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American Food
# 1 : 0.4
Food Mart
#2: 0.3
Atlas Foods
# 3: 0.3
#1: 0.8
0.4x0.8 = 0.32
#2: 0.1
0.4x0.1 = 0.04
#3: 0.1
0.4x0.1 = 0.04
#1: 0.1
0.3x0.1 = 0.03
#2: 0.7
0.3x0.7 = 0.21
#3: 0.2
0.3x0.2 = 0.06
#1: 0.2
0.3x0.2 = 0.06
#2: 0.2
0.3x0.2 = 0.06
#3: 0.6
0.3x0.6 = 0.18
Solution
Tree diagram and the calculations could be used to find the
state probabilities for the next month and the month after that
the tree would soon get very large. Rather than use a tree
diagram it is easier to use a matrix of transition probabilities,
which is a matrix of conditional probabilities of being in a
future state given a current state.
Pij = conditional probability of being in state j in the future
given the current state of i
P = matrix of transition probabilities
P11
P21
P12
P22
.
.
P1n
P2n
Pm1
Pm2
Pmn
P=
Solution
The three grocery stores to determine4 what percentage of the
customers would switch each month.
Put these transitional probabilities into the following matrix:
0.8 0.1 0.1
P = 0.1 0.7 0.2
0.2 0.2 0.6
When current period is 0, calculating the state probabilities for
the next period can be accomplished as (1) = (0) P
Similarly, calculating the state probabilities for the n + 1
period can be accomplished as (n + 1) = (n) P
Solution
When current period is 0, calculating the state probabilities for
the next period can be accomplished as (1) = (0) P
= (0.4 0.3
0.3)
0.8
0.1
0.2
0.1
0.7
0.2
0.1
0.2
0.6
Solution
Will this trend continue in the next period and the one after
that?
Consider two time periods from now: (2) = (1) P
Since we know that (1) = (0) P
So, (2) = (0) P P = (0) P2
In general (n) = (0) Pn
Machine Operator
Paul Tolsky, owner of Tolsky Works, has recorded the
operation of his milling machine for several years. Over the
past two years 80% of the time the milling machine functioned
correctly during the current month if it had functioned
correctly in the preceding month. This also means that only
20% of the time did the machine not function correctly for a
given month when it was functioning correctly during the
preceding month. In addition, it has been observed that 90% of
the time the machine remained incorrectly adjusted for any
given month. Only 10% of the time did the machine operate
correctly in a given month when it did not operate correctly
during the preceding month. In other words, this machine can
correct itself when it has not been functioning correctly in the
past and this happens 10% of the time.
Machine Operator
0.8 0.2
Matrix of transition probabilities for this machine is P =
0.1 0.9
Probabilities of functioning and non functioning (0) = (1, 0)
(1) = (0) P = (1, 0) 0.8 0.2
0.1 0.9
= [(1)(0.8) + (0)(0.1), (1)(0.2) + (0)(0.9) = (0.8, 0.2)
Probability that the machine will be functioning correctly two
months from now.
0.8 0.2
(2) = (1) P = (0.8, 0.2)
0.1 0.9
[(0.8)(0.8) + (0.2)(0.1), (0.8)(0.2) + (0.2)(0.9)] = (0.66, 0.34)
State 2
0
0.2
0.34
0.438
0.5066
0.55462
0.588234
0.611763
0.628234
0.639754
0.647834
0.653484
0.657439
0.660207
0.662145
Machine Operator
The machine starts off functioning correctly in the first period.
In period 5, there is only a 0.4934 probability that the machine
is still functioning correctly and by period 10, this probability
is only 0.360235.
In period 15, the probability that the machine is still
functioning correctly is about 0.34.
Probability that the machine will be functioning correctly at a
future period is decreasing but it is decreasing at a decreasing
rate.
Machine Operator
From table, it appears there will be an equilibrium at
0.333333.
An equilibrium condition exists if the state probabilities do not
change after a large number of periods.
At equilibrium the state probabilities for a future period must
be the same as the state probabilities for the current period.
(next period) = (this period) P or (n+1) = (n) P
At equilibrium (n + 1) = (n) or (n) = (n) P
or = P
Machine Operator
0.8 0.2
(1, 2) = (1, 2)
0.1 0.9
(1, 2) = [(1)(0.8) + (2)(0.1), (1)(0.2) + (2)(0.9)]
1 = 0.81 + 0.12
(1)
2 = 0.21 + 0.92
(2)
Machine Operator
2 = 0.21 + 0.92
1 + 2 = 1
From the above three equations arbitrarily drop any one of the
above two and solve the simultaneous equation, we get
1 =1/3 = 0.333333
2 = 2/3 = 0.666666
Paid
1
0
0.6
0.4
Next Month
Bad Debt 1< Month 1 to 3 Month
0
0
0
1
0
0
0
0.2
0.2
0.1
0.3
0.2
1
0
0
0
0
1
0
0
0.6 0 0.2 0.2
0.4 0.1 0.3 0.2
A
B
P=
I=
1
0
0
1
A = 0.6 0
0.4 0.1
0=
0
0
B = 0.2
0.3
0
0
0.2
0.2
I = an identity matrix
0 = a matrix with all 0
Fundamental matrix can be computed as F = (I B)-1
-1
F= 1 0
- 0.2 0.2
0 1
0.3 0.2
F=
F=
a
c
b
d
0.8 -0.2 -1
-0.3 0.8
-1
=
d
-b
ad-bc ad-bc
-c
a
ad-bc ad-bc
F=
0.8
-0.3
-0.2
0.8
-1
=
0.8 -(-0.2)
0.58 0.58
-(-0.3) 0.8
0.58 0.58
1.38
0.52
0.34
1.38
0.6
0.4
0
0.1
0.97 0.03
0.86 0.14
It indicates the probability that an amount in one of the nonabsorbing states will end up in one of the absorbing states.
(2000, 5000)
0.97
0.86
0.03
0.14
(6240, 760)
Out of the total $7000 ($2000 in the less than one month
category and $5000 in the one to three month category), $6240
will be eventually paid and $760 will end up as bad debt.
Solution:
State 1: initial share = 0.4 = Bradley School
State 2: initial share = 0.35 = Career Academy
State 3: initial share = 0.25 = International Technology
Transition matrix values are
Bradley
Bradley
0.65
Career
0.05
International
0.1
Career International
0.2
0.15
0.9
0.05
0.1
0.8
Solution:
To determine market share for Bradley School, he has to
multiply current market share and transition matrix
probability.
0.65
0.2
0.15
(0.4, 0.35, 0.25)
0.05
0.1
0.9
0.1
0.05
0.8
0.15
0.05
0.8