DECISION TREE PROBLEMS

Exam Questions
Question I
Waldo Books

States of Nature
Number of Books Demanded
Amount Ordered 50 100 150 200
50 $500 $500 $500 $500
100 ($300) $1,000 $1,000 $1,000
150 ($1,100) $200 $1,500 $1,500
200 ($1,900) ($600) $700 $2,000

Amt Ordered (b) Maximax (c) Maximin (d) LaPlace Decisions:

50 $500 $500 $500 (b) Order 200 books for Maximax
100 $1,000 ($300) $675 (c) Order 50 books for Maximin
150 $1,500 ($1,100) $525 (d) Order 100 books for LaPlace
200 $2,000 ($1,900) $50 (e) Order 200 books for Hurwicz

(e) Hurwicz: α = 0.7; 1-α = 0.3

Order 50: 0.7(500) + 0.3(500) = 500
Order 100: 0.7(1000) + 0.3(-300) = 610
Order 150: 0.7(1500) + 0.3(-1100) = 720
Order 200: 0.7(2000) + 0.3(-1900) = 830
Regrets
States of Nature
Amount
Ordered 50 100 150 200 Maximum
50 $0 $500 $1,000 $1,500 $1,500
100 $800 $0 $500 $1,000 $1,000
150 $1,600 $800 $0 $500 $1,600
200 $2,400 $1,600 $800 $0 $2,400
Decision: Order 100 for Minmax regret
Expected values:
Order 50: 0.2(500)+0.35(500)+0.25(500)+0.2(500) = 500
Order 100: 0.2(-300)+0.35(1000)+0.25(1000)+0.2(1000) = 740
Order 150: 0.2(-1100)+0.35(200)+0.25(1500)+0.2(1500) = 525
Order 200: 0.2(-1900)+0.35(-6200)+0.25(700)+0.2(2000) = -15
Decision: Order 100; Expected Monetary Value = 740

EVPI = Either Min expected Regret or EWPI – EWOPI; Min Expected Regret = 485
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b) EWPI = 0.2(500)+0.35(1000)+0.25(1500)+0.2(2000) = 1225; EWOPI = 740; EVPI = 1225– 740 = 485

Question II: Yogurt Hut

Decision Maximax Maximin Hurwicz LaPlace

Buy 200 50 50 50 50
Buy 300 75 25 55 58.33
Buy 400 100 0 60 50

Hurwicz: Buy 200: 0.6*50 + 0.4*50 = 50

Buy 300: 0.6*75 + 0.4*25 = 55
Buy 400: 0.6*100 + 0.4*0 = 60
Decisions: Maximax = Buy 400; Maximin = Buy 200; Hurwicz = Buy 400; LaPlace = Buy 300
e) Minmax Regret
Regrets
Decision Sell 200 Sell 300 Sell 400 Max
Buy 200 0 25 50 50
Buy 300 25 0 25 25
Buy 400 50 25 0 50
Decision: Buy 300

f) Expected Monetary Values: Buy 200: 0.25*50 + 0.45*50 + 0.30*50 = 50.0

Buy 300: 0.25*25 + 0.45*75 + 0.30*75 = 62.5 = EWOPI
Buy 400: 0.25*0 + 0.45*50 + 0.30*100 = 52.5

Decision: Buy 300; EMV = 62.5

g) Minimum EOL: Buy 200: 0.25*0 + 0.45*25 + 0.30*50 = 26.25
Buy 300: 0.25*25 + 0.45*0 + 0.30*25 = 13.75 EVPI = 13.75
Buy 400: 0.25*50 + 0.45*25 + 0.30*0 = 23.75

h) EVPI = EWPI – EWOPI

EWPI = 0.25*50 + 0.45*75 + 0.30*100 = 76.25; EVPI = 76.25 – 62.5 = 13.75

*****=====+++++

Question III

A decision maker has determined a payoff table for three decision alternatives A, B, and C as well as three
states of nature X, Y and Z:

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 Decision Maximax Maximin LaPlace Hurwicz
A 750 -100 350 495
B 700 200 490 550
C 600 400 500 540

(a) For Maximax, the decision is A

(b) For Maximin, the decision is C
(c) For LaPlace, the decision is C

(d) Hurwicz: α = 0.7; 1-α = 0.3

A: 0.7(750) + 0.3(–100) = 495
B: 0.7(700) + 0.3(200) = 550
C: 0.7(600) + 0.3(400) = 540 The decision is B

(e) Regrets
Decision X Y Z Maximum
A 0 170 500 500
B 50 0 200 200
C 150 70 0 150
The decision is C: (4 marks)

(f) A: 0.4(750) + 0.3(400) + 0.3(–100) = 390

B: 0.4(700) + 0.3(570) + 0.3(200) = 511
C: 0.4(600) + 0.3(500) + 0.3(400) = 510

The optimal expected value is 511 and the decision is B

(g) A: 0.4(0) + 0.3(170) + 0.3(500) = 201

B: 0.4(50) + 0.3(0) + 0.3(200) = 80
C: 0.4(150) + 0.3(70) + 0.3(0) = 81

The EVPI is 80
(i)
EVPI = EWPI – EWOPI
EWPI = 0.4(750) + 0.3(570) + 0.3(400) = 591
EWOPI = 511 (Maximum EMV)
EVPI = 591 – 511 = 80

Decision Trees

Question IV: A Canadian company called Rainville

Required:
P(O) = P(O|D)P(D) + P(O|S)P(S) + P(O|G)P(G) = 0.8*0.4 + 0.3*0.4 + 0.1*0.2 = 0.46. So P(C) = 0.54
P(D|O) = P(O|D)P(D)/P(O) = 0.70; P(S|O) = P(O|S)P(S)/P(O) = 0.26; P(G|O) = P(O|G)P(G)/P(O) = 0.04
P(D|C) = P(C|D)P(D)/P(C) = 0.15; P(S|C) = P(C|S)P(S)/P(C) = 0.52; P(G|C) = P(C|G)P(G)/P(C) = 0.33

See Tree Below

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Folding Back

EV(6) = 0.4*–400 + 0.4*350 + 0.2*1,600 = 300

EV(7) = 0.7*–430 + 0.26*320 + 0.04*1,570 = –155
EV(8) = 0.15*–430 + 0.52*320 + 0.33*1,570 = 620

At node 3 the decision is “Drill”; fold back 300

At node 4 the decision is “Do not drill”; fold back –30
At node 5 the decision is “Drill”; fold back 620

EV(2) = 0.46*–30 + 0.54*620 = 321

At node 1 the decision is “Seismic Tests”; fold back 321

Optimal EMV = 321 million.

Decision: Do Seismic tests, if Open structure, do not drill, if closed structure, drill.

(c)
EVSI = EWSI – EWOSI ;
EVSI = 321 + 30 – 300 = 51

(d)
EVPI = EWPI – EWOPI
EWPI = 0.4*0 + 0.4*350 + 0.2*1600 = 460;
EWOPI = 300
EVPI = 460 – 300 = 160

(e)
Efficiency = EVSI/EVPI = 51/160 = 31.875%

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Question V
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A company is planning a plant expansion.

The drawing of the tree will show that we need the following probabilities: P(F); P(U); P(H|F); P(L|F); P(H|U) and
P(L|U).
 P(F) = P(F|H)*P(H) + P(F|L)*P(L) = 0.84*0.69 + 0.16*0.31 = 0.63; P(U) = 1 – P(F) = 0.37
P ( F | H ) P( H ) 0.84*0.69
 P( H | F ) = = = 0.92 ; thus P(L|F) = 0.08
P( F ) 0.63
P(U | H ) P( H ) 0.16*0.69
 P( H | U ) = = = 0.30 thus P(L|U) = 0.70
P(U ) 0.37

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EVSI = EWSI – EWOSI = 83.72 – 63.2 = 20.52 (million)
EVPI = EWPI – EWOPI = 150*0.69 + -$30*0.31 – 63.2 = 94.20 – 63.2 = 31 (million)
Efficiency = 20.52/31 *100 = 66.19%

Question VI
Bakery Products is considering the introduction of a new line of products.
P(G) = P(G|F)*P(F) + P(G|U)*P(U) = 0.8*0.5 + 0.4*0.5 = 0.6; therefore P(B) = 0.4
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 P (G | F ) P ( F ) 0.4
P( F | G ) = = = 0.67; P (U | G ) = 1 - P ( F | G ) = 0.33
P (G | F ) P( F ) + P(G | U ) P(U ) 0.6
P( B | F ) P( F ) 0.2*0.5
P( F | B) = = = 0.25; P (U | B ) = 1 - 0.25 = 0.75
P ( B | F ) P( F ) + P( B | U ) P (U ) (0.2)(0.5) + (0.6)(0.5)

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EVSI = 17,380 + 5,000 – 10,000 = 12,380
EVPI = EWPI – EWoPI; EWPI = 0.5*100,000 + 0.5*0 = 50,000; EWOPI = 10,000; EVPI = 40,000
Efficiency = 12,380/40,000 = 30.95%

Question VII: A contractor is invited to bid on a construction job.

P(F) = P(F|G)* P(G) + P(F|B)* P(B) = 0.7*0.2 + 0.2*0.8 = 0.3. P(U) = 1 – P(F) = 0.7
P(G|F) = P(F|G)* P(G)/P(F) = 0.14/0.3 = 0.47; P(B|F) = 0.53;
P(G|U) = P(U|G)* P(G)/P(U) = 0.06/0.7 = 0.09 so P(B|U) = 0.91

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Decision: Do not buy the forecast and Bid. Expected Profit = $20,000

EVSI = 0
EVPI = EWPI – EWOPI
EWPI = 0.2*500,000 + 0.8*0 = 100,000
EWOPI = 20,000
EVPI = 80,000
Efficiency = 0

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