BU672 QUANTITATIVE TECHNIQUES FOR BUSINESS

TUTORIAL QUESTIONS
TOPIC TWO – DECISION ANALYSIS (Sample Information)

A road contractor receives a bonus for each day of daily completion of the project before the
final contract deadline. He has a choice of using three different subcontractors. The ability of
each of the subcontractors to finish the job early is influenced by the type of weather
conditions. The contractor estimates the number of days that each subcontractor will be able to
finish early for each type of weather condition. This summary is given in the table below, along
with the contractor’s estimate of the probabilities for each weather condition.

Type of weather condition

Subcontractor Clear (0.4) Light Rain (0.3) Heavy Rain (0.1) Rain with
Heavy Wind
(0.2)
1 14 10 9 6
2 12 9 7 8
3 16 11 6 5
Payoff table with prior probabilities

QUESTION 1:
Draw a decision tree representing the possible decisions and states of nature.

QUESTION 2:
Find the maximum expected payoff and the corresponding decision.

QUESTION 3:
Find the expected payoff under perfect information.

QUESTION 5:
Find the expected value of perfect information and interpret its meaning.

QUESTION 6:
Convert the table above to an opportunity loss table and then find the minimum expected
opportunity loss.

1
Question 7:
The long range forecast is for clear weather. The posterior probabilities under this additional
information are given as 0.686, 0.171, 0.086, and 0.057 for the states of nature 𝑆1 to 𝑆4 ,
respectively. Calculate the maximum expected payoff using posterior probabilities.

Question 8:
Find the expected payoff under perfect information using posterior probabilities.

Question 9:
Find the expected value of perfect information using posterior probabilities and comment on
the comparison with the expected value of perfect information found in Q5.

Question 10:
Find the minimum expected opportunity loss using posterior probabilities and compare it with
the expected value of perfect information found in Q9.