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Answer For Past Year

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1.

Let D = Default on loan; D' = No default; R = Loan rejected; R = Loan approved Given:
P(D) = 0.2
P(D') = 0.8
P(R | D) = 0.9
P(R' | D') = 0.7
(a) P(R | D') = 1 0.7 = 0.3
P D R

(b)

2. a.

b.

P R D P D

P R D P D P R D P D
0.3 0.8

0.3 0.8 0.9 0.2

0.57

S1: survey favorable


S2: survey unfavorable
S3: study favorable
S4: study unfavorable
S5: market favorable
S6: market unfavorable
P S5 S1

0.7 0.5

0.7 0.5 0.2 0.5

0.78

P(S6 | S1) = 1 0.778 = 0.222


P S5 S 2

0.3 0.5
0.27
0.3 0.5 0.8 0.5

P(S6 | S2) = 1 0.27 = 0.73


P S5 S 3

0.8 0.5
0.89
0.8 0.5 0.1 0.5

P(S6 | S3) = 1 0.89 = 0.11


P S5 S 4

0.2 0.5
0.18
0.2 0.5 0.9 0.5

P(S6 | S4) = 1 0.18 = 0.82

c. EMV(node 3) = 95,000(0.78) + (65,000)(0.22)


= 59,800
EMV(node 4) = 95,000(0.27) + (65,000)(0.73)
= 21,800
EMV(node 5) = 80,000(0.89) + (80,000)(0.11) = 62,400
EMV(node 6) = 80,000(0.18) + (80,000)(0.82)
= 51,200
EMV(node 7) = 100,000(0.5) + (60,000)(0.5) = 20,000
EMV(conduct survey) = 59,800(0.45) + (5,000)(0.55)
= 24,160
EMV(conduct pilot study) = 62,400(0.45) + (20,000)(0.55)
= 17,080
EMV(neither) = 20,000
Therefore, the best decision is to conduct the survey. If it is favorable, produce the razor. If it
is unfavorable, do not produce the razor.
3. a. = 0.20

Week

Actual
Miles

1
2
3
4
5
6
7
8
9
10
11
12

17
21
19
23
18
16
20
18
22
20
15
22

Forecast
(Ft)
17.00
17.00
17.80
18.04
19.03
18.83
18.26
18.61
18.49
19.19
19.35
18.48

Error

+4.00
+1.20
+4.96
1.03
2.83
+1.74
0.61
+3.51
+0.81
4.35
+3.52

RSFE

+4.00
+5.20
+10.16
+9.13
+6.30
+8.04
+7.43
+10.94
+11.75
+7.40
+10.92

Sum of
Absolute
Forecast
Errors

4.00
5.20
10.16
11.19
14.02
15.76
16.37
19.88
20.69
25.04
28.56

MAD

4.00
2.60
3.39
2.80
2.80
2.63
2.34
2.49
2.30
2.50
2.60

Track
Signal

1
2
3
3.3
2.25
3.05
3.17
4.21
5.11
2.96
4.20

b. The total MAD is 2.60.


c. RSFE is consistently positive. Tracking signal exceeds 2 MADs at week 10. This could
indicate a problem.
4. a. $120,000 in money market fund; $80,000 in stock fund; total risk = 1,560,000
b. Total return = $14,000. Rate of return = 14,000/200,000 = 0.07
c. The investments would not change since 14 is less than the upper bound for this

coefficient. The total risk would increase.


d. The total risk would worsen by 2 (the dual value) per additional dollar.
e. No. The amount invested in the money market fund is greater than $50,000 for the
original solution.
5. Let T = number of TV ads, R = number of newspaper ads, B = number of billboard ads,
and N = number of newspaper ads.
Minimize P1d1 + P2d2+ + P3d3 + P4d4+ + P4d5+ + P4d6+ + P4d7+
Subject to:
(1) number of people reached
40,000T + 32,000R + 34,000B + 17,000N d1+ + d1 = 1,500,000
(2) budget
900T + 500R + 600B + 180N d2+ + d2 = 16,000 budget constraint
(3) number of TV or radio ads
T + R d3+ + d3 = 6
(4) restriction on number of each individual type of ad
T d4+ + d4 = 10
R d5+ + d5 = 10
B d6+ + d6 = 10
N d7+ + d7 = 10
All variables 0
b. T = 0, R = 0.73, B = 0, N = 86.86 (These are rounded to two decimals)
c. Goal 1 (number of people reached) and goal 2 (budget) are met completely. The number
of TV, radio, and billboard ads are each less than 10. The other goals are not met.

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