THE UNIVERSITY OF HONG KONG DEPARTMENT OF MATHEMATICS CCST9017: Hidden Order in Daily Life: A Mathematical Perspective Final Examination

Date: SAMPLE PAPER Please answer any three questions. 1. (20 marks) An interesting variant of the Hare procedure was proposed by the psychologist Clyde Coombs. It operates exactly as the Hare system does, but instead of deleting alternatives with the fewest rst place votes, it deletes those with the most last place votes. (In all other ways, it operates as does the Hare procedure.) (a) Find the social choice according to the Coombs procedure that arises from the following individual preference lists of seven people. [6] c a e b d d a e c b c e d a b b d a e c e d a c b d e a b c c a e b d Time allowed: 1 hour 30 minutes

(b) State the denition of the monotonicity condition. [2] (c) Determine whether the Coombs system satises the monotonicity condition. [6] (d) Do the Coombs and the Hare procedure share the same strengths and weaknesses? Explain your answer carefully. [6] 2. (20 marks) John, Peter, and Mary want to purchase software to meet certain word-processing needs. There is no shortage of software on the market, but not all are compatible with either of their computers, nor do they fullll all their needs. After carefully studying the market, they have located four software products A,B,C and D which cost $800,$900,$1,000 and $1,700 respectively. The following table summarizes which software are satisfactory for these three people. Software product Satisfactory for A John, M ary B P eter, M ary C John, P eter D John, P eter, M ary

Since D is the only software which fullls all the needs of John, Peter, and Mary, they decide to buy D and have to gure out how to share the cost $1,700. (a) Model this situation as a suitable cooperative game (N, v ) where N is the set of all players and v (S ) is the cost for the player(s) in coalition S to purchase certain software. Here we may assume that each individual will purchase the cheapest software among all the software that fulll his/her needs. [6] (b) For the game dened in part (a), compute its Shapley value by two dierent methods. Hence, solve the cost sharing problem. [8] (c) Do you think that all three will be satsied with this settlement? Explain why or why not. [6]

3. (20 marks)

(a) Suppose that you plan to sell a call and a put on HSBC that both expire one year later with the call strike price being $120 and the put strike price being $90. If, at the time you sold the options, the price of one share of HSBC is $100 and it can only go to either $180 or $60 one year later, what is the total fee for these two options that you should charge at the beginning so that you have no loss and no gain at the end? Assume that the annual interest rate is 20% and compounded yearly. [8] (b) If the call and put in (a) are sold to two dierent persons, what portion of the total fee that you obtained in (a) should be charged to the call buyer so that no arbitrage opportunity occurs? [6] (c) Do you think that arbitrage is a morally acceptable business practice? Justify your answer. [6] 4. (20 marks)

(a) In a code, what is meant by the distance between two codewords? What is meant by the minimum distance of a code. [2] (b) Consider all strings of binary digits of k -bit long (where k is an arbitrary but xed positive integer). We add a parity-check bit (0 or 1) to each of these strings, so that the resulting new strings of (k + 1)-bit long have odd number of 1s. If these (k + 1)-bit strings are used as codewords of a code, what is the minimum distance of the code? How many errors can this code detect? How many errors can this code correct? Give explanation of your answers. [6]

(c) Now consider the four 2-bit strings 00, 01, 10, 11. Is it possible to add two binary digits at the end of each of these strings so that the resulting four 4-bit strings will become the codewords of a code which can correct all 1-errors? Explain your answer. (If you give only a Yes or No answer you will not get any credit for this part.) [6] (d) Describe or invent an application of coding in which error-correction is important. Explain what level of error-correction is necessary and why. [6] 5. (20 marks)

(a) According to the PageRank algorithm of Google, what are the two basic criteria for determining that a web page is important? [2] (b) Construct a web of four pages (with Pages 1, 2, 3, 4), such that: Page 1 is pointed to by only one other page, each of Page 2 and Page 3 is pointed to by two other pages, Page 4 is pointed to by three other pages, and although Page 1 is pointed to by the least number of other pages, its importance score is not the lowest among all pages. In your answer, you should draw a diagram of such a network, write down the link matrix, and compute the page scores up to 1 iteration to verify your result. [10] (c) Describe two practical ways of improving the pagerank of a webpage and explain how they attempt to satisfy the criteria of the pagerank algorithm. [8]

Solutions to Technical Questions

1. (a) Notice that no candidate is on top of at least 4 of the lists, we therefore delete the candidate with the most last place votes, i.e. b. Hence, we have c a e d d a e c c e d a d a e c e d a c d e a c c a e d

Since no candidate is on top of at least 4 of the lists, we therefore delete the candidate with the most last place votes, i.e. c. Hence, we have a d e d e d a e a d a d e e d e a e a a d Again, no candidate is on top of at least 4 of the lists, we therefore delete the candidate with the most last place votes, i.e. a. Hence, we have e d e d e d e d e d e d e d Now, e is on top of at least 4 of the lists and hence e is the winner. (b) Monotonicity condition: If the society prefers A to B, and an individual who once prefers B to A now places A higher than B, then the society should still prefer A to B.

(c) The Coombs system doesnt satisfy monotonicity condition. To see this, lets assume that we have 11 voters and the votes are distributed as follows. 4 votes 4 votes 3 votes b c a c a b a b c Since no candidate is on top of at least 6 of the lists, we therefore delete the candidate with the most last place votes, i.e. a and b and hence c is the social choice and c > a, b. Now suppose one of the voters change his preference list from a > b > c to c > b > a, i.e., he increases the ranking of c. Then, we have 4 votes 4 votes 2 votes 1 vote b c a c c a b b a b c a

Since no candidate is on top of at least 6 of the lists, we therefore delete the candidate with the most last place votes, i.e. a and hence we have 4 votes 4 votes 2 votes 1 vote b c b c c b c b Now, b is on top of at least 6 of the lists and hence b is the winner and we have b > c. Hence, the Coombs system doesnt satisfy monotonicity condition. 2. (a) Let J = John, P = Peter and M = Mary. Dene v () = 0, v (J ) = 800, v (P ) = 900, v (M ) = 800, v (J, M ) = 800, v (P, M ) = 900, v (J, P ) = 1000, v (J, P, M ) = 1700

(b)

The Shapley vale will then be give by ( 800 ( 0 ( 0 ( 350 ( 0 ( 400 + ( 500 ( 550 , 0 , 900 , 0 , 350 , 400 , 0 , 500 , 650 , 0 , 0 , 800 , 0 , 400 , 400 , 500 , 500 ) ) ) ) ) ) ) )

The Shapley value is given by = (1 , , n ) where for i = 1, . . . , n i (v ) = 1 i {i}) v (N i )] where N i is the set of players preceding i in N corre[v (N n! sponding to the permutation on N .

i {i}) v (N i )] [v (N

Permutation

JP M JM P P JM M JP PMJ MPJ

J 800 800 100 0 800 800

P 200 900 900 900 900 100

M 700 0 700 800 0 800

3300 3900 3000 6 6 6 = 550 = 650 = 500 the Shapley value is (550, 650, 500) which gives the amount John, Peter and Mary should pay. 3. (a) When the stock price can go

the total payos are stock price 180 60 call payo 60 0 put payo 0 30 total payo 60 30

If there are no loss and no gain, we shall have 60 = 180x + (y 100x) (1.2) 30 = 60x + (y 100x) (1.2) where y is the total fee charged and x is the amount of shares to hedge. Hence x = y = 30 1 = 120 4 15 + 25 = 37.5 1.2 (total fee charged).

(b) To avoid arbitrage opportunities, we should charge as if the call is sold individually. Let p be the number of shares to hedge and q be the call fee. We then have 60 = 180p + (q 100p) (1.2) 0 = 60p + (q 100p) (1.2) p= 1 2 30 + 50 = 25 (call fee). q= 1.2

4. (a) The distance between two codewords is the number of places at which the two codewords dier. The minimum distance of a code is the minimum of the distances between every pair of distinct codewords in the code. (b) For every pair of distinct codewords in this code, their distance is at least 2; it is because their distance must be at least 1 since they are distinct, and if their distance is 1 then they dier in exactly one place so that one of them must have an odd number of 1s and the other must have an even number of 1s, which contradicts the assumption that all codewords must have an odd number of 1s. Now that the distance is not 0 and 1, it must be at least 2. Hence the minimum distance of the code is at least 2. Now consider the codewords 0 001 and 0 010, the distance between which is exactly 2. Hence the minimum distance of the code is at most 2. Combining, we conclude that the minimum distance d is exactly 2. Now that d = 2, according to a result we learned in the course, the code can detect all d 1 = 1 errors. Also, it can correct up to (d 1)/2 = 1/2 errors, which means that it cannot correct any errors, because the required answer must be a whole number. (c) We claim that the code cannot correct all 1-errors. It is because if the code could correct all 1-errors then its minimum distance must be at least 3. However, if the codewords are 00a1 a2 , 01b1 b2 , 10c1 c2 , 11d1 d2 , where a1 , . . . , d2 are 0 or 1, then for 00a1 a2 and 01b1 b2 have distance 3 or more, we must have a1 = b1 , a2 = b2 . Similarly when we consider the pair 00a1 a2 and 10c1 c2 , we must have a1 = c1 , a2 = c2 . But then since all ai , bi , ci can only be 0 or 1, this forces b1 = c1 , b2 = c2 , so that the distance between 01b1 b2 and 10c1 c2 is 2. This show that the code has minimum distance less than 3, and the proof is complete. 5 (a) According to the PageRank algorithm, a page is important if it is pointed to (i) by many pther pages, or (ii) by other important pages. (b) The following shows the required network:

1 3 The link matrix is A = 1 3

1 3

0 0
1 2 1 2

0 1 1 2 0 . 0 0 1 2 0

We compute:

x[0]

0 1 1 1 3 = A = 1 1 3 1 1
3

0 0
1 2 1 2

0 1 1 1 4 1 1 3 2 0 = 5 , 0 0 1 6 1 5 1 2 0 6 4 0 1 1 3 4 7 1 0 2 3 = 6 , 5 3 0 0 6 4 1 5 3 2 0 6 4

x
[1]

=Ax

[0]

1 3 = 1 3
1 3

0 0
1 2 1 2

From the entries of x[1] which are the importance scores after 1 iteration, we see that the score of Page 1 is not the lowest.