Lecture One

Principals
Payoff = V(d, s)
d = decision (Shit we can influence)
s = state of nature (Shit we can't influence)

Payoff's value is defined not only by it's monetary worth, but by how much relative benefit it shall
have to the recipient (aka utility)

Product Contract I (S1) Contract II (S2)

Product A 250 70
Product B 160 150
Product C 90 170

This can be shown graphically also, as follows:

Choose A:d1 s1 250

s2
70
s1
Choose B: d2
160
Start s2
150
Choose C: d3
s1
90
s2

170
Maximax (optimistic)
Find the highest payoff value, in the above case, 250

Maximin (Pessimistic)
Find the lowest value of each decision over all the states of nature, then pick the highest value. In
layman's terms, the shittest circumstances, but the highest influential performance.
The Hurwicz Criterion
H (d i ) = α V m a x ( d i ) + (1 − α )V m in (d i )

This is basically a balance between optimism & pessimism, the value of 'a' is a decimal between 0
& 1, where 0 is ultimate pessimism, and 1 is ultimate optimism.

Minimax Regret

R ( d i , si ) = Vmax ( si ) −V ( d i , si )

Basically, the difference in the best & worst outcomes, so for a risk adverse decision maker, you
want the lowest value.
Basically, difference between that value and the highest vertically (along the state of nature) and
then the difference between all the horizontal values. Simple, eh?

Backward Induction

P(s1)=0.6

d1
250
P(s2)=0.4
70
d2 P(s1)=0.6
160
Start P(s2)=0.4
150
d3 P(s1)=0.6 90
P(s2)=0.4
170
Decimals relate to % chance of corresponding states of nature.
Perfect Information
Could be attained by a shitload of research, but ultimately, what's the point if that cost outweighs
the benefit gained from it. To find this we:

Take the highest possible gains from all states of nature,

Multiply these answers by their estimated probabilities (the decimal corresponding to their state of
nature.)
Add the values together
We already know the best possible outcome, so subtract the worst from that, and there you go, your
research to reach perfect information must cost less than that to be worth it.

Lecture Two
Easy shit.

Introduction to Differentiation

Rule 1 Rule 2 Rule 3 Rule 4 Rule 5 Rule 6 Rule 7

y a ax axn ln(x) ln(axb) eax beax

dy 1 b aeax abeax
0 a anxn-1
dx x x
Look at that if you need to.

Finding Min/Max points

Points occur when Dy/Dx = 0.
If second derivative > 0 then = minimum, else, maximum.
Nota Bene: If 2nd derivative = 0, then t'is a stationary point of inflection.

Lecture Three

Differentiation Example
A company produces only one product. The quantity made per week is called Q (measured
in tonnes).
The production cost depends on the weekly output in the following way:
C(Q) = 10 +8Q -2Q2
The achievable selling price also depends on the output, (and hence on the quantity offered)
and is:
 Pr(Q) =40 -10Q
Hence Revenue = Price x quantity sold
= (40 -10Q)Q= 40Q -10Q2
And Profit = Revenue – Cost
= 40Q -10Q2 -(10 +8Q -2Q2) = 32Q -8Q2 -10

Partial Derivative
If you've got more than one variable to work with in a function, you can only find the partial
derivative, this is found by holding one of the variables constant.

Lecture Four

Transportation Problems (Principals)

M = Number of Suppliers
N = Number of customers
Each index of M / N has it's own amount that can be supplied / demanded
This can be shown in a matrix format:
Duff Machine Tools manufacture machine tools at three factories.
The Leeds factory can produce 15 machines each month, the Manchester factory 25
machines and the Nuneaton factory 5 machines.
In a particular month, there are no machines in stock, and customers in Aston must be
supplied with 5 machines, 15 machines each must go to customers in Bradford and Cardiff, and a
customer in Durham requires 10 machines.
The transportation costs per machine are given below:

Aston Bradford Cardiff Durham

Leeds 10 1 20 11
Manchester 12 7 9 20
Nuneaton 2 14 16 18
Transportation Problems (Assumptions)
1.Items are shipped “individually”, that is there are no savings (or extra costs) when several items
are shipped from the same supplier to the same destination.
2.The items are identical, that is the customer has no preference as to which supplier(s) the item is
shipped from.
3. No shipping between suppliers or destinations.
4. Multiple “deliveries” are acceptable.
5. The scheduling of deliveries can be ignored.
 This information can be compounded into a table such as the one shown below:
Supplier

Transportation cost forDestination/

route Customer
Aston Bradford Cardiff DurhamAvailable
Leeds 10 1 20 11
15 15
Manchester 12 7 9 20
15 10 25

Nuneaton 2 14 16 18
5 5
Required 5 15 15 10 Total =
…...
Amount transported along route
How to Solve the Problem
To find a minimum cost basic feasible solution, i.e. a set of (m + n - 1) routes between suppliers
and customers and the amounts transported there, so that
all the demands are met,
all the supply is delivered

.
and transportation is done at the lowest possible cost

1. Balance supply and demand using a dummy destination (if needed).

2. Find a basic feasible solution.

3. Check if the solution can be improved.

If an improvement is possible, make it and repeat from step 3.

If no improvement is possible, the optimal solution has been found.

METHOD:
Least Cost First Method
1. Assign as much as possible to the cell with the smallest unit cost. (If two or
more tie just pick one at random.)
2. Cross out the row or column which is now satisfied.
(If both are satisfied cross out only one of them.)
3. Recalculate the supply and demand for the remaining rows and columns.
4. Repeat from step 1 until only one row and one column remain uncrossed.
Assign to remaining cells the appropriate amount.

Note: If there is a dummy column, its cells are only used after

If a solution is optimal, then no unused route will lower net cost.

If a route is an improvement, allocate as many units to it as possible.

Lecture Five

Method
The Farmer’s Problem
A farmer has 100 spare hectares of land, which can be used to plant either
wheat or potatoes (or neither).
Wheat gives a profit of £90 per hectare and potatoes £60 per hectare.
EU regulations limit the amount of potatoes planted to at most 65 hectares.
There will be only 480 person-hours available to harvest the crop. A hectare
of wheat takes 6 person hours to harvest, while a hectare of potatoes
takes only 3 hours.

Establish Variables
Hectares of potatoes = P
Hectares of wheat = W

Goal
Therefore, profit can be defined as = 90W + 60P

Constraints are present that:

W+P <= 100
P <= 65
6W + 3P <= 480
P >= 0
W >=0
 100

80

Feasible
Region

W Then find a parallel line just touching the feasible region.

100

80 Maximum Profit

90 W + 60 P =
Feasible
Region
7800
P
100 160
 W P Profit
W
0 0 90×0 + 60×0 =0
80 0 90×80 + 60×0 =
7200
80
60 40 90×60 + 60×40 =
60 7800
35 65 90×35 + 60×65 = 7050
35 0 65 90×0 + 60×65 =
Feasible 3900
Region

P
65

Lecture 10

Basis of Hypothesis Testing

The basic idea behind statistical hypothesis testing is as follows:
State a claim or hypothesis
Take a random sample and calculate the relevant sample statistic
Calculate the probability of getting a result this extreme if the hypothesis is true.
Reject the Hypothesis if it is too unlikely

By hand method
1 State the null hypothesis, H0 and alternative hypothesis, H1
2 Select the test statistic
3 Specify the level of significance α and find the critical value(s)
4 Calculate the test statistic assuming the null hypothesis is true.
Compare the sample statistic with the critical value(s) and make a decision

Using Statistics program

1 State the null hypothesis, H0 and alternative hypothesis, H1
2 Select the test statistic
3 Specify the level of significance α
4 Statistics package calculates the probability of a test statistic as extreme
 as the one observed (the p-value) assuming the null hypothesis is true.
Compare the p-value with the level of significance and make a decision