Problem 1

Department of Health in a large US city is accepting bids for the contract to design and deploy a new
citywide healthcare information platform. The IT company Rapid Deployment (RD) plans to submit a
bid and is considering a decision on how much to bid. Since RD does not know exactly how much its
main competitor will bid, it treats is main competitor’s bid B as a random variable (RD believes that
bids from other potential competitors are unlikely to win). RD estimates, based on past experience,
that B will be normally distributed with mean $12 million and the standard deviation of $1 million. RD
estimates that its own cost of designing and deploying the new platform will be $11 million, and it
plans to submit a bid amount A=$11.5 million. The company that submits the lowest bid will win the
contract, and if the bids are tied, RD’s competitor will get the contract as it has more experience with
similar projects. Thus, if B turns out to be less than or equal to $11.5 million, RD will lose this contract
and RD’s profit will be $0. On the other hand, if B turns out to be greater than $11.5 million, then RD
will win this contract, and RD’s profit will be equal to $11.5 million - $11million = $0.5 million. RD
would like to use simulation to model the distribution of its profit.

Problem 2

Assume that you’re bidding on a construction project that will cost you $25,000 to complete. It costs
$1,000 to prepare your bid. You have six potential competitors, and you estimate that there is a 50
percent chance that each competitor will bid on the project. If a competitor places a bid, its bid is
assumed to follow a normal random variable with a mean equal to $50,000 and a standard deviation
equal to $10,000. Also suppose you are only preparing bids that are exact multiples of $5,000. What
should you bid to maximize expected profit?

Problem 3

Marty Ford is an operations analyst for Piedmont Commuter Airlines (PCA). Recently, Marty was asked
to make a recommendation on how many reservations PCA should book on Flight 343—a flight from
a small regional airport in New England to a major hub at Boston’s Logan airport. The plane used on
Flight 343 is a small twin engine turbo-prop with 19 passenger seats available. PCA sells non-
refundable tickets for Flight 343 for $150 per seat. Industry statistics show that for every ticket sold
for a commuter flight, a 0.10 probability exists that the ticket holder will not be on the flight. Thus, if
PCA sells 19 tickets for this flight, there is a fairly good chance that one or more seats on the plane will
be empty. Of course, empty seats represent lost potential revenue to the company. On the other hand,
if PCA overbooks this flight and more than 19 passengers show up, some of them will have to be
bumped to a later flight. To compensate for the inconvenience of being bumped, PCA gives these
passengers vouchers for a free meal, a free flight at a later date, and sometimes also pays for them to
stay overnight in a hotel near the airport. PCA pays an average of $325 (including the cost of lost
goodwill) for each passenger that gets bumped. Marty wants to determine if PCA can increase profits
by overbooking this flight and, if so, how many reservations should be accepted to produce the
maximum average profit. To assist in the analysis, Marty analysed market research data for this flight
that reveals the following probability distribution of demand for this flight:

Problem 4

Large Lots is planning a seven-day promotion on a discontinued model of 31" colour television sets.
At a price of $575 per set, the daily demand for this type of TV has been estimated as follows:

Large Lots can order up to 50 of these TVs from a surplus dealer at a cost of $325. This dealer has
offered to buy back any unsold sets at the end of the promotion for $250 each.

a. How many TVs should Large Lots order if it wants to maximize the expected profit on this
promotion?
b. What is the expected level of profit?
c. Suppose the surplus dealer will buy back a maximum of only four sets at the end of the
promotion. Would this change your answer? If so, how?
Problem 5

A debate recently erupted about the optimal strategy for playing a game on the TV show called “Let’s
Make a Deal.” In one of the games on this show, the contestant would be given the choice of prizes
behind three closed doors. A valuable prize was behind one door and worthless prizes were behind
the other two doors. After the contestant selected a door, the host would open one of the two
remaining doors to reveal one of the worthless prizes. Then, before opening the selected door, the
host would give the contestant the opportunity to switch the selection to the other door that had not
been opened. The question is, should the contestant switch?

a. Suppose a contestant is allowed to play this game 500 times, always picks door number 1, and
never switches when given the option. If the valuable prize is equally likely to be behind each
door at the beginning of each play, how many times would the contestant win the valuable
prize? Use simulation to answer this question.
b. Now suppose the contestant is allowed to play this game another 500 times. This time the
player always selects door number 1 initially and switches when given the option. Using
simulation, how many times would the contestant win the valuable prize?
c. If you were a contestant on this show, what would you do if given the option of switching
doors?