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Stats 10

This document contains 5 questions regarding decision theory. Question 1 asks to formulate the action space, state space, payoff table, and loss table for a baker who produces pastries each weekend with demand between 78-80 pastries. Question 2 provides a profit table for a businessman deciding whether to build a 25, 50, or 100-bed hotel based on low, medium, or high demand and asks to calculate expected profit, expected profit of perfect information, and expected value of perfect information. Question 3 asks which mode of transport Mr. X should take based on expected monetary value to maximize the chance he catches his flight and completes a business deal. Question 4 provides sales data and asks how many cherry cases a retailer should

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150 views2 pages

Stats 10

This document contains 5 questions regarding decision theory. Question 1 asks to formulate the action space, state space, payoff table, and loss table for a baker who produces pastries each weekend with demand between 78-80 pastries. Question 2 provides a profit table for a businessman deciding whether to build a 25, 50, or 100-bed hotel based on low, medium, or high demand and asks to calculate expected profit, expected profit of perfect information, and expected value of perfect information. Question 3 asks which mode of transport Mr. X should take based on expected monetary value to maximize the chance he catches his flight and completes a business deal. Question 4 provides sales data and asks how many cherry cases a retailer should

Uploaded by

ChiragNarula
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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Decision Theory

Q. 1 A baker produces a certain type of special pastry at a total average cost of Rs. 3
and sell it at a price of Rs. 5. This pastry is produced over the weekend and is
sold during the following week; such pastry being produced but not sold during a
week’s time are totally spoiled and have to be thrown. According to past
experience the weekly demand for these pastries is never less than 78 or greater
than 80. You are required so formulate action space, state space, payoff table and
loss table. DONE

Q. 2 A businessman wants to construct a hotel. He usually builds 25, 50 or 100 bed


hotel, depending on whether anticipated demand is low, medium or high. The
businessman has been able to find out net profits which are expressed in the table
below and the corresponding probabilities are also given below.
Courses of action
D1 D2 D3
States Build 25-bed-hotel Build 50-bed-hotel Build 100-bed-hotel
of nature

S1 = Low demand 20,000 -10,000 -30,000

S2 = Medium demand 25,000 25,000 -5000

S3 = High demand 30,000 50,000 60,000

States of nature = Demand S1 S2 S3 Total

Probability 0.2 0.3 0.5 1.00

(a) Compute EP, EPPI and EVPI


(b) A research firm agrees to conduct a survey for Rs. 8000, and provide him with
information regarding the state of nature. Should the survey be conducted?

Q. 3 Mr. X quite often flies from town A to town B. He can use the airport bus which costs Rs.
25 but if he takes it, there is a 0.08 chance that he will miss the flight. The stay in a hotel
costs Rs. 270 with a 0.96 chance of being on time for the flight. For Rs. 350 he can use a
taxi which will make 99 per vent chance of being on time for the flight. If Mr. X catches
the plane on time, he will conclude a business transaction which will produce a profit of
Rs. 10,000, otherwise he will lose it. Which mode of transport should Mr. X use? Answer
on the basis of the EMV criterion.

1
Q. 4 A retailer purchases cherries every morning at Rs. 50 a case and sells them for Rs. 80 a
case. Any case remaining unsold at the end of the day can be disposed of next day at a
salvage value of Rs. 20 per case (thereafter they have no value). Past sales have ranged
from 15 to 18 cases per day. The following is the record of sales for the past 120 days:

Cases sold : 15 16 17 18
Number of days : 12 24 48 36

Find how many cases the retailer should purchase per day to maximize his profit.

Q. 5 A company needs to increase its production beyond its existing capacity. It has narrowed
the alternatives to two approaches to increase the production capacity: (a) expansion, at a
cost of Rs. 8 million, or (b) modernization at a cost of Rs. 5 million. Both approaches
would require the same amount of time for implementation. Management believes that
over the required payback period, demand will either be high or moderate. Since high
demand is considered to be somewhat less likely than moderate demand, the probability
of high demand has been set at 0.35. If the demand is high, expansion would gross an
estimated additional Rs. 12 million but modernization only an additional Rs. 6 million,
due to lower maximum production capacity. On the other hand, if the demand is
moderate, the comparable figures would be Rs. 7 million for expansion and Rs. 5 million
for modernization.
(a) Calculate the conditional profit in relation to various action-and-outcome combinations
and states of nature.
(b) If the company wishes to maximum its expected monetary value (EMV), should it
modernize or expand?
(c) Calculate the EVPI.
(d) Construct the conditional opportunity loss table and also calculate EOL.

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