Quantitative Methods for Business_ Ms.

Dang Thi Uyen Thao 1

Please read the following instructions carefully before working on the assignment

• PROCESS IS MORE IMPORTANT THAN RESULT

• There is a 10-extra-point-worth question in each chapter, so you may get 110 points at the
maximum
• Assignment is due on the following class next week, late submission will be deducted 10
points per day
• Handwriting is required
• Work in groups of two, and individuals may work alone if they wish to do so
• Let yourself struggle with problems for a while before looking up the answer using other
resources. What you turn in should reflect your own understanding of the assignment but
not the capability of copying from a solution manual. A copied answer is considered
plagiarism and is marked zero with no excuse.
• Please attach the information below on the top of the submitted answer paper. The scale
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
INDIVIDUAL/PAIR ASSIGNMENT CHAPTER 3_Part 2
dd/mm/yy

Full name & ID Contribution

Tasks and Questions

DECISION MAKING UNDER RISK (25p) .

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 decided in
advance how many dishs to prepare each day (40, 50, 60 or 70). Actual demand will also be 40,
50, 60 or 70 each day.
Quantitative Methods for Business_ Ms. Dang Thi Uyen Thao 2

DEMAND
40 50 60 70
40 80 80 80 80
SUPPLY 50 0 100 100 100
60 80 20 120 120
70 160 -60 40 140

1. Given the probability of the demand of 40, 50, 60 and 70 each day is 10%, 20%, 40% and
30%, respectively. What do you recommend?
2. 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?
3. Sometimes HDViet may face the regret of not picking the best solution. What do you
recommend HDViet in order to minimize its expected oppotunity loss?

DECISION TREE (75p) .

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 $30,000 profit in a favorable market and a $10,000 loss in an
unfavorable market. At the present time, he believes that there is a 50–50 chance that the
market will be favorable. 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. Draw the decision tree
Quantitative Methods for Business_ Ms. Dang Thi Uyen Thao 3

b. Should Mr. Austria use the marketing research?

Question 2
Two states of nature exist for a particular situation: a good economy and a poor economy. An
economic study may be performed to obtain more information about which of these will
actually occur in the coming year. The study may forecast either a good economy or a poor
economy. Currently there is a 65% chance that the economy will be good. In the past,
whenever the economy was good, the economic study predicted it would be good 72% of the
time. In the past, whenever the economy was poor, the economic study predicted it would be
poor 84% of the time.
a. Find the following:
P(good economy|prediction of good economy)
P(poor economy|prediction of good economy)
P(good economy|prediction of poor economy)
P(poor economy|prediction of poor economy)
b. Suppose the initial (prior) probability of a good economy is 75% (instead of 65%). Find
the posterior probabilities in part a based on these new values.

Question 3
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 50–50 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 0.7 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.
a. Draw the decision tree
b. What is your advice to Mr. Denmark?
Quantitative Methods for Business_ Ms. Dang Thi Uyen Thao 4

Question 4

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 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 per unit.

a. Develop a decision tree of this problem.

b. What is the best solution?
c. (10 extra points) 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

_____ THE END _____