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however, and an earthquake occurs at Diablo during the next five years, construction will be terminated and the compan
company believes there is a 20% chance that an earthquake will occur at Diablo during the next five years. For $1 million
that an earthquake will not occur. The geologists past record indicates that she will predict an earthquake on 95% of the
Should the power company hire the geologist? Also, calculate and interpret EVSI and EVPI.
Diablo $10,000,000
Roy Rogers $20,000,000
Geologist $1,000,000
P(Earthquake) 0.20
P(No earthquake) 0.80
0.27
Positive
To hire
Negative
0.73
To not hire
Diablo
EVSI:
Yes, the company should hire the geologist as it reduces the expected cost by $100,000. The cost o
hence it is worth it to hire the geologist.
Depending on the prediction, the company can then decide on where to build the nuclear power pl
Diablo Canyon. If she predicts an earthquake, then the plant should be build in Roy Rogers City ins
EVPI:
Since perfect prediction information does not exist, it will be impossible to allocate a cost to it.
Even though an exact cost of a perfect survey cannot be allocated, the company should not pay m
0.20
Positive
EMV:
$12,000,000
To hire
EMV: Negative
$12,000,000 0.80
0.7037037037 EMV
Got earthquake
$31,000,000
No earthquake 0.296296296
Diablo
$11,000,000
Roy Rogers $21,000,000
0.0136986301
Got earthquake $31,000,000
0.20
Got earthquake $30,000,000
No earthquake 0.80 $10,000,000
Roy Rogers
$20,000,000
ed cost by $100,000. The cost of geologist of $1,000,000 is $100,000 lesser than the EVSI of $1,100,000,
re to build the nuclear power plant. If she predicts no earthquake, then the company should build the plant a
be build in Roy Rogers City instead.
the company should not pay more than $2,000,000 for this information despite it is perfect.
Diablo $30,000,000
$10,000,000
Diablo
Roy Rogers
$20,000,000
0.20
Got earthquake $30,000,000
Roy Rogers
$20,000,000
0 million at Roy Rogers City. If the company builds at Diablo,
oy Rogers City). Without further expert information, the
anyon. She will predict either that an earthquake will occur or
n 90% of the occasions for which an earthquake will not occur.
= 0.7037037037
= 0.0136986301
Weighted
Probabilities EMV Minimum
average
0.7037 $21,814,815
$25,074,074 \\
$21,000,000
0.2963 $3,259,259 $21,000,000
1.00 $21,000,000
0.0137 $424,658
$11,273,973
0.9863 $10,849,315 $11,273,973
$21,000,000 \\
1.00 $21,000,000
0.20 $6,000,000
$14,000,000
0.80 $8,000,000 $14,000,000
$20,000,000 \\
1.00 $20,000,000
VSI of $1,100,000,
0.27 $5,670,000
$13,900,000
$14,000,000 \\
1.00 $14,000,000
76. Sharp Outfits is trying to decide whether to ship some customer orders now via UPS or wait until after the threat of a
the company will incur $60,000 in delay and shipping costs. If Sharp Outfits decides to ship the customer orders via UPS
customer orders via UPS, the company will incur $10,000 in delay costs regardless of whether UPS goes on strike. Let p r
a. For which values of p, if any, does Sharp Outfits minimize its expected total cost by choosing to postpone shipping its
b. Suppose now that, at a cost of $1000, Sharp Outfits can purchase information regarding the likelihood of a UPS strike i
information will predict a strike with probability 0.75, and if there will not be a strike, the information will predict no strike
cost?
a. Use the tree from part b to find the EVSI when p = 0.15. Then use a data table to find EVSI for p from 0.05 to 0.30 in in
To minimize its expected total cost, Sharp Outfits should postpone shipping its custome
P(Strike) 0.15
P(No strike) 0.85
0.24
Positive
Purchase
Negative
0.76
Don't purchase
Ship
To minimize its expected total cost, Sharp Outfits should first purchase the information r
strike, then Sharp Outfits should postpone shipping its customer orders via UPS. If it ass
shipping customer orders via UPS.
EVSI:
EVPI:
Since perfect prediction information does not exist, it will be impossible to allocate a co
Even though an exact cost of a perfect survey cannot be allocated, the company should
0.15
Positive
EMV:
$4,900
Purchase
EMV: Negative
$4,900 0.85
shipping its customer orders via UPS when p is more than 0.1786.
EMV
Strike
$61,000
No strike
Ship
$5,000
Postpone $11,000
Strike $61,000
Ship No strike $5,000
Postpone $11,000
Strike $60,000
No strike $4,000
Postpone
$10,000
hase the information regarding the likelihood of a UPS strike. If it assess that there will be a
rders via UPS. If it assess that there will not be a strike, then Sharp Outfits should continue
$1,000
$800
$600
$400
$200
$0
0.05 0.1 0.15 0.2 0.25 0.3
p
, the company should not pay more than $6,900 for this information despite it is perfect.
Ship $60,000
Postpone $10,000
$4,000
Ship
Postpone
$10,000
Postpone
$10,000
ndise now and the UPS strike takes place,
Outfits decides to postpone shipping its
hipments.
= 0.46875
= 0.0493421
Weighted
Probabilities EMV Minimum Probability
average
0.4688 $28,594
$31,250 \\
$11,000 0.24
0.5313 $2,656 $11,000
1.00 $11,000
0.0493 $3,010
$7,763
0.9507 $4,753 $7,763 0.76
$11,000 \\
1.00 $11,000
0.15 $9,000
$12,400
0.85 $3,400 $10,000 1.00
$10,000 \\
1.00 $10,000
0.3
p
Weighted Minimum
EMV
average EMV
$2,640
$8,540
$5,900 $8,540
$10,000 \\
$10,000