Practice sheet

UNIT I

Q.1. A man has to decide whether to sell ice cream or tea or coffee at his stall for the coming

season? There is 40 % chance of season being hot. If it is hot season his profit form Ice

cream would be Rs. 6500 and from tea and coffee his profit would be 1000. If season is

cold his profit from ice cream would be Rs. 1000 and profit from tea and coffee would

be Rs. 5000. Set-up the payoff table and find out what should be his decision?

Q.2. A management is faced with the problem of choosing one of three products for

manufacturing. The potential demand for each product may turn out to be good,

Moderate or poor. The probabilities for each of these three states of nature were

estimated as follows: -

Nature of Demand
Product
Good Moderate Poor

X 0.70 0.20 0.10

Y 0.50 0.30 0.20

Z 0.40 0.50 0.10

The Estimated profit or loss under the three states are as follows: -

X 30000 20000 10000

Y 60000 30000 20000

Z 40000 10000 -15000 (loss)

Prepare the expected value table and advise the management about the choice of

product.

Q.3. Calculate the expected opportunity loss from the following pay off table: -
 ACTS

Events A1 A2 A3 Event Probabilities

E1 25 -10 -125 0.10

E2 400 440 400 0.70

E3 650 740 750 0.20

Q.4. From the given payoff table construct the opportunity loss table. If the event

probabilities are as follows, calculate the expected monetary value and the expected

opportunity loss of each course of action: -

P(E1) =0.15, P(E2) = 0.45, P(E3) = 0.25, P(E4) = 0.15

Pay – off Table

Events

Action E1 E2 E3 E4

A1 50 300 -150 50

A2 400 0 100 0

A3 -50 200 0 100

A4 0 300 300 0

Q.5. A vegetable dealer sells strawberries. If not sold on the day of purchase, it is worthless.

The cost of one case of strawberries is Rs. 20 and selling price is Rs. 50. The dealer

cannot specify the number of cases customers will call for on any one day, but analysis

of past records has produced the following information: -

 Sales During 100 days

Daily Sales (No. of

Number of Days Sold Probability
Cases)

10 15 0.15

11 20 0.20

12 40 0.40

13 25 0.25

Total 100 1.0

The dealer has to make a decision as to how many cases of Strawberries he should

purchase daily so that his net expected profit is maximum.

Q.6. Calculate the Expected Profit with perfect information and Expected Value with perfect

Information on the basis of information given: -

Sales During 100 days

Daily Sales (No. of

Number of Days Sold Probability
Cases)

10 15 0.15

11 20 0.20

12 40 0.40

13 25 0.25

Total 100 1.0

Q.7. Maximum and minimum Payoff values for different actions as per various states of

nature are as follows:

Act A1 A2 A3 A4 A5 A6

Maximum Pay-off 360 380 400 420 440 460

 Minimum Pay - off 360 310 260 210 160 110

Coefficient of optimism is 0.7. Select the optimum act on the basis of Hurwicz

Criterion.

Q.8. The Payoff for combinations of three states of nature—E1, E2, E3 and for acts A1, A2,

A3 and A4 are given in the following table: -

Acts

Events A1 A2 A3 A4

E1 3000 5000 6000 10000

E2 3000 4400 4500 4000

E3 3000 500 1200 1000

Which act should be selected on the basis of following decision criteria?

a) Maximum Criterion

b) Maximax Criterion

c) Minimax Reget Criterion

d) Hurwicz Criterion assuming coefficient of optimism =0.6

e) Laplace Criterion.

Q.9. A businessman has three alternatives open to him, each of which can be followed by

any of the four possible events. The conditional pay-off for each action, even

combination are given below: -

Alternative Pay – off on Events (in Rs.)

Actions E1 E2 E3 E4

A1 8 0 - 10 6

A2 -4 12 18 -2

A3 14 6 0 8
 Determine which alternative the businessman should choose, if he adopts the:

a) Maximum Criterion

b) Maximax Criterion

c) Minimax Reget Criterion

d) Hurwicz Criterion assuming coefficient of optimism =0.6

e) Laplace Criterion.

Q.10. A farm owner is considering drilling a farm well. In the Past only 70 % of wells drilled

were successful at 20 meters of depth in that area. Moreover, on finding no water at 20

meters, some person drilled it further upto 25 meters but only 20% struck water at 25

meters. The prevailing cost of Drilling is Rs 500 per meter. The farm owner has

estimated that in case he does not get his own well, he will have to pay Rs 15000 over

the next 10 years to buy water from the neighbor. The Following decisions can be

optimal: -

a) Do not drill any well.

b) Drill upto 20 meters.

c) if no water is found ar 20 meters, drill further upto 25 meters.

Draw an appropriate decision tree and determine the farm owner’s strategy under EMV

approach.

Q.11. A businessman has two independent investment portfolios. A and B available to him,

but he lacks the capital to undertake both of them simultaneously. He can choose A first

and then Stop, or if A is Successful, then take B or vice- verse. The probability of

Success of A is 0.6 while for B is 0.4. Both investment schemes require an initial

capital outlay of Rs. 10000 and both return nothing if the venture is unsuccessful.

Successful Completion of A will return Rs 20000 (over cost) and successful of B will

return of Rs 24000 (over cost). Draw decision tree and determine the best strategy.
Q.12. Mr. X of ABC ltd. wants to introduce a new product in the market. He has a choice of

two different research and development plans A and B. A costs Rs 10 lakhs and has

40% of chance of success whereas B costs Rs 5 lakhs with 30% of chance of success.

In the event of a success, Mr. X has to decide whether or not to advertise the product

heavily or lightly. Heavy advertising will cost Rs 4 lakhs but gives a 0.7 probability of

full acceptance and 0.3 probability of partial acceptance by the market. Light

advertising will cost Rs 1 lakh with a probability 0.5 of full acceptance and 0.5

probability of partial acceptance. Full market acceptance of the product developed as

per the plan A would be worth 40 lakhs and as per plan B would be worth Rs. 30 lakhs.

Partial acceptance in both the cases will be worth Rs 20 lakhs. Which plan should Mr.

X adopt and what sort of advertising will be done for marketing the product? Solve the

problem with the help of decision tree.