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15.

060 Data, Models, and Decisions


Homework 1
Due: MONDAY, September 15, 2014
1. The number of hits per hour at the website http://thenextbigthing.com is a ran
dom variable. The probability distribution of the number of hits per hour at this site
is shown in Table 2.34.

Hits per Hour Probability


xi
pi
0
0.03
1
0.09
2
0.24
3
0.27
4
0.25
5
0.09
6
0.03
Table 2.34: Probability distribution of hits per hour at the website
http://thenextbigthing.com .
(a) For a given hour, what is the probability that the number of hits will be between
3 and 5 ?
(b) Compute the mean, the variance, and the standard deviation of the number of
hits per hour.
2. It is estimated that 70% of all visitors to a given website are college students. The
remaining 30% are either college graduates or have not attended college. Suppose
the website had twelve visitors in the last two hours.
(a) Let X be the number of visitors (among the twelve) who are college students.
What assumptions need to be satised in order for X to obey a binomial distri
bution?
(b) Modeling X as a binomially distributed random variable, what is n and what is
p in this case?
1

(c) What is the probability that exactly eight of the twelve visitors are college
students?
(d) What is the expected number of visitors (of the twelve) who are college stu
dents? What is the standard deviation of the number of visitors who are college
students?
3. The website http://MEGA-Retail.com features a huge variety of tness products for
upscale consumers. These consumers are segmented into smartphone consumers
and desktop consumers depending on whether or not the majority of their purchases
are conducted via their smartphones or a less-mobile device such as a desktop or lap
top computer. Indeed, 38% of the MEGA-Retail.coms consumer base are smartphone
consumers, with the remaining 62% being desktop consumers. The Consumer Fraud
Division of the Department of Justice has begun a preliminary investigation into the
online practices of MEGA-Retail.com after a newspaper article exposed complaints
of padded charges. Their rst task is to choose a random sample of 20 customers for
interviews and data collection regarding their transactions with MEGA-Retail.com.
(a) What is the probability that 7 of the 20 randomly chosen consumers will be
smartphone consumers?
(b) What is the probability that between 12 and 14 of the 20 randomly chosen
consumers will be desktop consumers?
(c) What is the probability that 3 or fewer of the randomly chosen consumers will
be desktop consumers?
4. You have made it to the nal round of a game show. The announcer asks you the nal
multiple choice question, which has four possible answers: (a), (b), (c), or (d). If you
answer the question correctly, you win $1,000,000. After listening to the question,
you realize you are not sure of the answer! Rather, you think the answer is either
choice (a) with probability 60%, or choice (b) with probability 40%. You know for
sure the answer is not choices (c) or (d). You have three options at this point:
Choose not to answer the question. In this case, you walk away with $500,000.
Select an answer (either (a) or (b)). If you are correct, you win the $1,000,000.
If you are incorrect, you only win $32,000.
Phone a friend. In this option, the announcer allows you to phone your friend
and ask her/him for help. After listening to your friends response, you then
will need to answer the question. You know that:
2

Given that the correct answer is (a), your friend will say a with probability
80%.
Given that the correct answer is (b), your friend will say b with probability
80%.
(a) What is the probability your friend says the answer is a? Hint: It may help
to make a probability table.
(b) What is the probability that the true answer is b given that your friend says
it is b?
(c) Make a decision tree to nd your best strategy. In words, what should your
strategy be? How much money do you expect to win?
5. A medical test for malaria is subject to some error. Given a person who has malaria,
the probability that the test will fail to reveal the malaria is 0.06. Given a person
who does not have malaria, the test will correctly identify that the person does not
have malaria with probability 0.91.
(a) If someone has malaria, what is the probability that the test will identify that
person as having malaria?
(b) Suppose three unrelated individuals who are not infected with malaria take the
test. What is the probability that at least one of the three individuals will be
identied by the test as having malaria?
(c) In a particular area of a particular country, 20% of the population suers from
malaria. If a random person from this area is tested and his test results indicate
that he has malaria, what is the chance that he actually has malaria?

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15.060 Data, Models, and Decisions


Homework 2
Due: MONDAY, September 22, 2014
1. The amount of yogurt sold by Clover each day (for their lovely yogurt parfaits) obeys
a continuous uniform distribution between 400 ounces and 600 ounces.
(a) What is the probability that tomorrow Clover will sell between 450 and 500
ounces of yogurt?
(b) What is the probability that tomorrow Clover will sell between 300 and 350
ounces of yogurt?
2. Assume that the net revenue per day for a certain e-store is approximately obeys a
Normal distribution with mean = $10,000 and standard deviation ( = $6,500.
(a) What is the probability that tomorrows net revenue will exceed $9,500?
(b) Suppose that the probability that todays net revenue exceeds the value b is
exactly 0.60. What is the value of b?
(c) What proportion of the days does the store have negative net revenue?
3. Your company melts bars of gold to produce liquid gold. The daily production of
melted gold approximately obeys a Normal distribution with mean = 50 tons and
standard deviation ( = 10 tons. Compute the quantiles of the daily production of
melted gold. More specically:
(a) If the probability that daily production is less than a tons is 0.25, then what is
a?
(b) If the probability that daily production is at least b tons is 0.25, then what is b?
(c) If the probability that daily production is at least c tons is 0.50, then what is c?
And here is a slightly more challenging question:
(d) What is the probability that daily production will be either more than 70 tons
or less than 30 tons? (In other words, what is the probability that our Normally
distributed random variable will be least 2 standard deviations away from its
mean?)
1

4. JoAnne has gathered data on stock prices and rates of return for companies A and B,
and has converted this data into the joint probability distribution of rates of return
for the two companies shown in Table 1.

Probability
(pi )
0.04
0.09
0.16
0.19
0.17
0.15
0.10
0.10

Annual Rate of
Return of Asset A (%)
(xi )
5.1
5.3
7.8
8.2
7.7
9.0
10.7
11.1

Annual Rate of
Return of Asset B (%)
(yi )
6.9
6.1
8.3
9.2
7.9
7.1
9.3
11.4

Table 1: Joint probability distribution of the rates of return of companies A and B.


(a) Compute the mean, variance, and the standard deviation of the rate of return
of company A.
(b) Compute the mean, variance, and the standard deviation of the rate of return
of company B.
(c) Compute the covariance and correlation of rates of the return of companies A
and B.
5. The website http://HelpingHomeowners.com oers a variety of information to assist
homeowners in repair and maintenance. The site features banner display ads of local
service companies and local home product companies, for which HelpingHomewners
receives ad revenues based on click-thrus. Let X denote the daily number of click
thrus of display ads of homeowner service companies on the site, and let Y denote
the daily number of click-thrus of display ads of home product companies on the site.
Suppose that X = 254.1 and (X = 88.7, and Y = 177.5 and (Y = 85.2. Suppose
further that CORR(X, Y ) = 0.63.
(a) Suppose that revenue to HelpingHomewners from click-thrus is $0.04/click-thru
for service ads and also $0.04/click-thru for product ads. Compute the mean and
2

standard deviation of total daily revenues. Compare the relative risk associated
with revenues from service companies, revenues from home product companies,
and total revenues. What do you observe?
(b) Suppose that revenue to HelpingHomewners from click-thrus is $0.03/click-thru
for service ads and is $0.07/click-thru for product ads. Compute the mean and
standard deviation of total daily revenues. Compare the relative risk associated
with revenues from service companies, revenues from home product companies,
and total revenues. What do you observe?
6. You are tasked with constructing a portfolio out of three assets: A, B and C. The
annual returns, risk, and correlations between the returns on these assets are given in
Table 2. The requirements of the portfolio are: (i) it should be composed of exactly
two assets, (ii) the funds should be invested 50% in each asset, and (iii) the expected
annual return of the portfolio should be at least 10%.

Asset
A
B
C

Annual Expected
Return(%)
13
7
9

Risk
(%)
13
12
15

Correlation
A
B
C

-0.20 -0.15
-0.20

0.30
-0.15 0.30

Table 2: Annual returns, risk, and correlation between the returns of assets A, B, and C.

(a) Find the portfolio that satises all of requirements and has the minimum risk.
(b) [Challenge] Can you nd a portfolio with less risk if you can invest any percentage
in each of the two assets (while still satisfying the minimum 10% expected return
requirement)?

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Company
Number
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43

Total Compensation ($thousand)


580
295
3,067
2,971
509
794
1,564
809
1,272
594
230
936
1,066
486
1,295
1,844
988
1,738
1,732
2,362
1,565
2,309
2,913
213
3,029
1,567
2,060
247
248
856
1,989
2,307
1,409
1,929
308
2,243
1,261
203
2,403
2,006
1,753
1,283
652

Years in current position


2
0
10
7
1
4
8
4
7
4
2
4
5
4
6
7
5
7
7
8
10
7
8
0
11
7
9
0
2
5
8
8
5
7
0
8
5
0
11
6
8
5
3

Change in stock price from previous year (%)


-15
-12
109
44
28
10
16
11
-21
16
-5
8
28
13
34
49
26
46
46
63
12
48
7
-18
102
42
55
-14
-17
23
66
67
21
46
-11
60
10
-17
37
40
-24
21
1

Change in Company's sales from Previous Year (%)


-67
49
-27
26
-7
-7
-4
50
-20
-24
64
-58
-73
31
66
-4
55
10
-5
28
-36
72
5
-16
51
-7
122
-41
-35
19
76
-48
64
104
99
-12
20
-18
27
41
-41
87
-34

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15.060 Data, Models, and Decisions


Homework 3
Due: WEDNESDAY, October 1, 2014
1. The spreadsheet EXEC-PAY.xls contains data on the annual compensation of CEOs
of 43 publicly-traded corporations, as well the number of years that the executive
has been the CEO of the company, the percentage change in the stock price of the
company from the previous year, and the percentage change in the companys sales
from the previous year.
(a) Download the spreadsheet EXEC-PAY.xls. Then construct and run a regression
model to predict the CEO compensation as a function of the three independent
variables indicated in the spreadsheet.
(b) What is the R2 of the regression? In your opinion is this value low or high?
(c) What is the standard error of the regression?
(d) What is the regression equation produced by your linear regression model?
(e) What is the predicted CEO compensation for a CEO who has been with her
company for 6 years, and for which the companys stock price has increased by
34% in the last year, while the companys sales have decreased by 3% in the last
year?
(f ) Do you notice anything unusual about your regression model that might make
you less condent about the validity of the model?
2. The Sloan Cafe bakes crumpets that are sold only in the afternoons. Suppose Jill
Preisig would like to predict the sales of afternoon crumpets in order to improve
eciencies in the baking operation. Jill has collected daily data on sales of afternoon
crumpets and has run a regression model with the following independent/explanatory
variables:
the number of students who park in the Sloan parking lot on the given day
the outside temperature, in degrees Fahrenheit, at noon on the given day
the number of croissants sold at breakfast in the morning of the given day
the number of crumpets sold the previous afternoon of that day
the number of cases due in any Core class on that day
Below is the regression model output from Jills model.
1

(a) What is the regression equation of Jills model?


(b) What is the R2 of Jills regression? In your opinion is this value low or high?
(c) According to Jills model, what is the prediction of daily crumpet sales if 40
students parked in the Sloan lot that day, the temperature is 65 F, the number
of croissants sold at breakfast was 40, the number of crumpets sold yesterday
was 10, and there was one Core class case due today?

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Beer
Number
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50

Annual
Sales
($ thousand)
4,800
5,100
5,100
1,900
5,300
2,000
3,400
2,700
2,100
2,600
3,600
2,650
2,200
3,750
2,800
4,600
3,700
4,650
5,900
5,900
4,700
3,800
3,900
4,800
6,050
1,750
5,800
1,600
1,700
1,800
4,200
4,100
6,200
2,400
5,400
2,300
2,500
2,550
6,000
5,500
5,800
6,000
6,100
5,600
5,700
6,250
4,900
5,000
5,100
5,200

Hops
(ounces
per keg)
9.0
9.0
8.0
9.0
8.0
12.0
6.0
8.0
12.0
5.0
10.0
9.0
6.0
12.0
7.0
6.0
8.0
11.0
11.0
12.0
6.0
6.0
12.0
7.0
11.0
13.0
8.0
5.0
10.0
14.0
6.0
6.0
9.0
13.0
17.0
5.0
12.0
12.0
9.0
11.0
8.0
8.0
8.0
6.0
17.0
8.0
5.0
5.0
8.0
8.0

Malt
(pounds
per keg)
8.0
8.0
8.0
7.0
8.0
7.0
7.0
6.0
7.0
6.0
7.0
6.0
7.0
7.0
6.0
8.0
7.0
8.0
8.0
8.0
8.0
7.0
7.0
8.0
8.0
6.0
8.0
6.0
6.0
6.0
7.0
7.0
8.0
7.0
7.0
7.0
7.0
7.0
8.0
7.0
8.0
8.0
8.0
7.0
7.0
8.0
7.0
7.0
7.0
7.0

Annual
Advertising
($)
180,000
180,000
180,000
140,000
180,000
140,000
170,000
180,000
140,000
180,000
170,000
180,000
140,000
170,000
180,000
160,000
170,000
160,000
180,000
180,000
160,000
170,000
170,000
160,000
180,000
150,000
180,000
150,000
150,000
150,000
170,000
170,000
180,000
130,000
190,000
130,000
130,000
130,000
170,000
190,000
170,000
170,000
170,000
190,000
190,000
170,000
170,000
170,000
170,000
170,000

Bitterness
Scale
3
3
3
4
3
5
4
4
5
4
5
5
3
6
5
2
4
4
1
2
2
3
6
3
2
7
4
4
6
7
3
4
3
6
9
4
6
6
2
6
4
3
2
4
9
2
3
2
3
1

Initial
Investment
($ million)
1.4
0.6
0.7
2.4
2.3
1.0
1.5
1.8
0.7
1.3
1.9
0.5
2.1
2.1
2.4
2.0
1.7
0.7
1.6
0.9
1.1
1.1
1.1
2.5
1.7
2.3
0.5
0.8
0.8
0.9
2.4
1.4
2.1
1.4
2.2
1.2
0.9
1.9
1.7
2.2
0.6
2.2
2.1
1.5
1.3
1.2
1.5
1.6
1.4
0.5

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15.060 Data, Models, and Decisions


Homework 5
Due: WEDNESDAY, October 29, 2014
1. Exercise 7.2 of the DMD textbook. Answer questions (a), (b), and (c).
2. Exercise 7.7 of the DMD textbook. Answer question (a) only, where you should write
down (or type) your formulation of the optimization problem. You are not expected
to solve this linear optimization problem, only to construct the formulation of the
model.

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15.060 Data, Models, and Decisions


Homework 6
Due: MONDAY, November 3, 2014
1. Read and analyze the Filatoi Riuniti case at the end of Chapter 7 of the text. Con
struct a linear optimization model. Write up and hand in your answers to questions
(a), (b), (c), (f), (g), (h), and (i), at the end of the case.
2. Exercise 7.7, continuation.
(i). Answer question (b) of Exercise 7.7 by constructing and solving your linear
optimization model on your computer. For your added convenience, we have
provided a spreadsheet that contains Table 7.38. This spreadsheet contains
other data needed in this exercise as well.
(ii). What is the value to Jordan Alloy Corporation of an extra ton per month of
copper?

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Metal

Aluminum
Copper
Magnesium

0.30
0.30
0.40

0.40
0.10
0.50

0.10
0.25
0.65

0.15
0.40
0.45

Contribution to Earnings ($/ton)

35.00

47.00

60.00

140.00

Availability
(tons/month)
600
400
800

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Data for the Dream Team

Player
Number
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

Average
Rebounds
Per Game
1
2
3
4
5
7
7
4
8
5
10
8
10
9
6
16
11
12
11
9

Average
Assists
Per Game
7
14
12
4
9
6
8
2
2
5
6
8
2
5
3
2
1
5
1
1

Height
(feet and inches)
5' 11"
6' 0"
6' 4"
6' 0"
6' 3"
6' 5"
6' 8"
6' 5"
6' 10"
6' 4"
6' 10"
6' 9"
7' 3"
6' 10"
6' 10"
6' 9"
7' 4"
7' 2"
7' 3"
7' 0"

Average
Points
Per Game
10
14
19
18
20
21
23
13
17
25
20
30
24
15
17
3
27
26
21
14

Defensive Ability
(scale from 0 to 10)
10
9
8
6
8
10
10
5
8
8
9
10
9
7
6
6
9
10
9
8

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15.060 Data, Models, and Decisions

Homework 7

Due: MONDAY, November 24, 2014

1. Exercise 9.3, parts (a) and (b).


2. Solve the optimization problem described in National Basketball Dream Team on
pages 476-478 of the textbook. Answer questions (a) and (b). You do NOT need to
answer question (c). The spreadsheet for this question is provided.
3. Read the case International Industries, Inc. at the end of Chapter 9, and be prepared
to discuss the case in class on Monday. You do NOT need to build or solve the model
for the case.

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