Beginning of Year
1 2 3 4
Purchase price 100
105
1.2
= 87.5
110
1.2
2
= 76.4
115
1.2
3
= 66.6
One year lease 24
26
1.2
= 21.7
28
1.2
2
= 19.4
30
1.2
3
= 17.4
Two year lease 20+
20
1.2
= 36.7
1
1.2
(22+
22
1.2
) = 33.6
1
1.2
2
(24+
24
1.2
) = 30.6
Inventory cost
2
1.2
= 1.67
2
1.2
2
= 1.39
2
1.2
3
= 1.16
2
1.2
4
= 0.96
Salvage value
11515
1.2
4
= 48.2
11025
1.2
4
= 41.0
10535
1.2
4
= 33.8
10045
1.2
4
= 26.5
Using these decision variables the objective function in terms of $1,000 is
min 100X
1
+ 87.5X
2
+ 76.4X
3
+ 66.6X
4
+
24.0L
1,1
+ 21.7L
2,1
+ 19.4L
3,1
+ 17.4L
4,1
+
36.7L
1,2
+ 33.6L
2,2
+ 30.6L
3,2
+
1.67I
1,A
+ 1.39I
2,A
+ 1.16I
3,A
+ 0.96I
4,A
+
1.67I
1,B
+ 1.39I
2,B
+ 1.16I
3,B
+ 0.96I
4,B

48.2S
1
41.0S
2
33.8S
3
26.5S
4
In order to relate the above decision variables to the production of units, we
will introduce
M
i, j
# of machines in year i producing components of type j.
(i = 1, 2; j = A, B)
This gives rise to the following denitional equations.
(5) X
1
+ L
1,1
+ L
1,2
= M
1,A
+ M
1,B
Denitional
(6) X
1
+ X
2
+ L
2,1
+ L
1,2
+ L
2,2
= M
2,A
+ M
2,B
Denitional
(7) X
1
+ X
2
+ X
3
+ L
3,1
+ L
2,2
+ L
3,2
= M
3,A
+ M
3,B
Denitional
(8) X
1
+ X
2
+ X
3
+ X
4
+ L
4,1
+ L
3,2
= M
4,A
+ M
4,B
Denitional
which simplify to
(5) X
1
+ L
1,1
+ L
1,2
M
1,A
M
1,B
= 0 Denitional
(6) X
1
+ X
2
+ L
2,1
+ L
1,2
+ L
2,2
M
2,A
M
2,B
= 0 Denitional
(7) X
1
+ X
2
+ X
3
+ L
3,1
+ L
2,2
+ L
3,2
M
3,A
M
3,B
= 0 Denitional
(8) X
1
+ X
2
+ X
3
+ X
4
+ L
4,1
+ L
3,2
M
4,A
M
4,B
= 0 Denitional
The contract requirements for component A are taken into account by
(9) 3M
1,A
= 4 + I
1,A
Year 1
(10) 3M
2,A
+ I
1,A
= 15 + I
2,A
Year 2
(11) 3M
3,A
+ I
2,A
= 10 + I
3,A
Year 3
(12) 3M
4,A
+ I
3,A
= 5 + I
4,A
Year 4
which simplify to
(9) 3M
1,A
I
1,A
= 4 Year 1
(10) 3M
2,A
+ I
1,A
I
2,A
= 15 Year 2
(11) 3M
3,A
+ I
2,A
I
3,A
= 10 Year 3
(12) 3M
4,A
+ I
3,A
I
4,A
= 5 Year 4
Similarly, the requirements for component B are taken into account using the
equations
(13) 2M
1,B
I
1,B
= 6 Year 1
(14) 2M
2,B
+ I
1,B
I
2,B
= 20 Year 2
(15) 2M
3,B
+ I
2,B
I
3,B
= 8 Year 3
(16) 2M
4,B
+ I
3,B
I
4,B
= 4 Year 4
369
min 100X
1
+ 87.5X
2
+ 76.4X
3
+ 66.6X
4
+
24.0L
1,1
+ 61.7L
2,1
+ 19.4L
3,1
+ 17.4L
4,1
+
36.7L
1,2
+ 33.6L
2,2
+ 30.6L
3,2
+
1.67I
1,A
+ 1.39I
2,A
+ 1.16I
3,A
+ 0.96I
4,A
+
1.67I
1,B
+ 1.39I
2,B
+ 1.16I
3,B
+ 0.96I
4,B

48.2S
1
41.0S
2
33.8S
3
26.5S
4
subject to
(1) X
4
S
1
= 0 Denitional
(2) X
3
S
2
= 0 Denitional
(3) X
2
S
3
= 0 Denitional
(4) X
1
S
4
= 0 Denitional
(5) X
1
+ L
1,1
+
L
1,2
M
1,A
M
1,B
= 0 Denitional
(6) X
1
+ X
2
+ L
2,1
+ L
1,2
+
L
2,2
M
2,A
M
2,B
= 0 Denitional
(7) X
1
+ X
2
+ X
3
+ L
3,1
+ L
2,2
+
L
3,2
M
3,A
M
3,B
= 0 Denitional
(8) X
1
+ X
2
+ X
3
+ X
4
+ L
4,1
+
L
3,2
M
4,A
M
4,B
= 0 Denitional
(9) 3M
1,A
I
1,A
= 4 Year 1
(10) 3M
2,A
+ I
1,A
I
2,A
= 15 Year 2
(11) 3M
3,A
+ I
2,A
I
3,A
= 10 Year 3
(12) 3M
4,A
+ I
3,A
I
4,A
= 5 Year 4
(13) 2M
1,B
I
1,B
= 6 Year 1
(14) 2M
2,B
+ I
1,B
I
2,B
= 20 Year 2
(15) 2M
3,B
+ I
2,B
I
3,B
= 8 Year 3
(16) 2M
4,B
+ I
3,B
I
4,B
= 4 Year 4
all variables 0
14.
Analysis
Problem: Need for more machines.
Objective: Minimize the total cost associated with obtaining the required ma-
chines.
Number of machines purchased each year.
Number of machines leased for two years.
Number of leases which are broken at the beginning of the second year.
Number of machines which are sold for their salvage value.
Amount of money borrowed at the beginning of each year.
Amount of cash invested at the beginning of each year.
Annual machine requirements constraints.
Purchase price of the machines objective function parameters.
Loan costs objective function parameters.
Salvage value cost objective function parameter.
Lease breaking cost objective function parameter.
Interest rates objective function parameters.
Depreciation rate structural parameter.
Initial cash constraint.
Model Formulation
371
X
i
# of machines purchased in year i.
S
i
# of machines of age i sold at the end of the year 2.
L
i
# of machines which are leased in year i.
L
b
# of leases broken at the beginning of the second year.
B
i
# of dollars (in 1,000s) borrowed at the beginning of year i.
C
i
# of dollars (in 1,000s) invested at the beginning of year i.
In all cases not specied, the yearly index i ranges from 1 to 2.
The machines which are purchases in the second year are those for which the
leases have been broken. In addition, the machines which are 2 years old are those
which were purchases in the rst year and the 1 year old machines are those which
were purchased in the second year.
(1) L
b
= X
2
Denitional
(2) S
2
= X
1
Denitional
(3) S
1
= X
2
Denitional
which are rewritten as
(1) X
2
L
b
= 0 Denitional
(2) X
1
S
2
= 0 Denitional
(3) X
2
S
1
= 0 Denitional
min 5.0X
1
+ 5.0X
2
1.0S
1
3S
2
+
2.8L
1
+ 2.8L
2
+ 0.3L
b
+
0.13B
1
+ 0.13B
2
0.10C
1
0.10C
2
The requirement that there be 100 machines in each year gives rise to two
constraints:
(4) X
1
+ L
1
= 100 Year 1
(5) X
1
+ X
2
+ L
2
= 100 Year 2
The loan restrictions are taken into account by
(6) B
1
300 Year 1
(7) B
2
300 Year 2
There is one cash balance constraint for the beginning of each year. Namely
the total cash used must equal the total cash available.
(8) C
0
= 150 Initial
(9) 5.0X
1
+ 2.8L
1
+ C
1
= C
0
+ B
1
Year 1
(10) 5.0X
2
+ 2.8L
2
+ C
2
+ 1.13B
1
+ 0.3L
b
= 350 + 1.1C
1
+ B
2
Year 2
which simplify to
(8) C
0
= 150 Initial
(9) 5.0X
1
+ 2.8L
1
+ C
1
C
0
B1 = 0 Year 1
(10) 5.0X
2
+ 2.8L
2
+ C
2
+ 1.13B
1
+ 0.3L
b
1.1C
1
B2 = 350 Year 2
min 5.0X
1
+ 5.0X
2
1.0S
1
3S
2
+
2.8L
1
+ 2.8L
2
+ 0.3L
b
+
0.13B
1
+ 0.13B
2
0.10C
1
0.10C
2
subject to
(1) X
2
L
b
= 0 Denitional
(2) X
2
S
1
= 0 Denitional
(3) X
2
S
2
= 0 Denitional
(4) X
1
+ L
1
= 100 Year 1
(5) X
1
+ X
2
+ L
2
= 100 Year 2
(6) B
1
300 Year 1
(7) B
2
300 Year 2
(8) C
0
= 150 Initial Cond.
(9) 5.0X
1
+ 2.8L
1
+ C
1
+
C
0
B
1
= 0 Year 1
(10) 5.0X
2
+ 2.8L
2
+ C
2
+ 1.13B
1
+
+ 0.3L
b
1.1C
0
B
2
= 350 Year 2
all variables 0
Instead of minimizing the cost as we have done, an equivalent way of ap-
proaching the problem would be to maximize the cash at the end of the second
year. This would add one more equation representing the cash ow at the end of
the second year. The model would be
373
max C
3
subject to
(1) X
2
L
b
= 0 Denitional
(2) X
2
S
1
= 0 Denitional
(3) X
2
S
2
= 0 Denitional
(4) X
1
+ L
1
= 100 Year 1
(5) X
1
+ X
2
+ L
2
= 100 Year 2
(6) B
1
300 Year 1
(7) B
2
300 Year 2
(8) C
0
= 150 Initial Cond.
(9) 5.0X
1
+ 2.8L
1
+ C
1
+
C
0
B
1
= 0 Year 1
(10) 5.0X
2
+ 2.8L
2
+ C
2
+ 1.13B
1
+
+ 0.3L
b
1.1C
0
B
2
= 350 Year 2
(11) C
3
1.0S
1
3S
2
+ 1.13B
2

1.10C
2
= 350 Year 3
all variables 0
15.
Analysis
Problem: Manpower planning.
Objective: Minimize the total cost associated with obtaining the required number
of employees.
Number of new trainees each month.
Number of retainees each month.
Number of trainees given full time status each month.
Number of full time employees.
Full time employee requirements constraints.
Initially trained employees constraint.
Working time each month structural parameter.
Full time rates objective function parameters.
Attrition rates structural parameter.
Training costs objective function parameters.
Retaining costs objective function parameters.
Model Formulation
X
i
# of full time employees in month i.
T
i
# of trainees in month i.
R
i
# of employees put on retainer in month i.
In all cases the monthly index i will range from 1 to 6 with 1 corresponding to
January and 6 corresponding to June.
min 960X
1
+ 960X
2
+ 960X
3
+ 960X
4
+ 960X
5
+ 960X
6
+
1200T
1
+ 1200T
2
+ 1200T
3
+ 1200T
4
+ 1440T
5
+ 1440T
6
+
75R
1
+ 75R
2
+ 75R
3
+ 75R
4
+ 75R
5
+ 75R
6
The initial conditions
4
are
(1) X
1
12 January
(2) R
1
= 0 January
The employee requirements are taken into account by
(3) 160X
1
1670 January
(4) 160X
2
1550 February
(5) 160X
3
1830 March
(6) 160X
4
1980 April
(7) 160X
5
1770 May
(8) 160X
6
2040 June
The new trainee restrictions are:
4
This problem should have one additional situation a regular employee being put on retainer.
However the problem states that only trainees are put on retainer and hence we will not include
this variable in the model.
375
(9) T
1
7 January
(10) T
2
7 February
(11) T
3
7 March
(12) T
4
7 April
(13) T
5
7 May
(14) T
6
7 June
There is a set of balance conditions which show what happens to the trainees.
Namely, the trainees of a previous month are either put on retainer or employed
full time. To show these relationships, we must introduce two new variables
W
i
# of trainees becoming full time employees in month i.
V
i
# of trainees becoming retainees in month i.
The balance conditions are
(15) V
2
+ W
2
= T
1
February
(16) V
3
+ W
3
= T
2
March
(17) V
4
+ W
4
= T
3
April
(18) V
5
+ W
5
= T
4
May
(19) V
6
+ W
6
= T
5
June
or
(15) V
2
+ W
2
T
1
= 0 February
(16) V
3
+ W
3
T
2
= 0 March
(17) V
4
+ W
4
T
3
= 0 April
(18) V
5
+ W
5
T
4
= 0 May
(19) V
6
+ W
6
T
5
= 0 June
There is a similar set of balance conditions for the number of retainees and the
number of employees except that these must take attrition into account. Regular
employees have an attrition rate of 25% whereas the retainees have an attrition
rate of 15% since they cannot be red.
To handle the retainee and employee balance conditions, we need to introduce
a new variable.
U
i
# of retainees becoming full time employees in month i.
The employee balance equations are
(20) X
2
= 0.75X
1
+ W
2
+ U
2
February
(21) X
3
= 0.75X
2
+ W
3
+ U
3
March
(22) X
4
= 0.75X
3
+ W
4
+ U
4
April
(23) X
5
= 0.75X
4
+ W
5
+ U
5
May
(24) X
6
= 0.75X
5
+ W
6
+ U
6
June
or
(20) X
2
0.75X
1
W
2
U
2
= 0 February
(21) X
3
0.75X
2
W
3
U
3
= 0 March
(22) X
4
0.75X
3
W
4
U
4
= 0 April
(23) X
5
0.75X
4
W
5
U
5
= 0 May
(24) X
6
0.75X
5
W
6
U
6
= 0 June
The balance conditions for the retainees are
(25) R
2
= 0.85R
1
U
2
+ V
2
February
(26) R
3
= 0.85R
2
U
3
+ V
3
March
(27) R
4
= 0.85R
3
U
4
+ V
4
April
(28) R
5
= 0.85R
4
U
5
+ V
5
May
(29) R
6
= 0.85R
5
U
6
+ V
6
June
or
(25) R
2
0.85R
1
+ U
2
V
2
= 0 February
(26) R
3
0.85R
2
+ U
3
V
3
= 0 March
(27) R
4
0.85R
3
+ U
4
V
4
= 0 April
(28) R
5
0.85R
4
+ U
5
V
5
= 0 May
(29) R
6
0.85R
5
+ U
6
V
6
= 0 June
377
min 960X
1
+ 960X
2
+ 960X
3
+ 960X
4
+ 960X
5
+ 960X
6
+
1200T
1
+ 1200T
2
+ 1200T
3
+ 1200T
4
+ 1440T
5
+ 1440T
6
+
75R
1
+ 75R
2
+ 75R
3
+ 75R
4
+ 75R
5
+ 75R
6
subject to
(1) X
1
12 January
(2) R
1
= 0 January
(3) 160X
1
1670 January
(4) 160X
2
1550 February
(5) 160X
3
1830 March
(6) 160X
4
1980 April
(7) 160X
5
1770 May
(8) 160X
6
2040 June
(9) T
1
7 January
(10) T
2
7 February
(11) T
3
7 March
(12) T
4
7 April
(13) T
5
7 May
(14) T
6
7 June
(15) V
2
+ W
2
T
1
= 0 February
(16) V
3
+ W
3
T
2
= 0 March
(17) V
4
+ W
4
T
3
= 0 April
(18) V
5
+ W
5
T
4
= 0 May
(19) V
6
+ W
6
T
5
= 0 June
(20) X
2
0.75X
1
W
2
U
2
= 0 February
(21) X
3
0.75X
2
W
3
U
3
= 0 March
(22) X
4
0.75X
3
W
4
U
4
= 0 April
(23) X
5
0.75X
4
W
5
U
5
= 0 May
(24) X
6
0.75X
5
W
6
U
6
= 0 June
(25) R
2
0.85R
1
+ U
2
V
2
= 0 February
(26) R
3
0.85R
2
+ U
3
V
3
= 0 March
(27) R
4
0.85R
3
+ U
4
V
4
= 0 April
(28) R
5
0.85R
4
+ U
5
V
5
= 0 May
(29) R
6
0.85R
5
+ U
6
V
6
= 0 June
all variables 0
16.
Analysis
Objective: Maximize the benet from exports.
Amount of each commodity exported.
Amount of each commodity produced.
Amount of each resource imported.
Amount of each resource used.
Commodity prices objective function coefcients.
Resource costs objective function coefcients.
Input requirements structural parameters.
Production capacities constraints.
Model Formulation
This is an example of a Leontief input/output model. The variables which give
rise to the simplest objective function are
X
i
# of units (in 1,000s) of commodity i exported.
I
i
# of units (in 1,000s) of resource j imported.
The indices are as follows:
Export Commodity Price Resource
Index Commodity $1,000 Index Resource
1 Electrical Energy 50 1 Electrical Energy
2 Aluminum 90 2 Aluminum
3 High Tech 200 3 High Tech
15 4 Bauxite Ore
120 5 Imported Materials
The input/output factors are summarized in the following table:
379
Resource Commodity Availability
1 2 3
1 1.20 0.70 500
2 0.10 0.20 350
3 0.05 0.04 unlimited
4 1.00 unlimited
5 1 unlimited
(a) If imports are not allowed, then the variables I
1
, I
2
and I
3
will not appear in the
model.
max 50X
1
+ 90X
2
+ 200X
3
15I
4
120I
5
In order to relate the exports to the resources used, we need to introduce a
set of variables indicating the total number of units locally produced for each
commodity.
P
i
# of units (in 1,000s) of commodity i produced locally.
These new variables give rise to the following set a balance relations based on:
Available Resources = Use of Resources
(1) P
1
= X
1
+ 1.20P
2
+ 0.7P
3
Electricity
(2) P
2
= 0.10P
1
+ X
2
+ 0.2P
3
Aluminum
(3) P
3
= 0.05P
1
+ 0.04P
2
+ X
3
High Tech
(4) I
4
= P
2
Bauxite
(5) I
5
= P
3
Imported Goods
or
(1) P
1
X
1
1.20P
2
0.7P
3
= 0 Electricity
(2) P
2
0.10P
1
X
2
0.2P
3
= 0 Aluminum
(3) P
3
0.05P
1
0.04P
2
X
3
= 0 High Tech
(4) I
4
P
2
= 0 Bauxite
(5) I
5
P
3
= 0 Imported Goods
The resource constraints are taken care of by
(6) P
1
500 Electrical Energy
(7) P
2
350 Aluminum
The export constraint are taken care of by
(8) X
3
100, 000 High Tech
max 50X
1
+ 90X
2
+ 200X
3
15I
4
120I
5
subject to
(1) P
1
X
1
1.20P
2
0.7P
3
= 0 Electricity
(2) P
2
0.10P
1
X
2
0.2P
3
= 0 Aluminum
(3) P
3
0.05P
1
0.04P
2
X
3
= 0 High Tech
(4) I
4
P
2
= 0 Bauxite
(5) I
5
P
3
= 0 Imported Goods
(6) P
1
(7) P
2
350 Aluminum
(8) X
3
100 High Tech
all variables 0
(b) If imports of the commodities are allowed, then we just need to add the vari-
ables I
1
, I
2
and I
3
to the model. The formulation would be as follows:
max 50X
1
+ 90X
2
+ 200X
3

50I
1
90I
2
200I
3
15I
4
120I
5
As before, we need to introduce the variables P
i
which indicate the total num-
ber of units locally produced for each commodity.
The balance conditions based on Available Resources = Use of Resources now
become
(1) P
1
+ I
1
= X
1
+ 1.20P
2
+ 0.7P
3
Electricity
(2) P
2
+ I
2
= 0.10P
1
+ X
2
+ 0.2P
3
Aluminum
(3) P
3
+ I
3
= 0.05P
1
+ 0.04P
2
+ X
3
High Tech
(4) I
4
= P
2
Bauxite
(5) I
5
= P
3
Imported Goods
or
(1) P
1
+ I
1
X
1
1.20P
2
0.7P
3
= 0 Electricity
(2) P
2
+ I
2
0.10P
1
X
2
0.2P
3
= 0 Aluminum
(3) P
3
+ I
3
0.05P
1
0.04P
2
X
3
= 0 High Tech
(4) I
4
P
2
= 0 Bauxite
(5) I
5
P
3
= 0 Imported Goods
381
As before, the resource constraints are taken care of by
(6) P
1
(7) P
2
350 Aluminum
and the export constraint are taken care of by
(8) X
3
100 High Tech
max 50X
1
+ 90X
2
+ 200X
3

50I
1
90I
2
200I
3
15I
4
120I
5
subject to
(1) P
1
+ I
1
X
1
1.20P
2
0.7P
3
= 0 Electricity
(2) P
2
+ I
2
0.10P
1
X
2
0.2P
3
= 0 Aluminum
(3) P
3
+ I
3
0.05P
1
0.04P
2
X
3
= 0 High Tech
(4) I
4
P
2
= 0 Bauxite
(5) I
5
P
3
= 0 Imported Goods
(6) P
1
(7) P
2
350 Aluminum
(8) X
3
100 High Tech
all variables 0
(c) To answer this part of the question we rst must calculate the cost of producing
each type of commodity.
0.1090 + 0.05200 = 19 50 Electricity
1.250 + + 0.04200 = 83 90 Aluminum
0.750 + 1.2090 = 120 200 High Tech
Since a prot is made on each of the items which is sold, we want to produce
for export as much of each commodity as possible. Hence
P
1
= 500 Electrical
P
2
= 350 Aluminum
X
3
= 100 High Tech
Equations (4) gives us I
4
= 350.
Using the above values equation (3) gives us
P
3
+ I
3
= 0.05P
1
+ 0.04P
2
+ 1.0X
3
= 0.05500 + 0.04350 + 100
= 139
Since there is cost associated with P
3
and there is with I
3
, we can conclude that I
3
= 0 and hence P
3
= 139. Equation (5) now gives us I
5
= 139.
To proceed further one can approach the problem in two different but equiva-
lent ways.
The rst approach is now examine equations (1) and (2) given the above val-
ues. Equations (1) and (2) reduce to
P
1
+ I
1
X
1
1.20P
2
0.7P
3
= 0
500 + I
1
X
1
1.20350 0.7139 = 0
I
1
X
1
= 17.3
P
2
+ I
2
0.10P
1
X
2
0.2P
3
= 0
350 + I
2
0.10500 X
2
+ 0.2139 = 0
I
2
X
2
= 272.2
Each of the above expressions gives us the net of imports vs exports. A posi-
tive value indicates a net import and hence the export variable equals zero whereas
a negative value indicates a net export and the import variable equals zero. Thus
I
1
= 17.3, X
1
= 0 and I
2
= 0, X
2
= 272.2.
In summary
Index X P I
1 0 500 17.3
2 272.2 350 0
3 100 139 0
4 350
5 139
The second approach is to let all of the internally used amounts of each com-
modity be imported and hence all of the production is exported with the prot
calculated above. With this assumption, we have
X
1
= 500 Electrical
X
2
= 350 Aluminum
383
Equations (1) and (2) now give us
P
1
+ I
1
= X
1
+ 1.20P
2
+ 0.7P
3
500 + I
1
= 500 + 1.20350 + 0.7139
I
1
= 517.3
P
2
+ I
2
= 0.10P
1
+ X
2
+ 0.2P
3
350 + I
2
= 0.10500 + 350 + 0.2139
I
2
= 77.8
In summary
Index X P I
1 500 500 517.3
2 350 350 77.8
3 100 139 0
4 350
5 139
Since the exports and imports of the same commodity will in fact cancel out,
an equivalent solution is
Index X P I
1 0 500 17.3
2 272.2 350 0
3 100 139 0
4 350
5 139
which is that same as the rst approach.
The total benet will be
OFV = 500+90272.2+200100
5017.3900200015350120139
= 21, 703 or $21,703,000
17.
Analysis
Objective: Minimize the amount of re-cycling required.
Number of each type of roll used.
Number of each width.
How each roll is cut.
Roll widths constraints.
Number required or each size constraints.
Model Formulation
Before considering the objective function, we rst need to determine the ob-
jective function coefcients. In order to do this we rst must determine what are
the possible ways in which each roll can be cut to obtain some of the required
outputs.
The simplest one to consider is the 90 cm roll. We will use the notation
(a,b,c,d) (which we will call a pattern) to indicate the number of 95, 80, 46 and
21 cm rolls which are cut from a standard width. Obviously the 90 cm roll will
always have a = 0.
The possible combinations for the 90 cm standard width are
Label Pattern Waste (cm)
(1,1) (0,1,0,0) 10
(1,2) (0,0,1,2) 2
(1,3) (0,0,0,4) 6
The systematic way of doing this is to work from the largest to the smallest.
In this case there were no 95s, so we went to the 80s. The only possibility was 1
with not enough left over for any other cut. Thus, for the next pattern, we set the
80s to zero and went to the 46s, etc. Applying the same procedure to the 200 cm
roll, there are a lot more possibilities.
385
Label Pattern Waste (cm)
(2,1) (2,0,0,0) 10
(2,2) (1,1,0,1) 4
(2,3) (1,0,2,0) 13
(2,4) (1,0,1,2) 17
(2,5) (1,0,0,5)
(2,6) (0,2,0,1) 19
(2,7) (0,1,2,1) 7
(2,8) (0,1,1,3) 11
(2,9) (0,1,0,5) 15
(2,10) (0,0,4,0) 16
(2,11) (0,0,3,2) 20
(2,12) (0,0,2,5) 3
(2,13) (0,0,1,7) 7
(2,14) (0,0,0,9) 10
P
i, j
# of rolls of type i cut with pattern j.
One way to approach the problem is to realize that if we minimize the total
amount of paper used, then we will have minimized the waste. Hence we dene
the variables
R
i
# of rolls of width i used.
min 90R
1
+ 200R
2
The order requirements are taken into account by the following equations
(1) 2P
2,1
+ P
2,2
+ P
2,3
+ P
2,4
+
P
2,5
25 95 cm rolls
(2) P
1,1
+ P
2,2
+ 2P
2,6
+ P
2,7
+
P
2,8
+ P
2,9
31 80 cm rolls
(3) P
1,2
+ 2P
2,3
+ P
2,4
+ 2P
2,7
+
P
2,8
+ 4P
2,10
+ 3P
2,11
+ 2P
2,12
+
P
2,13
23 46 cm rolls
(4) 2P
1,2
+ 4P
1,3
+ P
2,2
+ P
2,4
+
5P
2,5
+ P
2,6
+ P
2,7
+ 3P
2,8
+
5P
2,9
+ 2P
2,11
+ 5P
2,12
+ 7P
2,13
+
9P
2,14
68 21 cm rolls
The R
i
variables are expressed in terms of the P
i, j
variables as follows:
(5) R
1
= P
1,1
+ P
1,2
+ P
1,3
90 cm rolls
(6) R
2
=
14
j=1
P
2, j
200 cm rolls
min 90R
1
+ 200R
2
subject to
(1) 2P
2,1
+ P
2,2
+ P
2,3
+ P
2,4
+
P
2,5
25 95 cm rolls
(2) P
1,1
+ P
2,2
+ 2P
2,6
+ P
2,7
+
P
2,8
+ P
2,9
31 80 cm rolls
(3) P
1,2
+ 2P
2,3
+ P
2,4
+ 2P
2,7
+
P
2,8
+ 4P
2,10
+ 3P
2,11
+ 2P
2,12
+
P
2,13
23 46 cm rolls
(4) 2P
1,2
+ 4P
1,3
+ P
2,2
+ P
2,4
+
5P
2,5
+ P
2,6
+ P
2,7
+ 3P
2,8
+
5P
2,9
+ 2P
2,11
+ 5P
2,12
+ 7P
2,13
+
9P
2,14
68 21 cm rolls
(5) R
1
P
1,1
P
1,2
P
1,3
= 0 90 cm rolls
(6) R
2

14
j=1
P
2, j
= 0 200 cm rolls
all variables integer and 0
An alternate formulation is obtained if we dene S
i
as the surplus on con-
straints i = 1, 2, 3, 4. Calculating the waste directly, which includes any surplus
customer widths, the new model is:
387
min 10P
1,1
+ 2P
1,2
+ 6P
1,3
+
10P
2,1
+ 4P
2,2
+ 13P
2,3
+ 17P
2,4
+
0P
2,5
+ 19P
2,6
+ 7P
2,7
+ 11P
2,8
+
15P
2,9
+ 16P
2,10
+ 20P
2,11
+ 3P
2,12
+
7P
2,13
+ 10P
2,14

95S
1
80S
2
46S
3
21S
4
subject to
(1) 2P
2,1
+ P
2,2
+ P
2,3
+ P
2,4
+
P
2,5
S
1
= 25 95 cm rolls
(2) P
1,1
+ P
2,2
+ 2P
2,6
+ P
2,7
+
P
2,8
+ P
2,9
S
2
= 31 80 cm rolls
(3) P
1,2
+ 2P
2,3
+ P
2,4
+ 2P
2,7
+
P
2,8
+ 4P
2,10
+ 3P
2,11
+ 2P
2,12
+
P
2,13
S
3
= 23 46 cm rolls
(4) 2P
1,2
+ 4P
1,3
+ P
2,2
+ P
2,4
+
5P
2,5
+ P
2,6
+ P
2,7
+ 3P
2,8
+
5P
2,9
+ 2P
2,11
+ 5P
2,12
+ 7P
2,13
+
9P
2,14
S
4
= 68 21 cm rolls
(5) R
1
P
1,1
P
1,2
P
1,3
= 0 90 cm rolls
(6) R
2

14
j=1
P
2, j
= 0 200 cm rolls
all variables integer and 0
18.
Analysis
Problem: Efcient use of resources in production.
Objective: Maximize the prot contribution from the production of the products.
Number of each type of product produced.
Number of each component used.
Production line capacities constraints.
Component supply constraints.
Component requirements structural parameters.
Production and marketing restrictions constraints.
Product prot contributions objective function coefcient.
Given the nature of how the situation is described, it is useful to set up a re-
source table to summarize the data before proceeding with the model formulation.
Resource Used for Product Availability
X Y Z
Line 1 1, 000 1, 400 3, 000
Line 2 2, 500 1, 600 1, 000
Component A 1 1 2 2,500
Component B 2 1 1 3,000
Prot 100 150 150
X
i
# of units of product i produced.
The product indices are
Index Product
1 X
2 Y
3 Z
max 100X
1
+ 150X
2
+ 300X
3
The line capacities are taken into account by considering how much time it
takes the line to process the required number of units. For example, to produce
X
1
units of product X, it takes
X
1
1,000
of the available time. Thus the line capacities
give rise to two constraints
5
5
In practice we would simplify these equations by multiplying though by 4,200 in equation
(1) and 4,000 in equation (2) to obtain
(1) 4.2X
1
+ 3.0X
2
+ 1.4X
3
4, 200 Line 1
(2) 1.6X
1
+ 2.5X
2
+ 4.0X
3
4, 000 Line 2
389
(1)
X
1
1,000
+
X
2
1,400
+
X
3
3,000
1 Line 1
(2)
X
1
2,500
+
X
2
1,600
+
X
3
1,000
1 Line 2
The component availability constraints are simply taken into account with
(3) X
1
+ X
2
+ 2X
3
2, 500 Component A
(4) 2X
1
+ X
2
+ X
3
3, 000 Component B
The production and marketing restrictions are taken into account with
(5) X
3
X
1
+ X
2
Z production
(6) X
2
2X
1
Y marketing
or
(5) X
1
X
2
+ X
3
0 Z production
(6) 2X
1
X
2
0 Y marketing
max 100X
1
+ 150X
2
+ 300X
3
subject to
(1)
X
1
1,000
+
X
2
1,400
+
X
3
3,000
1 Line 1
(2)
X
1
2,500
+
X
2
1,600
+
X
3
1,000
1 Line 2
(3) X
1
+ X
2
+ 2X
3
2, 500 Component A
(4) 2X
1
+ X
2
+ X
3
3, 000 Component B
(5) X
1
X
2
+ X
3
0 Z production
(6) 2X
1
X
2
0 Y marketing
X
1
0 X
2
0 X
3
0
(b) The optimal solution is to produce 215.0 units of product X, 430.1 units of
product Y and 645.2 units of product Z for a payoff of $279,600.
or write the fractions in decimal format as follows
(1) 1.0X
1
+ 0.714X
2
+ 0.333X
3
1, 000 Line 1
(2) 0.4X
1
+ 0.625X
2
+ 1.000X
3
1, 000 Line 2
19.
Analysis
Problem: Required to write three mid-term exams.
Objective: Maximize the total marks received on the mid-terms.
Method of preparation.
Number of hours spend on each course by type of preparation.
Initial marks Initial condition.
Available hours constraint.
Preparation effects structural parameters.
Requirement to pass each mid-term constraints.
Maximum mark on each mid-term constraints.
Maximum improvement in mark constraints.
X
i
# of marks received for mid-term of course i.
max X
1
+ X
2
+ X
3
There are two methods of preparation: (1) reading, and (2) doing problems.
In order to relate the preparation time to the course mark, we need to introduce
another set of variables.
P
j,i
# of hours spend using preparation type j on course i.
j = 1, 2; i = 1, 2, 3
The course marks can now be written as
(1) X
1
= 20 + 5P
1,1
+ 9P
2,1
Course 1
(2) X
2
= 25 + 7P
1,2
+ 4P
2,2
Course 2
(3) X
3
= 30 + 6P
1,3
+ 8P
2,3
Course 3
391
(1) X
1
5P
1,1
9P
2,1
= 20 Course 1
(2) X
2
7P
1,2
4P
2,2
= 25 Course 2
(3) X
3
6P
1,3
8P
2,3
= 30 Course 3
The available hours condition is taken into account by
(4) P
1,1
+ P
1,2
+ P
1,3
+
P
2,1
+ P
2,2
+ P
2,3
20 Hours
The requirement to pass every mid-term are simply taken into account with
(5) X
1
50 Course 1
(6) X
2
50 Course 2
(7) X
3
50 Course 3
The maximum mark of 100 is handled similarly.
(8) X
1
100 Course 1
(9) X
2
100 Course 2
(10) X
3
100 Course 3
The simplest way to take into account the restriction of a maximum increase
of 60% in any one course is as follows:
(11) X
1
20 60 Course 1
(12) X
2
25 60 Course 2
(13) X
3
30 60 Course 3
or
(11) X
1
80 Course 1
(12) X
2
85 Course 2
(13) X
3
90 Course 3
which make equations (8) to (10) trivially redundant.
Leaving out the redundant constraints, the model can be summarized as
max X
1
+ X
2
+ X
3
subject to
(1) X
1
5P
1,1
9P
2,1
= 20 Course 1
(2) X
2
7P
1,2
4P
2,2
= 25 Course 2
(3) X
3
6P
1,3
8P
2,3
= 30 Course 3
(4) P
1,1
+ P
1,2
+ P
1,3
+
P
2,1
+ P
2,2
+ P
2,3
20 Hours
(5) X
1
50 Course 1
(6) X
2
50 Course 2
(7) X
3
50 Course 3
(8) X
1
80 Course 1
(9) X
2
85 Course 2
(10) X
3
90 Course 3
all variables 0
An equivalent approach is to maximize the increases in the courses since this
will have the same effect as maximizing the course marks. In this case we would
dene
I
i
Increase in the # of marks received for the mid-term of course i.
The model would be written as
max I
1
+ I
2
+ I
3
subject to
(1) I
1
5P
1,1
9P
2,1
= 0 Course 1
(2) I
2
7P
1,2
4P
2,2
= 0 Course 2
(3) I
3
6P
1,3
8P
2,3
= 0 Course 3
(4) P
1,1
+ P
1,2
+ P
1,3
+
P
2,1
+ P
2,2
+ P
2,3
20 Hours
(5) I
1
30 Course 1
(6) I
2
25 Course 2
(7) I
3
20 Course 3
(8) I
1
60 Course 1
(9) I
2
60 Course 2
(10) I
3
60 Course 3
all variables 0
393
(b) The optimal solution is to read 0 hours for course 1, 5
5
6
hours for course 2
and 0 hours for course 3 and to problem solve for 6
2
3
hours for course 1, 0 hours
for course 2 and 7
1
2
hours for course 3 to obtain nal marks of 80, 65
5
6
, and 90
respectively in courses 1, 2, and 3 for an OFV of 235
5
6
(the OFV is 160
5
6
in the
improvement version).
20.
Analysis
Problem: Need to deliver gasoline in a new region.
Objective: Minimize the monthly operating costs associated with meeting re-
quired deliveries.
Number of new vehicles to buy of each type of truck.
Available cash Constraint.
Tanker capacities structural parameters.
Purchase costs structural parameters.
Monthly operation cost objective function coefcients.
Demand for the region constraint.
Maximum number of trips per vehicle structural parameter.
Maximum number of vehicles to be added constraint.
Minimum number of Econoline tankers to be added constraint.
Maximum number of Supers to be added constraint.
Fleet insurance objective function coefcient.
Given the nature of how the situation is described, it is useful to set up a re-
source table to summarize the data before proceeding with the model formulation.
Resource Type of tanker Availability
Econoline Regular Super
Purchase Cost 75,000 100,000 150,000 1,600,000
Operating Cost 200 500 800
Tanker capacity 5,000 10,000 20,000
# of trips 30 25 20
Monthly capacity 150,000 250,000 400,000 2,000,000
X
0
Total # of tankers of purchased.
X
i
# of tankers of type i purchased.
The tanker indices are
Index Tanker
1 Econoline
2 Regular
3 Super
Obviously these decision variables are related and hence we have the deni-
tional constraint
(1) X
0
= X
1
+ X
2
+ X
3
Denitional
or
(1) X
0
X
1
X
2
X
3
= 0 Denitional
max 150X
0
+ 200X
1
+ 500X
2
+ 800X
3
The cash limitation is taken into account by (in terms of $1,000s)
(2) 75X
1
+ 100X
2
+ 150X
3
1, 600 Cash
The capacity requirement is taken into account by (in terms of 1,000s of litres)
395
(3) 150X
1
+ 250X
2
+ 400X
3
2, 000 Capacity
The vehicle requirements are simply taken into account with
(4) X
0
20 Maximum vehicles
(5) X
1
4 Econoline
(6) X
3

1
2
X
0
Super
(4) X
0
20 Maximum vehicles
(5) X
1
4 Econoline
(6) X
0
+ 2X
3
0 Super
The model can be summarized as
max 150X
0
+ 200X
1
+ 500X
2
+ 800X
3
subject to
(1) X
0
X
1
X
2
X
3
= 0 Denitional
(2) 75X
1
+ 100X
2
+ 150X
3
1, 600 Cash
(3) 150X
1
+ 250X
2
+ 400X
3
2, 000 Capacity
(4) X
0
20 Maximum vehicles
(5) X
1
4 Econoline
(6) X
0
+ 2X
3
0 Super
X
0
0 X
1
0 X
2
0 X
3
0
(b) The optimal solution is to order 13
1
3
tankers of which 13
1
3
are Econoline, 0 are
Regular and 0 are Super for a total monthly cost of $4,667.
Since the solution is not integral, a recommendation could be to purchase 14
Econoline trucks. Checking the constraints, we see that the one which limits us is
the capacity required. Thus we would have to round up to ensure that the capacity
would be satised. The cost of this would be $4,900.
[The actual optimal solution is to buy 1 Super tanker, 0 Regular tankers and 11
Econoline tankers for an OFV of $4,800. This is found using the techniques for
solving problems with integer requirements, which are discussed in a subsequent
chapter.]

Business 4401 Solutions Manual: C A.R. Redlack D.M. Tulett December 14, 2004

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BUSINESS 4401

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200 100 0 100 200 300 400

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