Expected Monetary Value

Question 1
ABC company is a leading firm of dry cleaners with branches in Delhi and the large
town in Western UP. The company has been thinking of setting up a new shop in
Agra, which already has a large number of dry cleaning shops, one of which is a
branch of a national company at par with the ABC. ABC is concerned about the
reaction of customers and potential customers to the opening of its branch in
Agra, and is of the opinion that one of the three possibilities can take place (i)
increased market share, (ii) no change in the present operations and (iii) a
reduced market share. The company assigns a value and probability to each of
these outcome as shown in below Table :

States of Nature Value in Lakh Probability

Increased Market Share 3 0.2
No Change 1 0.5
Reduced Market Share -2 0.3

On the basis of the information given in table, determine the expected monetary value
of the decision to open the branch.
 Question: 2
• The amount that the person will gain in each
combination of state of nature and action is shown in
the table. Probability for three states of nature are
given below:
• Find out the value of EP/EMV, EPPI (Expected Profit
with Perfect Information), EVPI (Expected Value of
Perfect Information)
• A research firm has agreed to conduct a survey to
provide the management with additional information
regarding the states of nature. It will charge Rs 12000
for undertaking this survey. Do you think that the
survey should be conducted.
Sate of Action A1 A2 A3
Nature
S1 25000 -7000 -18000
S2 30000 50000 -8000
S3 40000 25000 60000

State of S1 S2 S3
nature
Probabilities 0.3 0.5 0.2
 Question: 3
• The following payoff table gives the most
accurate estimates of payoff for three alternative
course of action and the four possible states of
nature under condition of uncertainty.
• The probabilities are S1: 0.4, S2: 0.25, S3: 0.2 and
S4: 0.15. The question arises:
• What course of action should be recommended
in this situation?
• What is the expected value of perfect information
if the budget amount is 100.5
Action Sate of S1 S2 S3 S4
Nature
A1 125 100 70 20
A2 70 90 100 50
A3 150 120 60 -10
Binomial Probability Distribution
 Basics and terminology

Outcome:- The end result of an experiment.

Random experiment:- Experiments whose

outcomes are not predictable.

Random Event:- A random event is an outcome or

set of outcomes of a random experiment that share a
common attribute.

Sample space:- The sample space is an exhaustive

list of all the possible outcomes of an experiment,
which is usually denoted by S.
Slide
 Basics and terminology (contd.)
Mutually Exclusive Event.
Random Variables.
 Discrete Random Variable .
 Continuous Random Variable.

Binomial Distribution:-
The Binomial Distribution describes discrete , not
continuous, data, resulting from an experiment
known as Bernoulli process.
Slide
 Notation(parameters) for Binomial
Distributions.
S and F (success and failure) denote two possible
categories of all outcomes.

P(S) = p (p = probability of success)

P(F) = 1 – p = q (q = probability of failure)

n =denotes the number of fixed trials.

Slide
 Notation(parameters) for Binomial
Distributions( contd.)
 p =denotes the probability of success in one of the
n trials.

 q =denotes the probability of failure in one of the

n trials.

 P(x) =denotes the probability of getting exactly x

successes among the n trials.
x = denotes a specific number of successesin n
trials, so x can be any whole number between 0
and n, inclusive.
Slide
 Assumptions for binomial
distribution
 For each trial there are only two possible
outcomes on each trial, S (success) & F (failure).
 The number of trials ‘ n’ is finite.
 For each trial, the two outcomes are mutually
exclusive .
 P(S) = p is constant. P(F) = q = 1-p.
 The trials are independent, the outcome of a
trial is not affected by the outcome of any other
trial.
 The probability of success, p, is constant from
trial to trial.
Slide
 Methods for Finding Probabilities

 Method 1: Using the Binomial Probability Formula.

Slide
 Ques
• Find the chance of getting 3 success in 5 trails
when the chance of getting a success in on
trail is 2/3. (Ans- .33)
 Ques
• Seven coins are tossed simultaneously. Using
the binomial distribution, find out the
probability of obtaining at least 5 heads. (Ans-
0.22)
 Ques
• For a probability distribution the mean is 4
and the variance is 2. Find the probability of
getting
1. At least 2 success (Ans: .964)
2. At the most 2 success. (Ans: 0.1445)
 Fit the binomial distribution for the
following data
X F
0 28
1 62
2 46
3 10
4 4
 Fit the binomial distribution and
calculate the value of standard
deviation

X F
0 4
1 20
2 40
3 40
4 20
5 4