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Taken from
MS&E 252: Decision Analysis I
Midterm Examination 2001-2002
Please read the following instructions carefully!
1. This exam is closed book and closed notes, except for a single sheet (2 sides). You may use a
calculator and a foreign language dictionary. Please sit in alternate seats.
2. The answer sheet is stapled to the back of the exam. Please tear it off, print your name, SU
ID#, Section TA, and sign the Honor Code and exam agreement. Your exam will not be
graded unless you have printed your name and signed this statement.
3. There are three blank pages at the end for you to use as scratch paper. All exam questions
carry the same weight. Don’t spend too much time on any one question.
4. Read over each question carefully. You may not need all the information given.
5. At the end of the exam, please make sure your probability assignments are written clearly in
the appropriate boxes on the answer sheet. If the teaching team cannot read your probability
assignment we will use our best judgment as to what you meant to write down and this
decision will be final. You will not be allowed to rewrite your assignment after the exam has
been graded. You will be graded solely on the basis of your probability assignments. Turn
in your answer sheet ONLY.
6. The exam will end at 12:15 pm. You will have five minutes to turn in your answer sheet. In
fairness to all members of the class, we will not accept exams after 12:20 pm.
7. You will receive a photocopy of your answer sheet. You will have until 11:59 pm on Friday
November 9, 2001 to enter your responses on the web. Please select “Midterm” from the
pulldown menu on the answer sheet page.
8. In the spirit of the Honor Code, the Teaching Team will not remain in the classroom during
the exam. If you have questions please ask. Clarifications will be announced to the class.
9. Unless stated otherwise, the characters in the exam prefer more money to less, and follow the
Five Rules of Actional Thought. Do not make any additional assumptions.
10. If your probability assignments do not add up to one, the teaching team will normalize them.
If you leave boxes blank and your assignments add up to less than one, we will distribute the
remaining probability equally among the empty answer boxes. If your assignments add up to
more than one and you have left boxes blank, we will normalize the non-blank boxes and
place zeroes in the empty boxes. For example, the following assignments:
Question Number a b c d
i 0.3 0.5 0.3 0.3
j 0.7
k 0.9 0.2
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would become:
Question Number a b c d
i 0.214 0.357 0.214 0.214
j 0.1 0.1 0.7 0.1
k 0.82 0.18 0 0
If you leave a question blank it will be interpreted as an assignment of 0.25 across the board.
10. Your exam be will graded according to the following scoring function:
100 ln p
Question Score = * (1 + )
15 ln 4
11. The graph and table below show the number of points you will receive per question
depending on the probability you assign to the correct answer.
p Score
0 −∞ 7.50
0.01 -15.48 5.00
0.05 -7.74
0.10 -4.41 2.50
0.15 -2.46
0.20 -1.07 0.00
0.25 0.00 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 1.1
-2.50
0.30 0.88
Score(p)
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1. How many of the following are not among the Five Rules of Actional Thought?
I Order Rule
II Value Rule
III Consistency rule
IV Price Rule
a) 1
b) 2
c) 3
d) 4
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2. There are two concerts you would like to go to next week: “Back Street Boys” and “New
Kids on the Block.” Your PIBPs for each of the concerts individually are $30 and $55
respectively. Later you find out that the tickets are only being sold in the following way:
Tickets you buy are for your own use only. (You cannot resell them or give them to a
friend.) What should you do?
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3. The ula-ula is a very rare bird that lives only on the island of Dia-Tia. Until recently, only
two types of ula-ula were known: the blue ula-ula, and the red ula-ula. Logically, the
scientific community used a perfectly clear distinction, “Color of the Ula-Ula” with two
degrees, “Blue” and “Red.”
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4. Which of the following statements represent a decision?
a) II only
b) I and II
c) II and III
d) III and IV
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5. Given the choice between hiring The Clairvoyant and hiring The Wizard to help you with
a decision problem, which should you hire?
a) The Clairvoyant
b) The Wizard
c) You need more information about the decision problem and the fees charged by The
Clairvoyant and The Wizard before you can answer this question.
d) You should be indifferent between hiring The Clairvoyant and hiring The Wizard.
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6. Consider the following relevance diagram.
A B
C D
How many of the following operations can be performed directly on the diagram above,
without having to make other arrow manipulations beforehand?
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7. Consider the following relevance diagram.
A B
C D
After performing any necessary manipulations, how many of the following statements
must be true?
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8. DA Industries Inc., a risk-neutral corporation, is ready to launch its new product, the
“Gizmo.” Given the current market uncertainty, the CEO thinks three cases are possible:
• Gizmo could be a “Hit” and result in $200 million in profit (probability = 0.3)
• Gizmo could be “OK” and result in $30 million in profit (probability = 0.4)
• Gizmo could be a “Flop” and result in a $240 million loss (probability = 0.3)
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9. Joanna is risk neutral, and last week was considering the decision situation depicted
below.
Alternative 2
$30
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10. Last year, Decisions Inc. had to choose between two projects. The “Agro” project was to
cost $50 million, and would return $80 million in one year. The “Bio” project was to cost
$40 million, would return $60 million in one year. The firm could not finance both
projects, and chose to invest in the Agro only.
Now, one year later, the Agro project has already cost $90 million, and has not yet
generated any return. The Agro manager is asking for $10 million in addition, and admits
there is just a 50% probability of generating $80 million, and a 50% probability of
generating only $20 million. The R&D budget is $50 million, and the Bio project is still
available.
Assume the firm is risk-neutral and there is no discounting. What should Decisions Inc.
do?
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11. In Italy, one person in 400 carries a harmful virus. A diagnostic test can detect this virus
with 99% sensitivity; that is, for those who carry the virus, the probability of the test
reporting that the virus is present (a “positive” test result) is 99%. The specificity of the
test is also 99%; that is, for those who do not carry the virus, the probability of the test
reporting the virus is not present (a “negative” test result) is also 99%.
Valentina, an Italian, just received a “positive” test result. Which of the following is
closest to the probability you should assign to her carrying the virus?
a) 0.20
b) 0.50
c) 0.99
d) 0.999
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12. Consider the certificate below:
50%
DEAL
DEAL“X”
X: DEAL
DEAL“Y”
Y:
Black = Win $100 Black = Win $500
White = Win $400 White = Win $0
50%
Quincy, a risk-neutral decision maker, has just acquired this certificate for $190 at an
auction. A clairvoyant offers to reveal the spinner outcome before Quincy chooses his
deal. Which of the following is closest to the most Quincy should be willing to pay for
this information?
a) $10
b) $200
c) $450
d) Cannot be determined from the information given
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13. Hubert has hired you to help him get control of a complex situation. You decide to draw
a relevance diagram for him.
There are 4 uncertainties, and Hubert tells you the following facts about them:
A is relevant to B, given &
B is relevant to C, given &
C is relevant to D, given &
However if he knew D, A would no longer be relevant to B.
a) b)
A D A D
B C B C
c)
A D
B C
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14. Josephine is about to receive a $2000 check, and is contemplating using it to buy stock in
a company for a 1-year investment. In researching the firm, Josephine read an analyst
report claiming there is a 20% chance that it will acquire a major competitor. Josephine
further believes that the GNP growth in one year is relevant to the final stock price. She
draws the following tree:
GNP “Well”
$3000
0.3
Acquisition
0.2
GNP “Badly”
$2000
0.7
Buy Stock
GNP “Well”
$1000
0.8
No Acquisition
0.8
GNP “Badly”
$0
0.2
Do Nothing
$2000
a) $0
b) $60
c) The sum of the value of clairvoyance on the acquisition, plus the value of clairvoyance on
the GNP
d) None of the above
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15. Corina has an unknown risk attitude and the following certain equivalents:
$200 $80
0.9 0.4
$100 ~ $30 ~
0.1 0.6
$30 $20
If presented with a choice between the following two deals, which would she prefer?
Deal I Deal II
$200 $100
0.5 0.6
$80 $30
0.1 0.2
0.4 0.2
$20 $20
a) Deal I
b) Deal II
c) Corina is indifferent between Deal I and Deal II
d) Cannot be determined from the information given
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MS&E 252: DECISION ANALYSIS I
In recognition and in the spirit of the Honor Code, I certify that I will neither receive nor give
unpermitted aid on this exam and that I will report, to the best of my ability, all Honor Code
violations observed. I also understand that obtaining a score of negative infinity on this exam
will result in failing this course. If I assign a zero probability to any answer, I declare that it is
done consciously and against the advice of the teaching team.
Question a b c d
Number
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
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