WorkedExamplesforChapter15

ExampleforSection15.2
Consideradecisionanalysisproblemwhosepayoffs(inunitsofthousandsofdollars)are
givenbythefollowingpayofftable:

StateofNature
Alternative

S1

S2

A1

80

25

A2

30

50

A3

60

40

Priorprobability

0.4

0.6

(a)Whichalternativeshouldbechosenunderthemaximinpayoffcriterion?
Underthemaximinpayoffcriterion,thefollowingtemplateshowsthatalternativeA3
shouldbechosenbecause40isthemaximumintheMinimuminRowcolumn.

(b)Whichalternativeshouldbechosenunderthemaximumlikelihoodcriterion?
Underthemaximumlikelihoodcriterion,thefollowingtemplateshowsthatalternative
A2shouldbechosenbecauseithasthemaximumpayoffforthestateofnaturethathas
themaximumpriorprobability.

(c)WhichalternativeshouldbechosenunderBayes'decisionrule?
UndertheBayesdecisionrule,thefollowingtemplateshowsthatalternativeA3should
bechosenbecauseithasthemaximumexpectedpayoff.

(d)UsingBayes'decisionrule,dosensitivityanalysisgraphicallywithrespecttothe
priorprobabilitiestodeterminethecrossoverpointswherethedecisionshiftsfrom
onealternativetoanother.
Thegraphofsensitivityanalysisisshownbelow.Fromthegraph,wecanseethat
A2andA3crossatapproximatelyp=0.25,

A1andA3crossatapproximatelyp=0.43.

(e)Usealgebratosolveforthecrossoverpointsidentifiedinpart(d).
LetpbethepriorprobabilityofS1.
ForA1:EP=80p+25(1p)=55p+25.
ForA2:EP=30p+50(1p)=20p+50.
ForA3:EP=60p+40(1p)=20p+40.
A2andA3crosswhen20p+50=20p+40p=0.25.
A1andA3crosswhen55p+25=20p+40p=0.429.
Therefore,theoptimalpolicyistochooseA2whenp0.25,chooseA3when0.25p
0.429,andchooseA1whenp0.429.

ExampleforSection15.3
Anewtypeofphotographicfilmhasbeendeveloped.Itispackagedinsetsoffivesheets,
whereeachsheetprovidesaninstantaneoussnapshot.Becausethisprocessisnew,the
manufacturerhasattachedanadditionalsheettothepackage,sothatthestoremaytest

onesheetbeforeitsellsthepackageoffive.Inpromotingthefilm,themanufactureoffers
torefundtheentirepurchasepriceofthefilmifoneofthefiveisdefective.Thisrefund
mustbepaidbythecamerastore,andthesellingpricehasbeenfixedat$2ifthis
guaranteeistobevalid.Thecamerastoremaysellthefilmfor$1ifthepreceding
guaranteeisreplacedbyonethatpays$0.20foreachdefectivesheet.Thecostofthefilm
tothecamerastoreis$0.40,andthefilmisnotreturnable.Thestoremaychooseanyone
ofthreeactions:
1.Scrapthefilm.
2.Sellthefilmfor$2.
3.Sellthefilmfor$1.
(a)Ifthesixstatesofnaturecorrespondto0,1,2,3,4,and5defectivesheetsinthe
package,completethefollowingpayofftable.

Alternative
1
2
3

0
0.40
1.60
0.60

StateofNature
2
3

.40
0.40

0.00

(a)Thepayofftableisgivenbelow.
Alternative
1
2
3

0
0.40
1.60
0.60

1
0.40
0.40
0.40

State of Nature
2
3
0.40
0.40
0.40
0.40
0.20
0.00

4
0.40
0.40
0.20

5
0.40
0.40
0.40

(b)Thestorehasaccumulatedthefollowinginformationonsalesof60such
packages.
Qualityof
AttachedSheet
Good
Bad
Total

0
10
0
10

1
8
2
10

StateofNature
2
3
6
4
4
6
10
10

4
2
8
10

5
0
10
10

Thesedataindicatethateachstateofnatureisequallylikely,sothatthisprior
distributioncanbeassumed.Whatistheoptimaldecisionalternativeforapackage
offilm?
Sincethedataindicatethatthestatesofnatureareequallylikely,theexpectedpayoffof
eachalternativeiscalculatedasfollows:
E[payoff(alternative1)]=0.40.
1
5
E[payoff(alternative2)]= (1.60)+ (0.40)=0.067.
6
6
1
E[payoff(alternative3)]= (0.60+0.40+0.20+00.200.40)=0.10.
6
Theoptimaldecisionalternativeisalternative3,sellingthefilmfor$1.
(c)Nowassumethattheattachedsheetistested.Useaprobabilitytreediagramto
findtheposteriorprobabilitiesofthestateofnatureforeachofthetwopossible
outcomesofthistesting.
Theprobabilitytreediagramandtheresultingposteriorprobabilitiesaregivennext.

(d)Whatistheoptimalexpectedpayoffforapackageoffilmiftheattachedsheetis
tested?Whatistheoptimaldecisionalternativeifthesheetisgood?Ifitisbad?
IfthetestisGood,then
E[payoff(alternative1)|testisGood]=0.40.
1
2
E[payoff(alternative2)|testisGood]= (0.60)+ (0.40)=0.267.
3
3
1
4
1
2
E[payoff(alternative3)|testisGood]= (0.60)+ (0.40)+ (0.20)+ (0)
3
15
5
15
1
+ (0.20)=0.333.
15
IfthetestisBad,then
E[payoff(alternative1)|testisBad]=0.40.
E[payoff(alternative2)|testisBad]=0(0.60)+1(0.40)=0.40.
1
2
1
(0.40)+ (0.20)+ (0)
15
15
5
4
1
+ (0.20)+ (0.40)=0.133.
15
3
E[payoff(alternative3)|testisBad]=0+

Inbothcases,theoptimaldecisionalternativeisalternative3,sellingthefilmfor$1.
Theexpectedpayoffis0.1.

ExampleforSection15.4
Considerthedecisiontreebelow,withtheprobabilitiesateventnodesshownin
parenthesesandwiththepayoffsatterminalpointsshownontheright.Analyzethis
decisiontreetoobtaintheoptimalpolicy.

10
(0.5)
(0.5)

(0.5)

(0.5)

0
30
-10

-5
(0.4)
40
(0.3)
(0.6)
(0.7)
-10

10

UsingTreePlan,theoptimalpolicyisindicatedinthefollowingdecisiontreebythe
numberinsidethesquareboxateachofthethreedecisionnodes.Sincethisnumberis2
ineachcase,theoptimaldecisionateachdecisionnodeistheonethatcorrespondsto
takingthelowerbranchoutofthatnode.Thisisfurtheremphasizedinthefollowing
decisiontreebyhavingthebranchtofollowoutofeachdecisionnodebethethicker
branch.Theexpectedpayoffforthisoptimalpolicyis8,asindicatedbythe8nexttothe
decisionnodeontheleftthatinitiatesthedecisiontree.