TA QUANTITATIVE METHODS FOR BUSINESS
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EXERCISE
1/ Mickey Lawson is considering investing some money that he inherited. The
following payoff table gives the profits that would be realized during the next
year for each of three investment alternatives Mickey is considering:
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(a) What decision would maximize expected profits?
(b) What is the maximum amount that should be paid for a perfect forecast of the
economy?
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Solution
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2/ Even though independent gasoline stations have been having a difficult
time, Susan Solomon has been thinking about starting her own independent
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gasoline station. Susan’s problem is to decide how large her station should be.
The annual returns will depend on both the size of her station and a number of
marketing factors related to the oil industry and demand for gasoline. After a
careful analysis, Susan developed the following table:
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For example, if Susan constructs a small station and the market is good, she will
realize a profit of $50,000.
(a) Develop a decision table for this decision.
(b) What is the maximax decision?
(c) What is the maximin decision?
(d) What is the equally likely decision?
(e) What is the criterion of realism decision? Use an
value of 0.8.
(f) Develop an opportunity loss table.
(g) What is the minimax regret decision?
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3. Mr. Seoul is thinking about opening a toy shop in his hometown. Mr. Seoul
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. Seoul is also thinking about asking support from a research
agency for a marketing report. If the study is conducted, the study could be
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favorable (i.e., predicting a favorable market) or unfavorable (i.e., predicting an
unfavorable market). If Mr. Seoul 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 $30,000 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. Seoul that there is
only a probability of 0.12 of a favorable market if the marketing research
results are not favorable. Mr. Seoul is confused.
TA QUANTITATIVE METHODS FOR BUSINESS
[email protected]1. What are the chances of a favorable market and an unfavorable market?
2. Draw the decision tree and advise Mr. Seoul
Solution
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4. Jim Sellers is thinking about producing a new type of electric razor for men.
If the market were favorable, he would get a return of $100,000, but if the
market for this new type of razor were unfavorable, he would lose $60,000.
Since Ron Bush is a good friend of Jim Sellers, Jim is considering the
possibility of using Bush Marketing Research to gather additional information
about the market for the razor. Ron has suggested that Jim either use a survey
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or a pilot study to test the market. The survey would be a sophisticated
questionnaire administered to a test market. It will cost $5,000. Another
alternative is to run a pilot study. This would involve producing a limited
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number of the new razors and trying to sell them in two cities that are typical
of American cities. The pilot study is more accurate but is also more
expensive. It will cost $20,000. Ron Bush has suggested that it would be a
good idea for Jim to conduct either the survey or the pilot before Jim makes
the decision concerning whether to produce the new razor. But Jim is not sure
if the value of the survey or the pilot is worth the cost.
Jim estimates that the probability of a successful market without performing a
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survey or pilot study is 0.5. Furthermore, the probability of a favorable survey
result given a favorable market for razors is 0.7, and the probability of a
favorable survey result given an unsuccessful market for razors is 0.2. In
addition, the probability of an unfavorable pilot study given an unfavorable
market is 0.9, and the probability of an unsuccessful pilot study result given a
favorable market for razors is 0.2.
a) Draw the decision tree. Compute the revised probabilities needed to
complete the decision, and place these values in the decision tree.
b) What is the best decision for Jim? Use EMV as the decision criterion.
Solution:
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P(FM) = P(UM) = 0.5
P(FS|FM) = 0.7 → P(UnS|FM) = 0.3
P(FS|UnM) = 0.2 → P(UnS|UnM) = 0.8
P(UnP|UnM) = 0.9 → P(FaP|UnM) = 0.1
P(UnP|FM) = 0.2 → P(FaP|FM) = 0.8
𝑃(𝐴𝐵)
P(A|B) = 𝑃(𝐵)
PILOT
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FaP UnP
FM 0.4 0.2x0.5=0.1 0.5
UnM 0.05 0.9x0.5 = 0.45 0.5
0.45
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P(FM|FP) = 0.4/0.45 = 0.89
→ P(UnM|FP) = 1 - 0.89 = 0.11
P(FM|UnP) = 0.1/0.55 = 0.18
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→ P(UnM|UnP) = 1 - 0.18 = 0.82
SURVEY
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FaS UnS
FM 0.35 0.15 0.5
UnM 0.1 0.4 0.5
0.45 0.55 1
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P(FM|FS) = 0.35/0.45 = 0.78
→ P(UnM|FS) = 0.22
P(FM|UnS) = 0.15/0.55 = 0.27
→ P(UnM|UnS) = 0.22 = 0.73
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Solution
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Solution
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