QA Suarez (Updated Apr-14)

K102: Quantitative Analysis
Contents (lecture-wise):
Lecture-01: Course Outline
Lecture-02: Inventory Model (Risk, Certainty, Expected Value, Payoff Matrix, EVR)
Lecture-03: Opportunity Loss method, EVLO, EVPI, EVC, Incremental Analysis
Lecture-04: Lab Class (Payoff table, Opportunity Loss table in Excel)
Lecture-05: Introduction to Probability, Using tree diagrams for mutually exclusive events
Lecture-06: Problems solved with tree diagrams
Lecture-07: Bayes Theorem
Lecture-08: Decision Analysis (Using Bayes theorem), Decision tree diagram
Lecture-09: Introduction to Linear Programming (LP) Modelling
Lecture-10: LP modelling exercises
Lecture-11: Lab Class (Data input in Excel and using Solver)
Lecture-12: Transportation Model and Assignment Model (LP modelling)
Formulae
Contents (topic-wise):
Payoff Table, Opportunity Loss Table, EVR, EVC, EVLO etc: Lectures 02-04
Probability, Tree Diagram, Bayes theorem: Lectures 05 to 08
Decision Analysis, Decision tree: Lecture-08
LP modelling: Lectures 09 to 12
Transportation and Assignment Model: Lecture-12

Lecture-1
February 18, 2013
Course Outline
1. Concepts of Probability
2. Decision Analysis
3. Linear Programming (LP) Model (Use of excel)
4. Forecasting Techniques
5. Critical Path Method (CPM)
6. Waiting Line Model
7. Markov Process Model
8. Others
Solving of problems is not expected, as they will be solved by simulation. The goal is to
build models based on the variables and conditions.
Reference Material
Either Quantitative Methods for Business or An Introduction to Management Science
(both by) Anderson Sweeney and Williams
Mark Distribution
Quiz - 15%
MT - 25%
FT - 35%
Assignments - 15%
Class - 10%
Grade Boundary
A: 90+
B+: 85-90
B: 80-85
C+: 75-80
C: 70-75
D+: 65-70
D: 60-65

Lecture-2
February 20, 2013
Decision Making
Uncertain Risk Certain
Risk situation: Where some of the components are certain and some are uncertain.
The idea of probability is related with risk.
=> The more information we collect, the more we move towards certainty.
For example, if a weatherman forecasts that there is a 90% chance of raining tomorrow, it
means that out of 100 days it will rain on 90 days.
The certain component here is that it will rain on 90 days. The uncertain component is that
we do not know if a given day or group of days fall within the 10 days or the 90 days.
Expected Value: A predicted value of a variable, calculated as the sum of all possible
values each multiplied by the probability of its occurrence.
For XYZ Bread Manufacturing Company (the significance of bread here is that it is a
perishable good i.e. if 42 units are produced when there is a demand of 40, then 2 units will
be wasted as they cannot be stored for sales next day).
Demand = 40-44 [25 different outcomes e.g demand is 40, production is 41 is 1 outcome]
Selling Price = Tk.38; Variables Cost = Tk.25; Fixed Cost = Tk.200
Table 1.1 Payoff Matrix / Profit Matrix
Decision Alternatives (Productions)
Probability
Demand
40
41
42
43
44
10%
40
320
295
270
245
220
20%
41
320
333
308
283
258
40%
42
320
333
346
321
296
20%
43
320
333
346
359
334
10%
44
320
333
346
359
372
100%
Expected
Value
320
329.2
330.8
317.2
296
5 expected values (EVs) for each of the production levels (in units) have been found. The
optimum expected value is known as Expected Value under Risk (EVR).
Thus, here EVR = Tk. 330.8 (at 42 units of production).
Note, for the first cell (Demand=40, Production=40) the formula R=38*40-40*25-200 has
been used. However from then on, the values of cells adjacent to each other have been
found using marginal cost, marginal and marginal profit principles.
In the short-term, the models may produce undesired outcome. However, in the long-term,
these models help us make more correct decisions and we would have made without them.

Lecture-3
February 27, 2013
OL (Opportunity Loss): Loss incurred by not taking the best decision.
CM (Contribution Margin): Marginal profit per unit of sale (Selling price - Variable cost)
OLU (Opportunity Loss of Understocking) = CM (Contribution Margin)
OLO (Opportunity Loss of Overstocking) = VC (Variable Cost)
For XYZ Bread Manufacturing Company
Demand = 40-44; Selling Price = Tk.38; Variables Cost = Tk.25; Fixed Cost = Tk.200
Table 1.2 Opportunity Loss table
Production -->
Probability
Demand
40
41
42
43
44
10%
40
25
50
75
100
20%
41
13
25
50
75
40%
42
26
13
25
50
20%
43
39
26
13
25
10%
44
52
39
26
13
ELO
26
16.8
15.2
28.8
50
EV
320
329.2
330.8
317.2
296
EVC
346
346
346
346
346
*Only the ELO are calculated from this table. EV had been calculated in the payoff matrix.
Here, the ELOR (Expected Opportunity Loss under Risk) is 15.2 (for 42 units). It is also
the EVPI (discussed below). Therefore, the best decision is to produce 42 units.
ELO (Expected Opportunity Loss)

EV (Expected Value): A predicted value of a variable, calculated as the sum of all possible
EVR (Expected Value under Risk)
EVC (Expected Value under Certainty)
EVPI (Expected Value of Perfect Information)
For calculation of EVC, the situation has no uncertain components, i.e. we know exactly
which days the demand will be x. Thus, there will never be any case of overstocking or
understocking. Consequently, there will be no opportunity loss.
Thus, we can say that Opportunity Loss occurs due to lack of information.
Table 1.1 Payoff Matrix / Profit Matrix
Decision Alternatives (Productions)
Probability
Demand
40
41
42
43
44
10%
40
320
295
270
245
220
20%
41
320
333
308
283
258
40%
42
320
333
346
321
296
20%
43
320
333
346
359
334
10%
44
320
333
346
359
372
100%
Expected
Value
320
329.2
330.8
317.2
296
Here, EVC
= (320 * 0.1) + (333 * 0.2) + (346 * 0.4) + (359 * 0.2) + (372 * 0.1)
= 346
EVC = EVR + EVPI , or EVPI = EVC - EVR

Thus, EVPI = 346 - 330.8 = 15.2 = ELOR (found above)
EVPI = ELOR , i.e. the value of perfect information is the opportunity loss under risk
And for each level of production, EV + ELO = EVC (refer to Table 1.2)
Incremental Analysis
Probability of selling the additional unit: (refer to Table 1.1 or 1.2 for probability values)
40th - 100%
41st - 90%
42nd - 70%
43rd - 30%
44th - 10%
For 41st unit, probable profit (? term) = (13 * 0.9) - (25 * 0.1) = 9.2
Since the value is greater than zero, it is profitable to produce the 41st unit.
OLu p - OLo (1-p) = 0, where p = probability of selling; (1-p) = probability of not selling
The above equation helps us find the minimum value of p for which loss is not made.
Thus, p = OLO / (OLO + OLU), where OLO = VC; OLU = CM = SP - VC
This value of p is a minimum value. If, for example, p = 0.68 (or 68%) then up to the 42nd
unit should be produced. The 43rd unit should not be produced because 68% > 30%. Even if
p is 30.5%, then only 42 units should be produced. 43 units should only be produced when p
is below 30%, for example 25%.
Single-Period Inventory Models with Probabilistic Demand
Method
Advantages
Disadvantages
Payoff Table /
Payoff Matrix
can be used to directly find the

EVC, EVR, EVPI
ELO can be found indirectly by
working backwards from EVC
= EV + ELO
calculations are complex

and time-consuming
ELO cannot be found
directly
Opportunity
Loss
can be used to direclty find the

ELO, EVPI
simpler calculations
does not reveal all

information e.g EVC,
EVR
Incremental
Analysis
very simple and more viable

for larger numbers of
production/demand values
only SP, VC, p values needed
does not reveal any

information about EVC,
EVR, ELO, EVPI
When only the decision is needed, Opportunity Loss method and Incremental Analysis
Method offer quick anwers. However, the Payoff Table is needed when more detailed
information e.g. about EVC and EVR is needed.
Single-Period Inventory Model with Probabilistic Demand

[Excerpt from An Introduction to Management Science 13E, page-474]
In situations in which the demand rate is not deterministic, other models treat demand as
probabilistic and best described by a probability distribution. In this section we consider a
single-period inventory model with probabilistic demand.
The single-period inventory model refers to inventory situations in which one order is placed
for the product; at the end of the period, the product has either sold out or a surplus of
unsold items will be sold for a salvage value. The single-period inventory model is
applicable in situations involving seasonal or perishable items that cannot be carried in
inventory and sold in future periods. Seasonal clothing (such as bathing suits and winter
coats) is typically handled in a single-period manner. In these situations, a buyer places
one pre-season order for each item and then experiences a stockout or holds a clearance
sale on the surplus stock at the end of the season. No items are carried in inventory and
sold the following year. Newspapers are another example of a product that is ordered one
time and is either sold or not sold during the single period. Although newspapers are
ordered daily, they cannot be carried in inventory and sold in later periods. Thus,
newspaper orders may be treated as a sequence of single-period models; that is, each day
or period is separate, and a single-period inventory decision must be made each period
(day). Because we order only once for the period, the only inventory decision we must
make is how much of the product to order at the start of the period.

Lecture-4
March 6, 2013
[LAB CLASS]
p = quantity produced
d = quantity demanded
SP = selling price
VC = variable cost
FC = fixed cost
CM = contribution margin = SP - VC
Use IF function to formulate:
1.
Profit = p x SP - p x VC - FC (when production <= demand)
Profit = d x SP - p x VC - FC (when production > demand)
[Using IF, for payoff matrix]
2.
Opportunity Loss = (d - p) x CM (when production <=demand)

Opportunity Loss = (p - d) x VC (when production > demand)
[Using IF, for opportunity loss method]
3.
Units to produce = Index (Production array, 1,

(Match (EVR/ELOR, EV/ELO array, 0)
)
e.g.
=Index($C$8:$G$8,1,Match(H14,C14:G14,0))
or
=Index($C$8:$G$8,1,Match(Max(C14:G14),C14:G14,0))
Note that H14 = Max (C14:G14) i.e. EVR = Max (EV array)
[Using INDEX and MATCH, for payoff matrix method or OL method]
Excel functions used: SUM, IF, MIN, MAX,

New Excel functions: SUMPRODUCT, INDEX, MATCH

Lecture-5
March 10, 2013
Probability: A number expressing the likelihood that a specific event will occur, expressed
as the ratio of the number of actual occurrences to the number of possible occurrences
Experiment e.g. toss a coin
Event / Outcome e.g. getting heads or tails
Marginal Probability: Probability with only one condition/criteria
e.g. P(A) , P (B)
Joint Probability: Probability with more than one condition/criteria
e.g. P(AB) , P(AUB); P(AUB) = P(A) + P(B) - P(AB);
P(AUBUC) = P(A) + P(B) + P(C) - P(AB) - P(AC) - P(BC) + P(ABC)
Conditional Probability: Probability when one or more outcome has already occurred or is
given. The sample size or sample space becomes smaller when using this condition.
e.g. P(A|B); P(A|B) = P(AB) / P(B)
Mutually Exclusive Events: Two events are said to be mutual if one cannot occur
simultaneously with the other.
e.g. heads and tails, king and ace
For mutually exclusive events A and B: P(AB) = 0; P(AUB) = P(A) + P (B)
Independent Events: Two events are said to be independent of each other if the
occurrence of one event does not affect the occurrence of the other.
e.g. picking cards with replacement; a coin landing on heads and die landing on six.
Two events, A and B, are independent only when: P(A) = P(A|B), i.e the marginal probability
of one of an event is the same as its conditional probability (given the other event).
For independent events A and B: P(AB) = P(A).P(B); P(AUB) = P(A) + P(B) - P(A).P(B)
Note: Two events cannot simultaneously be mutually exclusive and independent.
But can two events can simultaneously be mutually inclusive and dependent.
Picking an integer from 1 to 10. Sample space is {1,2,3,4,5,6,7,8,9,10).

P(T) = probability of multiple of 3
P(E) = probability of even number
P(T) = 0.3; P(E) = 0.5; P(TE) = 0.1; P(TUE) = 0.7; P(T).P(E) = 0.15
Since P(TE) 0, the events are not mutually exclusive
Since, P(TE) P(T).P(E), the events are not independent
Thus the events are neither mutually exclusive nor independent. That is, they are
dependent mutually inclusive events.
Formulae
For all events:
1a. P(AUB) = P(A) + P(B) - P(AB)
1b. P(AUBUC) = P(A) + P(B) + P(C) - P(AB) - P(AC) - P(BC) + P(ABC)
2a. P(A|B) = P(AB) / P(B) or,
2b. P(AB) = P(A|B) / P(B) or,
2c. P(B) = P(AB) / P(A|B)
For mutually exclusive events:
3. P(AB) = 0
4. P(AUB) = P(A) + P (B)
For independent events:
5. P(AB) = P(A).P(B)
6. P(AUB) = P(A) + P(B) - P(A).P(B)
The branches of tree diagrams represent mutually exclusive events
Problem-1:
There are:
10 cups with milk and sugar

8 cups with milk and no sugar
6 cups with no milk and sugar
4 cups with no milk and no sugar
1. If we randomly pick one cup what is the probability that:

a) it will contain sugar
b) it will contain no milk
c) given that it contains sugar, what is the probability that it will contain milk
d) it will contain both sugar and milk
2. Are the events sugar and milk independent?
Solution:
[Use table, NOT venn diagram]
Milk
No Milk
Total
Sugar
10
16
No Sugar
12
Total
18
10
28
1a) P(S) = 16/28

1b) P(M) = 10/28
1c) P(M|S) = 10/16
1d) 10/28
2. P(M) = 18/28;
P (M|S) = 10/16;
P(M) P(M|S)
Therefore, the cup containing milk and the cop containing sugar are not independent events.
Note: Another case of events that are neither independent nor mutually exclusive.
Problem-2:
Draw 2 cards from a deck and calculate the probability of getting one ace.
Solution:
[Use tree diagram or direct method. Tree diagram is preferred in complex problems, e.g.
those with more than 4 final outcomes.
Probability of getting one ace = P(AA) + P(AA)

Lecture-6
March 13, 2013
Problem-1:
H, C and F represent claims for health, car and flat respectively.
P(H) = 0.4;
P(C) = 0.3;
P (F) = 0.2
What is the probability that a person will file claim for:
a) car and flat
b) flat or car but not both
c) exactly 2 claims
d) car and health but not house
e) any one claim
Solution:
a) For car and flat, P = P(HCF) + P (HC) = 0.024 + 0.096 = 0.12

Note: Its no mention whether flat or no flat, so both combinations of car and house have
been taken.
b) For flat or car but not both, P
= P(F) + P(C) + P(HF) + P(HC)

= 0.084 + 0.144 + 0.056 + 0.096
= 0.38
(Again, House is not important here. All combinations that have either F or C but not FC
have been taken).
c) For exactly to claims, P
= P(FC) + P(HC) + P(HF)

= 0.036 + 0.096 + 0.056
= 0.188
d) P(HC) = 0.096
e) For any one claim, P
= P(H) + P(F) + P(C)

= 0.224 + 0.084 + 0.144
= 0.452
Problem-2:
The probability that a customer will buy a pen is 30% and a book is 40%. What is the
probability that:
a) he will buy only a pen
b) he will buy both the pen and the book
c) either the pen or the book (but not both)
d) 2 consecutive customers dont buy anything
Solution-A (with Tree diagram):
a) P(PB) = 0.18;
c) P(PB) + P(PB) = 0.18 + 0.28 = 0.46;
b) P(PB) = 0.12;
d) [P(PB)]2 = 0.422 = 0.1764
Solution-B (without Tree diagram):

a) P(PB) = 30% x 60% = 0.18
b) P(PB) = 30% 40% = 0.12
c) P(Only pen) + P(Only book) = P(PB) + P(PB) = (30% x 60+ (70% x 40%) = 0.46
d) P(two customers buy nothing) = [P(Nothing)]2 = (70% x 60%)2 = 0.422 = 0.1764
Problem-3:
You have 2 red and 2 black marbles. If you randomly pick 2 marbles, what is the probability
that both will be back (without replacement).
Note: Unless replacement is mentioned explicitly, it will always be without replacement.
P(BB) = 1/6
Solution-B (without tree diagram):
P(BB) = 2/4 x 1/3 = 1/6
Problem-4:
From a deck of cards, you pick 2 cards. What is the probability that you will get an Ace and
a King (in any order)?
P(Ace and King) = P(AK) + P(KA) = 4/663 + 4/663 = 8/663

P(Ace and King) = P(AK) + P(KA)
= (4/52 x 4/51) + (4/52 x 4/51)
= 4/663 + 4/663
= 8/663
Problem-5:
From a deck of cards, you pick 2 cards. What is the probability that you will get an Ace and
a King of the same suit (in any order)?
P(AK of same suit) = 2/663

P(AK of hearts in this order) = 1/52 x 1/51 = 1/2652
P (AK of hearts in any order) = 2 x 1/2652 = 1/1326
P( AK of any suit in any order) = 4 x 1326 = 2/663

Lecture-7
March 20, 2013
Bayes Theorem
Problem-1:
P(X) = 30%;
P(Y) = 20%;
P(Z) = 50%;
P(E|X) = 10%
P(E|Y) = 20%
P(E|Z) = 5%
where E = error
To find: P(X|E)
Sample Space:
Steps:
1.Find joint probabilities [i.e. P(KE) ]
2. Find marginal p of E [ P(E) = sum of all P(KE) ]
3. Find all the P(K|E) using P(K|E) = P (KE) / P(E)
Solution:
Events
Marginal
Probability
P(K)
Conditional
Probability
P(E|K)
Joint
Probability
P(KE)
Conditional P
(given Error)
P(K|E)
0.30
0.10
0.03
0.316
0.20
0.20
0.04
0.421
0.50
0.05
0.025
0.263
P(E) = 0.095
Total
Problem-2:
Three typists are working. The probability of work being doen by each typist and the
corresponding chances of error are given:
P(A) = 25%; P(E|A) = 20%
P(B) = 45%; P(E|B) = 25%
P(C) = 30%; P(E|C) = 10%
Given that there is error, what is the probability that
(1) A typed it (2) B typed it (3) C typed it
Solution:
Events
Marginal
Probability
P(K)
Conditional
Probability
P(E|K)
Joint
Probability
P(KE)
Conditional P
(given Error)
P(K|E)
0.25
0.20
0.05
0.260
0.45
0.25
0.1125
0.584
0.30
0.10
0.03
0.156
P(E) = 0.1925
Total
Probability that (1) A typed it is 0.260, (2) B typed it is 0.584, (3) C typed it is 0.156
Problem-3:
There will be a football match tomorrow. It rained 5 days each year. Weatherman
forecasted rain for tomorrows match. When it rains, he forecasts 90% of the time. When it
doesnt rain, he forecasts rain 20% of the time. So given that he forecasted rain tomorrow,
what is the probability that it will rain?
Solution:
Let the events Raining be R, not raining be N, and weatherman forecasts rain be F.
Thus,
P(R) = 5/365;
P(N) = 360/365;
P(F|R) = 90%;
P(F|N) = 20%
Events
Marginal
Probability
P(K)
Conditional
Probability
P(F|K)
Joint
Probability
P(KF)
Conditional P
(given Error)
P(K|F)
5/365
0.90
0.0123
0.0587
360/365
0.20
0.1973
0.9413
P(F) = 0.2096
Total
Thus, the probability of rain tomorrow given that weatherman forecasted rain is 0.0587
*Note: If P(F|N) decreases, e.g. 10%, then P(R|F) will increase since it means accuracy
is increasing. [When P(F|N) = 10%, P(R|F) = 0.11 > 0.0587 ]
Discrete Probability Distribution: (Most probably not in syllabus)

1. Binomial Distribution
2. Poisson Distribution
Conditions of binomial distribution:
1. There are 2 events/outcome
2. Outcomes are independent of previous outcome
Binomial distribution:
(p+q)n ; where p is the probability of success, q = (1-p) is the probability of failure and n is
the number of experiments
(p+q)10 = p10 + (AB)/C p9q + ..

where,
A = power of p in previous term
B = coefficient of previous term (AB/C of previous term)
C = position no. of previous term (in this case, 1)
Probability of a single term (the rth term:
P of (r+1)th term = ncr pn-r qr
In binomial distribution, n is finite. In poisson distribution n is infinite.

We can only measure success in Poisson distribution, not failure. This is because the
variable is distributed over space and time. For example, we can measure the road
accidents in Dhaka-Chittagong highway from 5pm to 6pm on a day, but we cannot the
measure the number of road accidents averted.

Lecture-8
March 30, 2013
Decision Analysis
Problem-1:
Given: Payoff table (the values express revenue/profit)
Decision
High Demand (h)
Low Demand (l)
Large Plant
200,000
-180,000
Small Plant
100,000
-20,000
Do nothing
The company can buy a report which may show the market has favorable conditions (F) or
unfavorable conditions (U). Given that P(F|h) = 70%, P(F|l) = 20%, P(h) = 50%, P(l) = 50%,
find the expected value of the report and the expected value of sample information.
Solution:
When report is Favorable (F):
Variable
P(k)
P(F|k)
P(kF)
P(k|F)
0.50
0.70
0.35
0.778 [0.35/0.45]
0.50
0.20
0.1
0.222 [0.1/0.45]
Sum
0.45 = P(F)
EV of Large Plant
= (200,000 x 0.778) + (-180,000 x 0.222)

= 115,555.56
EV of Small Plant
= (100,000 x 0.778) + (-20,000 x 0.222)

= 73,333.33
EV of Do Nothing
= (0 x 0.778) + (0 x 0.222)
= 0
*EV of Do Nothing is always zero as we actually are not producing anything

EVR when favorable = EVRF = 115,555.56
[largest value among the three]
When report is Unfavorable (U):

Variable
P(k)
P(U|k)
P(kU)
P(k|U)
0.50
0.30 [1- 0.70]
0.15
0.273 [0.15/0.55]
050
0.80 [1 - 0.20]
0.4
0.727 [0.4/0.55]
Sum
0.55 = P(U) = 1 - P(F)
EV of Large Plant
= (200,000 x 0.273) + (-180,000 x 0.727)

= -76,363.63 [negative value means loss is made]
EV of Small Plant
= (100,000 x 0.273) + (-20,000 x 0.727)

= 12,727.27
EV of Do Nothing
= 0
EVR when unfavorable = EVRU = 12,727.27

EV of Report
Without Report:
EV of Large Plant
= EVRF x P(F) + EVRU x P(U)

= (115,555.56 x 0.45) + (12,727.27 x 0.55)
= 59,000
= 200,000 x P(h) + (-180,000) x P(l)
= (200,000 x 0.5) + (-180,000 x 0.5)
= 10,000
EV of Small Plant
= 100,000 x P(h) + (-20,000) x P(l)

= (100,000 x 0.5) + (-20,000 x 0.5)
= 40,000
EV of Do Nothing
= 0
EV of without report
= EVR = 40,000
To find Expected Value of Sample Information (EVSI)

EV of Report = 59,000; EV without report = 40,000
Thus, EVSI = 59,000 - 40,000
= 19,000
So, the company should buy the report if price of the report is less than 19,000.
Insert
beautiful
decision
tree
diagram
here.
Problem-2:
Given two routes, one of which uses the expressway, and the time taken to travel:
Expressway Open (s 1)
Expressway Jammed (s 2)
Queen City Avenue

(Route 1)
30 minutes
30 minutes
Expressway
(Route 2)
25 minutes
45 minutes
Based on their experience with traffic problems, Rona and Jerry agreed on a 0.15
probability that the expressway will be jammed.
In addition, they agreed that weather seemed to affect the traffic conditions on the
expressway. Let:
C = clear;
O = overcast;
R = raining
The following conditional probabilities apply:
P(C|s 1) = 0.8;
P(O|s 1) = 0.2;
P(R|s 1) = 0.0
P(C|s 2) = 0.1;
P(O|s 2) = 0.3;
P(R|s 2) = 0.6
[Note that 0.8+0.2+0.0 = 1]

[Note that 0.1+0.3+0.6 = 1]
Which route should be selected if the weather is: (a) clear, (b) overcast, (c) raining
(d) What is the expected travel time?
Solution:
For Clear weather:
Variable
P(k)
P(C|k)
P(kC)
P(k|C)
s1
0.85 [1-0.15]
0.80
0.68
0.978 [0.68/0.695]
s2
0.15 [given]
0.10
0.015
0.022 [0.015/0.695]
Sum
0.695 = P(C)
EV of Route 1 = 30
[Route 1 does not use the expressway, so probability of s 1 and s 2 has no effect on it]
EV of Route 2 = 25 x P(s 1|C) + 45 x P(s 2|C)
= (25 x 0.978) + (45 x 0.022)
= 25.44
EVR of Clear = EVRC = 25.44
[Smallest value is EVR as it is regarding time taken]
(a) Route 2 should be selected if weather is clear as it will take less time to travel.
For Overcast weather:

Variable
P(k)
P(O|k)
P(kO)
P(k|O)
s1
0.85
0.20
0.17
0.791 [0.17/0.215]
s2
0.15
0.30
0.045
0.209 [0.045/0.215]
Sum
0.215 = P(O)
EV of Route 1 = 30
EV of Route 2 = 25 x P(s 1|O) + 45 x P(s 2|O)
= (25 x 0.791) + (45 x 0.201)
= 29.18
EVR of Overcast = EVRO = 29.18
(b) Route 2 should be selected if weather is overcast as it will take less time to travel.
For Rainy weather:
Variable
P(k)
P(R|k)
P(kR)
P(k|R)
s1
0.85
0.00
0.00
0 [0/0.09
s2
0.15
0.60
0.09
1 [0.09/0.09]
0.09 = P(R)
Sum
EV of Route 1 = 30
EV of Route 2 = 25 x P(s 1|R) + 45 x P(s 2|R)
= (25 x 0) + (45 x 1)
= 45
EVR of Rainy = EVRR = 30

(c) Route 1 should be selected if weather is rainy as it will take less time to travel.
(d) Expected time to travel
= [P(C) x EVRC] + [P(O) x EVRO] + [P(R) x EVRR]

= (0.695 x 25.44) + (0.215 x 29.18) + (0.09 x 30)
= 26.65
___________________________________The End_________________________________
Note that for the marginal p values of weather found in this problem, P(C) + P(O) + P(R) =1
Insert
beautiful
decision
tree
diagram
here.

Lecture-9
March 31, 2013
Linear Programming (LP)

Things to do:
1. Develop the LP model
2. Input the data into MS Excel and use Solver to find the answer
Note: We DONT have to know how to solve the LP problems manually.
LP Requirements:
Maximize or minimize an objective function (MAX or MIN)
Constraints acting as a limiting factor, introduced by S.T. (Subject to)
There must be alternatives available
Mathematical relationship is linear (power of decision variables is 1, i.e. no x 2, x 3...)
Basic Assumptions of LP:
Certainty (e.g. raw materials per unit / profit per unit is fixed/constant)
Proportionality (e.g. profit for 10 units = profit for 1 unit x 10)
Additivity (e.g. Profit from A and B = Profit from A + Profit from B)
Divisibility (e.g. non-integer solutions such as no. of chairs produced = 2.5)
Steps to develop LP model:
1. Understand the problem
2. Identify the decision variables
3. Determine the objective function in terms of decision variables
4. Determine constraints in terms of decision variables
5. State the non-negative constraints
Special Conditions in LP Models:
Alternate optimal solutions (when objective line is parallel to a constraint line)
Redundant constraints
Unbounded solutions
Infeasibility
Problem-1:
Blue Ridge Hot tubs produces two types of tubs, X and Y. Their details are given below:
Type X
Type Y
Pumps
Labor
9 hrs
6 hrs
Tubing
12 feet
16 feet
Unit profit
$350
$300
There are 200 pumps, 1566 hours of labor and 2880 feet of tubing available.
Solution:
x 1 = number of type X to produce;
x 2 = number of type Y to produce
MAX: 350x 1 + 300x 2
S.T. : x 1 + x 2 200
9x 1 + 6x 2 1566
12x 1 + 16x 2 2880
x 1 0 ; x 2 0
Note: The objective here is to maximize the profit function. The first constraint is about
pump capacity, the second constraint relates to labor capacity, the third constraint is about
tubing capacity, and the final constraints are for non-negativity.
Problem-2:
Two types of paint jobs can be done. A and B are raw materials required:
Exterior Paint
Interior Paint
No. of units of A required
No. of units of B required
Revenue
3000
2000
Only 6 units of A and 8 units of B can be used. No more than two interior paint jobs can be
done. At least one more exterior paint job than interior paint job needs to be done.
Develop an LP to maximize the revenue.
Solution:
x 1 = no. of exterior paint jobs
x 2 = no. of interior paint jobs
MAX: 3000x 1 + 2000x 2
S.T. : x 1 + 2x 2 6
2x 1 + x 2 8
x 1 - x 2 1
x 2 2
x 1 0
x 2 0
Note: The objective here is to maximize the revenue function.
The first constraint is about maximum capacity of resource A (which is 6) and the second
constraint is about capacity of resource B (which is 8).
The third constraint expresses that there is AT LEAST one more exterior paintjob than
interior paintjob.
The fourth constraint is about maximum number of interior paintjobs that can be done.
Last 2 constraints are for non-negativity.

Lecture-10
April 1, 2013
Problem-1
ICT has $5 million available for immediate investment and wishes to do two things:
(1) maximize the interest earned on the investments made over the next one year and
(2) satisfy the diversification requirements as set by the board of directors. The specifics of
the investment possibilities are as follows:
Investment
Interest earned (%)
Trade credit
Maximum investment
($ millions)
7
1.0
Corporate bonds
11
2.5
Gold stocks
19
1.5
Construction loans
15
1.8
In addition, the board specifies that at least 55% of the funds invested must be in gold
stocks and construction loans, and that no less than 15% be invested in trade credit.
Develop the LP model.
Solution:
x 1 = investment in trade credit ($ millions)
x 2 = investment in corporate bonds ($ millions)
x 3 = investment in gold stocks ($ millions)
x 4 = investment in construction loans ($ millions)
MAX: 0.07x 1 + 0.11x 2 + 0.19x 3 + 0.15x 4
S.T. : x 1 + x 2 + x 3 + x 4 5
x 1 1
x 2 2.5
x 3 1.5
x 4 1.8
x 3 + x 4 0.55 (x 1 + x 2 + x 3 + x 4)
x 1 0.15 (x 1 + x 2 + x 3 + x 4)
x 1 , x 2 , x 3 , x 4 0
Note:
1. Objective is to maximize interest earned, so objective function is sumproduct of array of
interests and the types of investment. The decision variables are the particular types of
investments.
2. First constraint expresses that total investment cannot exceed allotted sum of $5 million.
3. Constraints 2-5 express the maximum investment capacity for each type of investment.
4. Constraint 6 expresses at least 55% of total investment must be in gold + construction.
5. Constraint 7 expresses that at least 15% of total investment must be in trade credit.
6. Non-negative constraints
Problem-2
MSA, a surveying agency, must conduct a survey that satisfied the following requirements:
1. Survey at least 2,300 US households in total.
2. Survey at least 1,000 households whose heads are 30 years of age or younger.
3. Survey at least 600 households whose heads are between 31 and 50 years of age,
4. Ensure at least 15% of those surveyed live in a state that borders Mexico.
5. Ensure that no more than 20% of those surveyed who are 51 years of age or over
live in a state that borders Mexico.
MSA decides that all surveys should be conducted in person. It estimates that the costs of
reaching people in each age and region category are as follows:
Region
Age 30
Age 31-50
Age 51
State Bordering Mexico
7.5
6.8
5.5
State not bordering Mexico
6.9
7.25
6.1
MSAs goal is to meet the above sampling requirements at the least possible cost.
Note: With three age groups and two geographic groups, there are 6 different combinations
of population. Moreover, there are specific constraints in the problem such as the group of
people in Age 51 who are living in a state that borders Mexico. Thus there must be 6
decision variables, for each of the combinations. In LP problems like these, it helps to
visualize the decision variables in a table/array format (shown below), as it is more
convenient to input these decision variables when using excel to solve.
(This table is to help visualize, and is NOT needed when developing the LP model):
[x 1...x 6 represents no. of people]
Age 30
Age 31-50
Age 51
State Bordering Mexico
x1
x2
x3
State not bordering Mexico
x4
x5
x6
Solution:
x 1 = No. of people in age 30 living in a state bordering Mexico
x 2 = No. of people in age 31-50 living in a state bordering Mexico
x 3 = No. of people in age 51 living in a state bordering Mexico
x 4 = No. of people in age 30 living in a state NOT bordering Mexico
x 5 = No. of people in age 31-50 living in a state NOT bordering Mexico
x 6 = No. of people in age 51 living in a state NOT bordering Mexico
MIN:
7.5x 1 + 6.8x 2 + 5.5x 3 + 6.9x 4 + 7.25x 5 + 6.1x 6
S.T. : x 1 + x 2 + x 3 + x 4 + x 5 + x 6 2300
x 1 + x 4 1000
x 2 + x 5 600
x 1 + x 2 + x 3 0.15 (x 1 + x 2 + x 3 + x 4 + x 5 + x 6)
x 3 0.20 (x 3 + x 6)
x 1 , x 2 , x 3 , x 4 , x 5 , x 6 0
Note: The first 5 constraints correspond to the constraints numbered 1-5 in the problem,
and the last constraint is for non-negativity. The 5th constraint does not take the entire
population of people surveyed as it is mentioned in the problems constraint no.5 of those
surveyed who are 51 years of age or over so only 20% of (x 3 + x 6) is taken.
Problem-3
You need to buy some filing cabinets. You know that Cabinet X costs $10 per unit, requires
six square feet of floor space, and holds eight cubic feet of files. Cabinet Y costs $20 per
unit, requires eight square feet of floor space, and holds twelve cubic feet of files. You have
been given $140 for this purchase, though you don't have to spend that much. The office
has room for no more than 72 square feet of cabinets. How many of which model should
you buy, in order to maximize storage volume?
Solution
Drawing the table makes the problem very easy to model.
Cabinet X
Cost
Cabinet Y
Maximum
$10
$20
$140
Floor Space
6 sq. ft.
8 sq. ft.
72 sq. ft.
Storage Volume
8 cu. ft.
12 cu. ft.
[Objective]
Thus, objective is to maximize storage volume.
x 1 = no. of Cabinet X
x 2 = no. of Cabinet Y
MAX: 8x 1 + 12x 2
S.T :
10x 1 + 20x 2 140

6x 1 + 8x 2 72
x 1 , x 2 0
Problem-4
XYZ bank has 12 full time tellers. The number of teller required per hour is given below:
Time
No. of tellers required
9-10
10
10-11
12
11-12
14
12-1
16
1-2
18
2-3
17
3-4
15
4-5
10
The bank is considering hiring some part time tellers. If it is economically viable, they will
reduce the number of full time employees.
Full Time Tellers:
Work from 9 AM 5 PM
Take a 1 hour lunch break, half at 11, the other half at noon
Cost $90 per day (salary & benefits)
Part Time Tellers:
Work 4 consecutive hours (no lunch break)
Are paid $7 per hour ($28 per day)
Part time teller hours cannot exceed 50% of the days minimum requirement
Develop the LP Model
Solution:
p1 = No. of part-time employees starting work at 9
x = No. of full-time employees
MIN: 90x + 28(p1 + p2 + p3 + p4 + p5)

S.T. : x + p1 10
[Note: for 9-10 timeslot]
x + p1 + p2 12
x/2 + p1 + p2 + p3 14
x/2 + p1 + p2 + p3 + p4 16 [Note: for 12-1 timeslot]
x + p2 + p3 + p4 + p5 18
x + p3 + p4 + p5 17
x + p4 + p5 15
x + p5 10
4(p1 + p2 + p3 + p4 + p5) 56
x 12
p1 , p2 , p3 , p4 , p5 , x 0
Note: The objective here is to minimize daily cost (salary). The daily salary of full-timers is
$90. Part-timers earn $7 an hour and work for 4 consecutive hours (which means minimum
and maximum 4 hours) so their daily salary is $28. The decision variables are the number
of part-timers that have started to work at each timeslot beginning and the number of
full-timers. Note that there are only 5 decision variables of part-timers as part-timers cannot
work 4 hours if recruited after 1-2 timeslot (the work-day ends at 5).
The first 8 constraints are about the minimum number of full-time + part-time workers
required for each of the 8 time-slots. At each slot till the 1-2 slot, a new set of part-timers
join in (from p1 to p5). Each set of part-timers leave after 4 hours, for example the ones that
joined in 9-10 timeslot (p1) are found in 9-10, 10-11, 11-12, 12-1: these four timeslots.
Finally, note that in the 11-12 and 12-1 timeslots, the number of full-time workers is halved
as half of the full-time workers leave for lunch.
The 9th constraint: 4(p1 + p2 + p3 + p4 + p5) 56 relates to Part time teller hours cannot
exceed 50% of the days minimum requirement. The days minimum requirement (112) is
found by adding all of the 8 entries for no. of tellers required in the problems table. Then it
is halved (56), and the total part-time hours are found by adding all the part-timers and
multiplying with 4 as each part-timer works for 4 hours.
The 10th constraint expresses that number of full time employees is at most 12.

Lecture-11
April 3, 2013
[LP Lab Class]
Read this if you feel technologically challenged, at least as far as MS Excels Solver is
concerned. Warning: reading the next few lines may slightly lower your self-esteem.
[These steps have been taken (and modified) from Computer Shikkha by Arman Pavel. ]
0. Input all your data.
1. Open Solver. You can find it in the Data pane or Data menu.
2. Click Objective Function / Set Objective box and select the cell that has the function
that you need to maximize or minimize.
3. Select either the Max or Min radio button below the Objective box depending on what you
need to do.
4. Click the By changing variable cells box and select ALL the cells that contain the
decision variables. You should input the data in array format so that you can just select
the array here. For example $A$1:$C$3 is an array that includes the 9 cells A1, A2, A3, B1,
B2, B3, C1, C2 and C3.
5. Click Add beside the Subject to the Constraints box. Then select the appropriate cells
for the cell reference boxes and make sure that the sign is appropriate ( , = , )
6. After adding all the constraints, make sure that Make unconstrained variables
nonnegative box is checked (by default, it IS checked) and change Select a Solving
Method to Simplex LP (usually it is set at GRG Nonlinear by default).
7. Click Solve, then whatever dialog box appears click OK.
8. [Depending on luck] EITHER watch the magix happen OR freak out as it doesn't work
Note: Refer to the excel files in the group in case you have any problems whatsoever.

Lecture-12
April 7, 2013
Transportation Model (LP):
Decision: How much to ship from each origin to each to destination?
Objective: Minimize shipping cost
i) A balanced transportation model is one where total demand is equal to total supply:
Since all supplies will be used supply constraints have =
Since all demands are satisfied demand constraints have =
ii) If demand exceeds supply (unbalanced transportation model):
Since all supplies will be used supply constraints have =
Since not all demands can be satisfied demand constraints have
iii) If supply exceeds demand (unbalanced transportation model):
Since not all supplies will be used supply constraints have
Since all demands can be satisfied demand constraints have =
Problem-1
Cost of transporting from each origin to each destination:
Albuquerque
Boston
Cleveland
Des Moines
Evansfield
Fordville
Capacity of units:
Des Moines
100
Albequerque
300
Evansfield
300
Boston
200
Fordville
300
Cleveland
200
Total
700
Total
700
*Note that total capacity of units demanded (Destination) and supply (Origin) sides are
equal (700 units). Thus, this is a balanced model.
Solution
Let no. of units to be shipped from Des Moines to Albuquerque = x 11
Let no. of units to be shipped from Des Moines to Boston = x 12
Let no. of units to be shipped from Des Moines to Cleveland = x 13
Let no. of units to be shipped from Evansfield to Albuquerque = x 21
Let no. of units to be shipped from Evansfield to Boston = x 22
Let no. of units to be shipped from Evansfield to Cleveland = x 23
Let no. of units to be shipped from Fordville to Albuquerque = x 31
Let no. of units to be shipped from Fordville to Boston = x 32
Let no. of units to be shipped from Fordville to Cleveland = x 33
MIN:
S.T:
5x 11 + 4x 12 + 3x 13 + 8x 21 + 4x 22 + 3x 23 + 9x 31 + 7x 32 + 5x 33
x 11 + x 12 + x 13 = 100
x 21 + x 22 + x 23 = 300
x 31 + x 32 + x 33 = 300
x 11 + x 21 + x 31 = 300
x 12 + x 22 + x 32 = 300
x 13 + x 23 + x 33 = 200
x 11 , x 12 , x 13 , x 21 , x 22 , x 23 , x 31 , x 32 , x 33 0
Note:
1. The objective is to minimize the cost function, thus objective function is the
sumproduct of the array of no. of units (shipped from each origin to each destination) and
the unit cost of transportation. The decision variables here are the no. of units shipped
from each origin to each destination, and as there are six combinations, there are 9
decision variables from x 11 to x 33
2. Constraints 1-3 are for origin/demand-side. The 1st constraint is for Des Moines, 2nd
constraint for Evansfield and so on. = is used as this is a balanced transportation model.
3. Constraints 4-6 are for destination/supply-side. The 4th constraint is for Albuquerque, 5th
constraint is for d-2 and so on. = is used as this is a balanced transportation model.
4. The final (7th) constraint is for non-negativity.
Assignment Model (LP):

Assignment models are like transportation models, except you decide whether or to assign
a source to a destination (or employee to a task).
Decision: Which assignee (person) to assign to which assignment (task)?
Objective: Minimize cost
1-to-1 relationship between assignments and assignees, i.e. each assignment must
get AT MOST 1 assignee, and each assignee must get AT MOST 1 assignment
Decision variables are binary, i.e. they can only be either 0 or 1. For example,
John-1 = 0 means that John will not perform assignment-1 and John-1 = 1 means
that John will perform assignment-1.
Problem-2
Cost of given programmers performing each task:
Task-1
Task-2
Task-3
Adams
11
14
Brown
10
11
Cooper
12
Solution
Adams doing Task-1 = x 11
Brown doing Task-1 = x 21
Cooper doing Task-1 = x 31
Adams doing Task-2 = x 12 ; Adams doing Task-3 = x 13

Brown doing Task-2 = x 22 ; Brown doing Task-3 = x 23
Cooper doing Task-2 = x 32 ; Cooper doing Task-3 = x 33
MIN:
11x 11 + 14x 12 + 6x 13 + 8x 21 + 10x 22 + 11x 23 + 9x 31 + 12x 32 + 7x 33
S.T:
x 11 + x 12 + x 13 = 1
x 21 + x 22 + x 23 = 1
x 31 + x 32 + x 33 = 1
x 11 + x 21 + x 31 = 1
x 12 + x 22 + x 32 = 1
x 13 + x 23 + x 33 = 1
x 11 , x 12 , x 13 , x 21 , x 22 , x 23 , x 31 , x 32 , x 33 0
x 11 , x 12 , x 13 , x 21 , x 22 , x 23 , x 31 , x 32 , x 33 1
Note:
1. The objective is to minimize the cost function, thus objective function is the
sumproduct of the array of each assignee doing each assignment and the unit cost of
doing the work. The decision variables here are assignees doing assignments.
2. The last two constraints (constraints 7 and 8) are to express that the value of decision
variables can only be either 1 (for assignee doing the assignment) and 0 (for assignee not
doing assignment).
3. Constraints 1-6 are for 1-to-1 relationship of assignees/people and assignments/tasks.
The first three constraints are to express that each assignee/person can perform AT LEAST
and AT MOST one task only. Since total value is 1 and decision variables can only take
values of either 1 or 0, only one of the three decision variables in the constraint will be
equal to 1 and the other two will equal zero. For example, x 11 + x 12 + x 13 = 1 is the
constraint for Adams. If x 12 = 1, this means x 11=x 13=0, which means that Adams will be
performing task-2 and not performing task-1 and task-3.
Similarly, the last three constraints are to express that each assignment/task can be
performed by AT LEAST and AT MOST one assignee/person only.

Single-Period Inventory Models with Probabilistic Demand
p (Quantity Produced)
d (Quantity Demanded)
SP (Selling Price)
VC (Variable Cost)
FC (Fixed Cost)
CM (Contribution Margin): Marginal profit per unit of sale
EV (Expected Value): A predicted value of a variable, calculated as the sum of all possible
EVR (Expected Value under Risk)
EVC (Expected Value under Certainty)
OL (Opportunity Loss): Loss incurred by not taking the best decision.
OLU (Opportunity Loss of Understocking)
OLO (Opportunity Loss of Overstocking)
ELO (Expected Opportunity Loss)
ELOR (Expected Opportunity Loss under Risk)
EVPI (Expected Value of Perfect Information)
CM = SP - VC
EVR = maximum EV value in a risk situation
ELOR = minimum ELO ina risk situation
EVC = EV + ELO (in other words, OL is the gap between EV of certainty and EV without it)
EVC = EVR + ELOR
EVC = EVR + EVPI (difference in EV of certain and risk situation is caused by perfect info)
EVPI = EVC - EVR
EVPI = ELOR (opportunity loss under risk comes from lack of perfect information)
ELOC = 0 (in a certain situation, there is no lack of perfect information, thus no OL)
OLO = VC
OLU = CM = SP - VC
p = OLO / (OLO + OLU) (this is the minimum value of p used in incremental analysis)
Excel:
1.
Profit = p x SP - p x VC - FC (when production <= demand)
Profit = d x SP - p x VC - FC (when production > demand)
[Using IF, for payoff matrix]
2.
Opportunity Loss = (d - p) x CM (when production <=demand)

Opportunity Loss = (p - d) x VC (when production > demand)
[Using IF, for opportunity loss method]
3.
Units to produce = Index (Production array, 1,

(Match (EVR/ELOR, EV/ELO array, 0)
)
e.g. =Index($C$8:$G$8,1,Match(H14,C14:G14,0))
or =Index($C$8:$G$8,1,Match(Max(C14:G14),C14:G14,0))
Note that H14 = Max (C14:G14) i.e. EVR = Max (EV array)
[Using INDEX and MATCH, for payoff matrix method or OL method]
4.
probability = p0 = VC / (VC + CM)

Units to produce = whichever level of demand has highest probability of selling
additional unit that is less than or equal to p0
=if(E32<=C36,B36,if(E32<=C35,B35,if(E32<=C35,B35,if(E32<=C34,B34,if(E32<=C33,B33,B32)))))
[Using IF, for incremental analysis method]

Excel functions used: SUM, IF, MIN, MAX,
New Excel functions: SUMPRODUCT, INDEX, MATCH
Probability
For all events:
P(AUB) = P(A) + P(B) - P(AB)
P(AUBUC) = P(A) + P(B) + P(C) - P(AB) - P(AC) - P(BC) + P(ABC)
P(A|B) = P(AB) / P(B)
or, P(AB) = P(A|B) / P(B) or, P(B) = P(AB) / P(A|B)
For mutually exclusive events:
P(AB) = 0; P(AUB) = P(A) + P (B)
For independent events:
P(AB) = P(A).P(B); P(AUB) = P(A) + P(B) - P(A).P(B)
The branches of tree diagrams represent mutually exclusive events
Bayes Theorem:
1.Find all the joint probabilities [i.e. P(KE) ]
2. Find marginal probability of E [ P(E) = sum of all P(KE) ]
3. Find all the P(K|E), using P(K|E) = P (KE) / P(E)
Steps to develop LP model:
1. Understand the problem
2. Identify the decision variables
3. Determine the objective function in terms of decision variables
4. Determine constraints in terms of decision variables
5. State the non-negative constraints

QA Suarez (Updated Apr-14)

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K102: Quantitative Analysis

K102: Quantitative Analysis

K102: Quantitative Analysis

K102: Quantitative Analysis

ELO (Expected Opportunity Loss)

EVC = EVR + EVPI , or EVPI = EVC - EVR

can be used to directly find the

calculations are complex

can be used to direclty find the

does not reveal all

very simple and more viable

does not reveal any

Single-Period Inventory Model with Probabilistic Demand

K102: Quantitative Analysis

Opportunity Loss = (d - p) x CM (when production <=demand)

Units to produce = Index (Production array, 1,

Excel functions used: SUM, IF, MIN, MAX,

K102: Quantitative Analysis

Picking an integer from 1 to 10. Sample space is {1,2,3,4,5,6,7,8,9,10).

10 cups with milk and sugar

1. If we randomly pick one cup what is the probability that:

1a) P(S) = 16/28

Probability of getting one ace = P(AA) + P(AA)

K102: Quantitative Analysis

a) For car and flat, P = P(HCF) + P (HC) = 0.024 + 0.096 = 0.12

b) For flat or car but not both, P

= P(F) + P(C) + P(HF) + P(HC)

= P(FC) + P(HC) + P(HF)

= P(H) + P(F) + P(C)

Solution-B (without Tree diagram):

Solution-A (with Tree diagram):

P(Ace and King) = P(AK) + P(KA) = 4/663 + 4/663 = 8/663

P(AK of same suit) = 2/663

K102: Quantitative Analysis

Discrete Probability Distribution: (Most probably not in syllabus)

(p+q)10 = p10 + (AB)/C p9q + ..

P of (r+1)th term = ncr pn-r qr

In binomial distribution, n is finite. In poisson distribution n is infinite.

K102: Quantitative Analysis

High Demand (h)

Low Demand (l)

= (200,000 x 0.778) + (-180,000 x 0.222)

= (100,000 x 0.778) + (-20,000 x 0.222)

*EV of Do Nothing is always zero as we actually are not producing anything

[largest value among the three]

When report is Unfavorable (U):

0.30 [1- 0.70]

0.55 = P(U) = 1 - P(F)

= (200,000 x 0.273) + (-180,000 x 0.727)

= (100,000 x 0.273) + (-20,000 x 0.727)

EVR when unfavorable = EVRU = 12,727.27

= EVRF x P(F) + EVRU x P(U)

= 100,000 x P(h) + (-20,000) x P(l)

To find Expected Value of Sample Information (EVSI)

Queen City Avenue

[Note that 0.8+0.2+0.0 = 1]

For Overcast weather:

EVR of Rainy = EVRR = 30

= [P(C) x EVRC] + [P(O) x EVRO] + [P(R) x EVRR]

K102: Quantitative Analysis

Linear Programming (LP)

No. of units of A required

No. of units of B required

K102: Quantitative Analysis