Office Use Only

Semester Two 2015

Examination Period
Faculty of Business and Economics
EXAM CODES:

ETC1010

TITLE OF PAPER:

Data Modelling and Computing - PAPER 1

EXAM DURATION:

2 hours writing time

READING TIME:

10 minutes

THIS PAPER IS FOR STUDENTS STUDYING AT:( tick where applicable)

Berwick
Clayton
Malaysia
Off Campus Learning
Caulfield
Gippsland
Peninsula
Enhancement Studies
Parkville
Other (specify)

Open Learning
Sth Africa

During an exam, you must not have in your possession, a book, notes, paper, electronic device/s, calculator,
pencil case, mobile phone, smart watch/device or other material/item which has not been authorised for the
exam or specifically permitted as noted below. Any material or item on your desk, chair or person will be
deemed to be in your possession. You are reminded that possession of unauthorised materials, or attempting to
cheat or cheating in an exam is a discipline offence under Part 7 of the Monash University (Council) Regulations.
No exam paper or other exam materials are to be removed from the room.

AUTHORISED MATERIALS
OPEN BOOK

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NO

CALCULATORS

YES

NO

SPECIFICALLY PERMITTED ITEMS

if yes, items permitted are:

YES

NO

Candidates must complete this section if required to write answers within this paper

STUDENT ID:

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DESK NUMBER:

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INSTRUCTIONS TO CANDIDATES:
1. NO EXAMINATION PAPERS ARE TO BE REMOVED FROM THE ROOM
2. WRITE ALL ANSWERS IN THE EXAM BOOKLET
3. EXAM BEGINS ON PAGE THREE

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Question 1: Spreadsheet Modeling (18 pt)

Serenity transport company delivers goods of almost any kind with no questions asked. The
company charges two types of fees for their services: administrative fees associated with
acquiring and delivering the goods; and management fees associated with the distance the
goods are to be transported, the weight of the goods, and whether the goods are hazardous in
nature. In addition to these revenue streams, Serenity incurs several costs associated with each
shipping contract: ship maintenance costs, fuel costs and labor costs. Use the above information
and Figure 1 to answer the following questions.
(A) Serenity is trying to expand their business model by now offering to transport passengers
and cargo to distant, and sometimes exotic, locations. However, such an expansion will
require refitting their fleet of ships with areas that allows passengers to relax during the
journey. This will require the company to raise new capital, which they will borrow from
a bank. As part of their loan application the bank has asked Serenity to explain their
business model, including all revenue and cost streams. Draw an influence diagram that
accurately represents this information and how these different pieces relate to company
profit. (6 pt)
(B) Consider the spreadsheet model in Figure 1. The entry Hazardous takes a value 1 if
the shipment is hazardous and zero else. If the shipment contains hazardous materials,
Serenity charges its customer an additional fee that is equal to twice the weight of the
material to be shipped.
Serenity is currently trying to decide whether or not to accept a job that requires them
to transport 200 kilos of explosives to the city of Coruscant. The administrative and
management fees associated with this shipment have been estimated and can be found in
Figure 1. Determine the profit Serenity will obtain if they decide to take this contract.
How will profit change if the hazardous shipping charge is increased to three times the
shipping weight of the material. (6 pt)
(C) Serenity has labor costs given in Figure 1. Serenity would like to give its employees a
raise. Using Figure 1, determine how much Serenity can increase their employees hourly
wage before earning zero profit (holding everything else constant). Explain how this can
be answered using native spreadsheet functions in excel. (6 pt)

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Figure 1: Spreadsheet model for Serenity, with excel formulas.

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Question 2: Regression Analysis (38 pt)

Nearly forty years of economic research says that wages are positively related to an employees
level of education and job experience. The goal of this question is to determine the exact relationship between wages, education and experience. We record data related to wages, experience,
education and age for a representative survey of 753 individuals living in the United States. The
precise definition of the recorded variables in the data set are as follows: wage, the individuals
reported wage (in ten thousands); lwage, the logarithm of the individuals reported wage; Age,
age of the individual at the time of the survey; Educ, the individuals level of education at the
time of the survey; Exp, the individuals level of experience at the time of the survey.
(A) Figure 2 contains the regression output with dependent variable wage. State the population regression model. (1 pt)

Figure 2: Regression output with dependent variable wage.

(B) What does the R2 in the above regression measure? Interpret the R2 in Figure 2. (2 pt)
(C) Calculate the coefficient estimate of experience. (3 pt)
(D) Using the R2 from the regression model in (A), test the overall significance of the regression
model at the 5% significance level. Clearly state all testing steps. The following values
may be needed: F.INV.RT(.025,3,749)=3.114, F.INV.RT(.05,3,749)=2.617, (5 pt)
(E) We know from class that 95% CIs can be used to conduct two-sided hypothesis tests. Is a
two-sided hypothesis test for experience appropriate in this example (2 sentence maximum
please)? (3 pt)
(F) Using the critical value approach, conduct a one-sided hypothesis test for a positive experience affect at the 5% significance level. State all testing steps. The following values may
be needed: T.INV(.025, 749)=1.96, T.INV(.05, 749)=1.645 (5 pt).
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(G) Figure 3 plots the residuals from the regression model in part (A).
(G.1) Do the residuals appear to be dispersed uniformly? (1 pt)
(G.2) Using the formula for calculation of standardized residuals, and the overall residual
variance of 8.808, calculate the standardized residual using the following residual
values: e286 = 16.5565, e132 = 17.0625, e751 = 10.4472. (2 pt)
(G.3) In total, we find that 21 observations have standardized residuals greater than 1.96.
What does this information, and Figure 3, say about the presence of outliers and how
could these points affect the estimated regression line? (3 pt)

Figure 3: Residual output for regression model with dependent variable wage.
(H) Let us now consider the same regression model in part (A), but where the dependent
variable wage is replaced by lwage. Figure 4 gives the results from this new model and
the residuals are plotted in Figure 5.
(H.1) State the estimated regression model in Figure 4. (1 pt)
(H.1) Compare and contrast the residuals in Figures 3 and 5. (3 pt)
(H.2) Based on only the residual plots in Figures 3 and 5, which model seems more appropriate? Justify your answer to receive full marks. (2 pt)
(I) Analyzing the number of observations used to estimate the regression models in Questions
(A) and (H), see Figures 2 and 4, we see that many observations for the model with lwage
as a dependent variable have not been included when estimating the regression model.
These observations were dropped from the sample because those individuals had a zero
wage at the time of the survey.
(I.1) State two alternative means of dealing with the missing values for lwage. (1 pt)
(I.2) Given the information in the stem of this question, are there likely to be any differences
between the individuals in the samples in questions (A) and (H)? (4 pt)
(I.3) Using the regression output in Figures 2 and 4 predict the mean wage and mean
log-wage for individuals with Age=45, Educ=12 and Exper = 14. Compare the
answers obtained from the two regression models. (2 pt)

Figure 4: Regression output with dependent variable lwage.

Figure 5: Residual output for regression model with dependent variable lwage.

Question 3 (20pt)
The four little villages on the Sunshine Dream Island completely depend on desalinated water.
Three desalination stations are located at three different locations across the island. The four
villages: Blue-Shell, Pinky-Sand, Salmon Bay and Storm-Shelter, demand 45, 20, 30 and 30 hectoliters of water per week, respectively. The biggest desalination station can not desalinate more
than 50 hectoliters of water per week. The other two, the medium and the small, desalination
stations can not desalinate more than 40 and 35 hectoliters of water per week, respectively. The
transportation costs, per hectoliter, of the desalinated water are given in the following table.

From
Large station
Medium station
Small station

Blue-Shell
$9
$14
$8

Transportation costs to
Pinky-Sand Salmon Bay Storm-Shelter
$12
$13
$7
$9
$16
$5
$6
$10
$9

(A) Draw a network chart to represent the transportation problem that the Sunshine Dream
Island people need to solve. (3 pt)
(B) What are the decision variables in part (A)? (3 pt)
(C) Formulate the mathematical optimization problem based on the above description. (6 pt)
(D) One of the junior business analysts on the island has developed an optimization Excel file
to solve this problem. Examine the print screens from the excel file in Figures 6, 7, 8, and
determine if there are any mistakes in the file. Full marks require finding at least three
errors. (4 pt)
(E) Explain how to find an alternative solution to this transportation problem. (4 pt)

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Figure 6: First screen shot of excel file for Sunshine Dream Island.

Figure 7: Second screen shot of excel file for Sunshine Dream Island.

Figure 8: Third screen shot of excel file for Sunshine Dream Island.

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Question 4 (12pt)
ABC kindergarten has decided to promote their business to increase student enrollment in the
coming academic year. The managers consider three media alternatives: local television, local
radio and newspaper advertising. Audience estimates, advertisement costs and maximum media
limitations for each media alternative are as follows:
Audience per advertisement
Cost per advertisement
Maximum media usage

TV
80,000
$ 4,000
10

Radio
15,000
$ 6,000
20

Newspaper
30,000
$ 1,240
10

The owner of ABC kindergarten insists that at least 10% of media usage (the total number
of commercial messages) must come from TV and no more than 50% can come from Radio
advertising. The budget available for the promotion activity is $36,400.
(A) State the objective function. (1pt)
(B) What are the decision variables in part (A)? (1pt)
(C) Formulate the mathematical optimization problem based on the above description. (4pt)
This problem has been solved in Excel. Use the output in Figures 9-11 to answer the following
questions.
(D) How many commercial messages should be run on each medium, and what is the total
audience reached? (2pt)
(E) By how much would the audience size increase if an additional $1,000 were allocated to
the promotion? (4pt)

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Figure 9: Excel for ABC Kindergarten.

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Figure 10: Answer report for ABC Kindergarten.

Figure 11: Sensitivity report for ABC Kindergarten.

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Question 5 (12pt)
A restaurateur is trying to launch a new restaurant and must choose one of three proposals: a
restaurant that only serves ice cream (named Ice-Town), a dinosaur themed restaurant (named
Jurassic Fork) and an Italian restaurant (named Toms Bistro). Two future states of nature
determine how much profit the investor will make: state one is characterized by good economic
conditions (Good Economy), and state two is characterized by poor economic conditions (Bad
Economy). The potential yearly profits (in thousands) for each decision, conditional on the state
of nature, are as follows:
Good Economy
Ice-Town
$ 7,000
Jurassic Fork
$ 5,000
Toms Bistro
$ 4,000

Bad Economy
$-4,000
$ 2,500
$ 2,800

(A) Determine the best decision without probabilities based on the following criterion:
(A.1) Maximax (optimistic approach). (1pt)
(A.2) Maximin (conservative approach). (1pt)
(A.3) Minimax Regret. (1pt)
(B) The investor believes with 40% probability that good economic conditions will prevail and
with 60% probability that bad economic conditions will prevail.
(B.1) Determine the best decision using expected value. (1pt)
(B.2) Determine the best decision using expected opportunity loss. (1pt)
(B.3) Compute the expected value given perfect information. (1pt)
(B.4) Develop a decision tree with the expected value at each of the nodes. (3pt)
(C) The investor has now hired a professional business analyst. Based on their past history,
the investor knows the prediction quality (conditional probabilities) of the analyst is as
follows:
P (F |g) = .60 and P (U |b) = .20,
where
g = good economic conditions
b = bad economic conditions
F = Favorable economic report (predict good)
U = Unfavorable economic report (predict poor)
Determine posterior probabilities P (g|F ) and P (b|U ) using Bayes rule (or Contingency
Table) and the probabilities given in part (B). (3pt)

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