Scribd
Upload
22 views

Exercise 2 Decision Tree and Utility

The document outlines a series of problems related to decision trees and utility theory, including calculations of probabilities for exam completion times and optimal newspaper quantities. It also presents scenarios for Mary considering grocery store locations and Sue evaluating investment in a retail store, incorporating costs, probabilities of success, and expected values. The problems require drawing decision trees, calculating revised probabilities based on survey results, and assessing the value of information in decision-making.

Uploaded by

uqy02935
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
22 views

Exercise 2 Decision Tree and Utility

The document outlines a series of problems related to decision trees and utility theory, including calculations of probabilities for exam completion times and optimal newspaper quantities. It also presents scenarios for Mary considering grocery store locations and Sue evaluating investment in a retail store, incorporating costs, probabilities of success, and expected values. The problems require drawing decision trees, calculating revised probabilities based on survey results, and assessing the value of information in decision-making.

Uploaded by

uqy02935
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 2

Exercise 2 – Decision Tree & Utility Theory

Deadline: before 23:00 Monday 15 April

Problem 1
The time it takes to write a standard entrance exam is normally distributed, with a mean of 60
minutes and a standard deviation of 8 minutes.
(a) What is the probability that a student will finish the exam in between 45 and 50 minutes?
(b) What is the probability that a student will finish the exam less than 50 minutes?
(c) The probability a student finishes the exam more than x minutes is 0.75. What is the value of
x?

Problem 2
A newspaper shop has papers sold daily has a normal distribution with µ = 200 papers and standard
deviation = 15 papers. The cost = $3/paper, selling price = $5/paper. What is the optimal quantity of
newspaper to buy and resell?

Problem 3

Mary is considering opening a new grocery store in town. She is evaluating three sites: downtown,
the mall, and out at the busy traffic circle. Mary calculated the value of successful stores at these
locations as follows: downtown, $250,000; the mall, $300,000; the circle, $400,000. Mary calculated
the losses if unsuccessful to be $100,000 at either downtown or the mall and $200,000 at the circle.
Mary figures her chance of success to be 50% downtown, 60% at the mall, and 75% at the traffic circle.
(a) Draw a decision tree for Mary and select her best alternative.
(b) Mary has been approached by a marketing research firm that offers to study the area to
determine if another grocery store is needed. The cost of this study is $30,000. Mary believes
there is a 60% chance that the survey results will be positive (show a need for another grocery
store). SRP=survey results positive, SRN=survey results negative, SD= success downtown, SM=
success at mall, SC= success at circle, SD’ =don’t succeed downtown, and so on. For studies of
this nature: P(SRP/success) =0.7; P(SRN/not success)=0.8. Calculate the revised probabilities
for success (and not success) for each location, depending on survey results.
(c) How much is the marketing research worth to Mary? Calculate the EVSI.

Problem 4

Sue Reynolds has to decide if she should get information (at a cost of $20,000) to invest in a retail
store. If she gets the information, there is a 0.6 probability that the information will be favorable and
a 0.4 probability that the information will not be favorable. If the information is favorable, there is a
0.9 probability that the store will be a success. If the information is not favorable, the probability of a
successful store is only 0.2. Without any information, Sue estimates that the probability of a successful
store will be 0.6. A successful store will give a return of $100,000. If the store is built but is not
successful, Sue will see a loss of $80,000. Of course, she could always decide not to build the retail
store.
(a) What do you recommend?
(b) What impact would a 0.7 probability of obtaining favorable information have on Sue’s
decision? The probability of obtaining unfavourable information would be 0.3.
(a) Sue believes that the probabilities of a successful and an unsuccessful retail store given
favourable information might be 0.8 and 0.2, respectively, instead of 0.9 and 0.1, respectively.
What impact, if any, would this have on Sue’s decision and the best EMV?
(b) Sue had to pay $20,000 to get information. Would her decision change if the cost of the
information increased to $30,000?
(c) Using the data in this problem and the following utility table, compute the expected utility. Is
this the curve of a risk seeker or a risk avoider?
MONETARY
VALUE UTILITY
$100,000 1
$80,000 0.4
$0 0.2
–$20,000 0.1
–$80,000 0.05
–$100,000 0

You might also like