Quantitative Methods for Business_ Ms.

Dang Thi Uyen Thao 1

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• PROCESS IS MORE IMPORTANT THAN RESULT

• Assignment is due on the following class next week, late submission will be deducted 10
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for Contribution is from 1 to 5, in which 1 describes minimum and 5 describes maximum
commitment.

QUANTITATIVE METHODS FOR BUSINESS

Ms. Dang Thi Uyen Thao
ASSIGNMENT CHAPTER 3
dd/mm/yy

Full name & ID Contribution

Quantitative Methods for Business_ Ms. Dang Thi Uyen Thao 2

Tasks and Questions

DECISION MAKING UNDER UNCERTAINTY AND RISK .

HDViet runs a canteen that provide food for students of IU and other nearby universities. A new
dish of Sping rolls is sold for $10 and costs $8 to prepare. At present HDViet must decide in
advance how many dishs to prepare each day (40, 50, 60 or 75). Actual demand will also be 40,
50, 60 or 75 each day. Please support HDViet to
DEMAND
40 50 60 75
40 =40x10-40x8
= 80
SUPPLY 50 =40x10-50x8 =50x10-50x8
=0 =100
60
75
1. Conduct the payoff table
Hint: in case supply > demand, there are prepared dished that cannot be sold; in case
supply < demand, there are some students that are not served

2. What decision would HDViet make if they were extremely optimistic? extremely cautious?
risk neutral?

3. Given HDViet is in a middle ground between the extremes posed by the optimist and
pessimist criteria, and they are found to be more adventurous over cautious. What range
should the coefficient of realism assigned in this case? Explain

An IU staff who know about the situation advises HDViet to use the coefficient of realism
of 0.8. What decision do you recommend?
4. What decision do you recommend if HDViet wants to minimize its maximum regret?
minimize its expected regret?

Apply these infomation for the following questions: Given the probability of the demand of 40, 50,
60 and 75 each day is 10%, 20%, 40% and 30%, respectively

5. What do you recommend?

6. Suppose a new ordering system is being considered, whereby students are advised to
order their dish online the day before. With this new system HDViet may predict the daily
demand 24 hours in advance. They can adjust production levels on a daily basis. How
much should this system worth to HDViet?
Quantitative Methods for Business_ Ms. Dang Thi Uyen Thao 3

DECISION TREE .
Question 1
Mr. Austria is thinking about opening a toy shop in his hometown. Mr. Austria can open a
small shop, a large shop, or no shop at all. The profits will depend on the size of the shop and
whether the market is favorable or unfavorable for his products. Mr. Austria is also thinking
about asking support from a research agency for a marketing report. If the study is conducted,
the study could be favorable (i.e., predicting a favorable market) or unfavorable (i.e.,
predicting an unfavorable market). If Mr. Austria builds the large toy shop, he will earn
$60,000 if the market is favorable, but he will lose $40,000 if the market is unfavorable. The
small shop will return a $28,000 profit in a favorable market and a $10,000 loss in an
unfavorable market. The agency will charge him $5,000 for the marketing research. It is
estimated that there is a 0.6 probability that the survey will be favorable. Furthermore, there
is a 0.9 probability that the market will be favorable given a favorable outcome from the study.
However, the marketing professor has warned Mr. Austria that there is only a probability of
0.12 of a favorable market if the marketing research results are not favorable. Mr. Austria is
confused.
a. What are the chances of favorable market?
b. Draw the decision tree and advise Mr. Austria
c. Should Mr. Austria order the marketing research?

Question 2
Mr. Denmark is thinking about either building a quadplex (a building with four apartments),
building a duplex, or simply doing nothing. Mr. Denmark is also thinking about hiring his old
marketing professor to conduct a marketing research study. If the study is conducted, the study
could be positive or negative, but it would cost him $3,000. Mr. Denmark believes that there
is a 58:42 chance that the information will be positive. If the rental market is favorable, he
will earn $15,000 with the quadplex or $5,000 with the duplex. He doesn’t have the financial
resources to do both. With an unfavorable rental market, however, Mr. Denmark could lose
$20,000 with the quadplex or $10,000 with the duplex. Without conducting the market
research study, Mr. Denmark estimates that the probability of a favorable rental market is 0.6.
Based on historical data, there is a 0.8 probability that the marketing research will be positive
given a favorable rental market. Moreover, there is a 0.75 probability that the marketing
research will be negative given an unfavorable rental market. Of course, Mr. Denmark could
forget all of these numbers and do nothing.
Quantitative Methods for Business_ Ms. Dang Thi Uyen Thao 4

a. Any conflicts in the information given? If Yes, how would you correct?
b. Draw the decision tree and advise Mr. Denmark

Question 3

Mr. Norway, a homemade ketchup supplier of famous restaurants in Philadelphia, produces

ketchup in a certain number of units at once to save the setup costs as much as possible, due
to his small scale. Norway plans to produce their homemade ketchup in batch of 50, 100, 150,
200 units. Using historical data, Norway was able to determine that the probability of selling
50, 100, 150, and 200 units are 0.2, 0.3, 0.4, and 0.1, respectively. The question facing Norway
is how many units to produce in the next batch run. The price is $20 per unit, manufacturing
cost is $12 per unit, warehousing costs are estimated to be $1 per unit. In addition, Norway
pays $50 for quality inspection certificate after each batch produced.

Unfortunately, a homemade ketchup only preserves its highest quality level in a very short
period of about one month. If it is not sold after the batch run, the remaining units of ketchup
that lose much of their special flavor are sold to local convenient stores at $16.5 per unit.
Furthermore, Norway has guaranteed to his suppliers that there will always be an adequate
supply of ketchup at the fixed price. If the ketchup in his inventory does run out, he has agreed
to get products from his brothers’ company at the same price he sells $20 per unit, plus
transportation costs of $1.2 per unit.

a. Conduct the payoff table

b. Develop a decision tree of this problem. What is the best solution?
c. Determine the expected value of perfect information.

Hint: Be careful in conducting the payoff table. Please be noticed that

** In case supply > demand, there are units that are not demanded from restaurants but can be sold at lower
price to local convenience store.
** In case supply < demand, there are units that were not produced to meet all the need, so Norway must
outsource at $20 (and $1 logistic cost) and in turn sell to restaurants at same price as before.
** The cost of obtaining quality inspection is per batch produced, not per unit produced

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