Here are the solutions to problems 2 - 8.

You should try to solve them all yourself first based upon
the solutions in your notes, the lectures, and the book.
2) Given the following payoff table for three alternative investments , A, B and C,
under two future states of the economy , good and bad:
Determine the best decision using the following decision criteria.
a) Maximax
$120,000
b) Maximin
$40,000
c) Minimax regret
$50,000
d) La Place Bayes
$47,500

Investment
A
B
C
Ideal
Regret Table
Investment
A
B
C

Economic Conditions
Good
Bad
Max
Min
Mean
$70,000
$25,000
$70,000
$25,000
$47,500
$120,000
($60,000)
$120,000
($60,000)
$30,000
$40,000
$40,000
$40,000
$40,000
$40,000
$120,000
$40,000

Good

Bad
$50,000
$0
$80,000

Max
$15,000
$100,000
$0

$50,000
$100,000
$80,000

3) A local real estate investor in Orlando is considering three alternative investments: a motel, a theater, or a restaurant.
The motel and restaurant will be adversely or favorably affected by the availability of gasoline and the number of tourists,
while the theater will be relatively stable under any conditions.
The following payoff table shows the profit ( or losses) resulting from each investment.
Determine the best investment using the following decision criteria:
a) Maximax
$20,000
b) Maximin
$5,000
c) Minimax regret
$14,000
d) La Place - Bayes
$9,000

Investment
Motel
Restaurant
Theater
Ideal

Gasoline Availability
Shortage
Stable
Surplus
Max
Min
Mean
($8,000)
$15,000
$20,000
$20,000
($8,000)
$9,000
$2,000
$8,000
$6,000
$8,000
$2,000
$5,333
$6,000
$6,000
$5,000
$6,000
$5,000
$5,667
$6,000
$15,000
$20,000

Regret Table
Investment
Motel
Restaurant
Theater

Shortage
Stable
Surplus
Max
$14,000
$0
$0
$14,000
$4,000
$7,000
$14,000
$14,000
$0
$9,000
$15,000
$15,000

4) The Miramar Company is going to introduce one of three possible new products: a widget , a hummer, or a nimnot.
The market conditions (favorable, stable, or unfavorable) will determine the profit (or loss ) the company
will receive as shown in the following payoff table.
a. Compute the expected value for each decision and select the best one.
b. Develop the opportunity loss table and compute the expected opportunity loss for each product.
c. Determine how much the firm would be willing to pay to a market research firm to gain better
information about future market conditions.

Product
Probabilities
Widget
Hummer
Nimnot
Ideal

Market Conditions
Favorable
Stable
Unfavorable
20%
70%
10% EMV
$120,000
$70,000
($30,000)
$70,000
$60,000
$40,000
$20,000
$42,000
$35,000
$30,000
$30,000
$31,000
$120,000
$70,000
$30,000
$76,000 EVUPI

EOL
Product
Probabilities
Widget
Hummer
Nimnot

Favorable
Stable
Unfavorable
20%
70%
10% EOL
$0
$0
$60,000
$6,000
$60,000
$30,000
$10,000
$34,000
$85,000
$40,000
$0
$45,000

$70,000

$6,000

5) The Blitzkrieg Banking House in Berlin speculates in the money market, and the status of the
American dollar in trading determines the return from investments in other currencies.
The banking house will invest in the dollar, yen, mark. The return from each is shown in the following payoff table.
Determine the best currency to invest in

$35,500 => Mark

and the expected value of perfect information.

$75,000

Currency
Probabilities
Dollar
Yen
Mark
Ideal

Value of the Dollar

Increases
Stable
Decline
30%
50%
20% EMV
$210,000
$0
($170,000)
$29,000
($10,000)
$20,000
$80,000
$23,000
($40,000)
$35,000
$150,000
$35,500
$210,000
$35,000
$150,000
$110,500 EVUPI

6) Southland Corporation's decision to produce a new line of recreational products has resulted in the need to
construct either a small plant or a large plant. The decision as to which plant size to select depends upon how the
marketplace reacts to the new product line. In order to conduct an analysis , marketing management has
decided to view the possible long-run demand as either low, medium, or high.
The following payoff table shows the projected profit in millions of dollars.
a) Maximax
Maximin
Minimax regret
La Place Bayes
b) EMV
c) EOL
EVPI

$500
$150
$100
$250
$365
$20
$20

Small

Low
$190 Med
High

0.2
0.15
0.65

150
200
200

Low
$365 Med
High

0.2
0.15
0.65

50
200
500

d) Decision: Build Large Plant

Large

Probabilities
SMALL PLANT
LARGE PLANT
Ideal

LONG-RUN DEMAND
LOW
MEDIUM
HIGH
20%
15%
$150
$200
$50
$200
$150
$200

65%
$200
$500
$500

Probabilities
SMALL PLANT
LARGE PLANT

Regret Table
LOW
MEDIUM
HIGH
20%
15%
$0
$0
$100
$0

65%
$300
$0

Max

Min
$200
$500

Max

Mean
$150
$50

EOL
$300
$100

$195
$20

EMV
$183
$250

$190
$365
$385 EVUPI

7) McHuffer Condominiums, Inc. of Pensacola, Florida, recently purchased land near the Gulf of Mexico
and is attempting to determine the size of the condominium development should build.
Three sizes of development are being considered: small d1, medium d2, and large d3.
At the same time an uncertai economy makes it difficult to ascertain the demand for the new condominiums.
McHuffer's management realizes that a large development followed by a low demand could be very costly to the company.
However, if McHuffer makes a conservative small development decision and then finds a high demand,
the firm's profits will be lower than they might have been. With the three levels of demands- low, medium, and highMcHuffer's management has prepared the following payoff table:
a) If nothing is known about the demand probabilities ,what are the decision recommendations under the:
Maximax
Maximin
Minimax regret
La Place Bayes

$900
$400
$300
$433

b) If P(low) = 0.20, P(medium) = 0.35 and P(high) = 0.45, what decision is recommended under EMV?

$500

c) What is expected value of perfect information?

$195

d) Construct the decision tree.

Probabilities
SMALL
MEDIUM
LARGE
Ideal

DEMANDS (PROFITS IN $ x 1000)

LOW
MEDIUM
HIGH
20%
35%
$400
$400
$100
$600
($300)
$300
$400
$600

Max
45%
$400
$600
$900
$900

Min
$400
$600
$900

Mean
$400
$100
($300)

Regret Table
LOW
Probabilities
SMALL
MEDIUM
LARGE

MEDIUM
20%
$0
$300
$700

35%
$200
$0
$300

HIGH

Max
45%
$500
$300
$0

EOL
$500
$300
$700

$295
$195
$245

EMV
$400
$433
$300

$400
$500
$450
$695 EVUPI

8) A quality control procedure involves 100% inspection of parts received from a supplier.
Historical records show the following defective rates have been observed.
PERCENT DEFECTIVE
0
1
2
3

PROBABILITY
0.15
0.25
0.4
0.2

The cost for the quality control 100% inspection is $250 for each shipment of 500 parts.
If the shipment is not 100% inspected, defective parts will cause rework problems later in the production process.
The rework cost is $25 for each defective part.
Complete the following payoff table, where the entries represent the total cost of inspection and reworking:
a) The plant manager is considering eliminating the inspection process in order to save the $250
inspection cost per shipment. Do you support this action? Use EMV to justify your answer.
Only if goodwill, handling, and all other associated costs other than the $25
rework costs are not expected to exceed $44 per batch of 500
b) Show the decision tree for this problem.

Percent Defective
100% Inspection
Defects if No Inspection
Probabilities
Costs of no inspection

0
$250
0
15%
0

1
$250
5
25%
125

2
$250
10
40%
250

3
$250
15
20%
375

Exp'd Cost
$250

$206

9-11
#9
P(C)
P(~C)

EMV
$(50,000)

0.35
0.65

$ 600,000
C
0.35
~C
0.65

# 10
P(F|C)
P(U|C)
P(F|~C)
P(U|~C)

C
0.315
0.035
0.35

F
U

0.9
0.1
0.5
0.5

$(400,000)

~C
0.325
0.325
0.65

0.64
0.36
1
P(C|F)
0.492188 $ 600,000

EMV
92,188
Invest
Don't Invest

P(~C|F)

EMV
Favorable
59,000
0.64

$(400,000)

0.507813
$

P(C|U)
Unfavorable
0.36

0.097222 $ 600,000
EMV
(302,778)
Invest
P(~C|U)
Don't Invest

EMV
$

0.902778
$

Page 8

$(400,000)

9-11
# 11
Boiler Plate
F
U
Tot

S
36
4
40

F
30
30
60

Tot
66
34
100

Smoke & Mirrors

S
F
54
U
6
Tot
60

F
20
20
40

Tot
74
26
100

S
0.9
0.1
1

F
0.5
0.5
1

Tot
1.4
0.6
2

Smoke & Mirrors

S
F
0.9
U
0.1
Tot
1

F
0.5
0.5
1

Tot
1.4
0.6
2

Boiler Plate
F
U
Tot

So both are equally good at what they do.

Page 9

12 & 13
# 12

Mega
Turnip
Prob

Small
Medium
Great
EMV
$ 200,000 $
1,000,000 $
3,000,000 $ 960,000 = choose this with no sample data
$ 900,000 $
900,000 $
900,000 $ 900,000
0.3
0.6
0.1

# 13
P(F|S)
P(F|M)
P(F|G)
Joint
Fav
Unf

0.2 P(U|S)
0.5 P(U|M)
0.9 P(U|G)
Small

0.8
0.5
0.1

Medium
0.06
0.24
0.3

Great
0.3
0.3
0.6

Tot
0.09
0.01
0.1

Posteriors Small
Medium
Great
P(Size|F) 0.133333333 0.6666666667
0.2
P(Size|U) 0.436363636 0.5454545455 0.0181818182

0.45
0.55
1
EMV(Mega)
1
1,293,333 => choose this if report favorable
1 $
687,273 => If unfavorable, go with Turnip
$
$
$

Page 10

1,077,000
117,000
50000
67,000

=EVUSI (.45 * 1,293,333 + .55* 900,000)

=EVSI (1,077,000 - Decision in #8)
Cost of info
Net

14
# 14

Make
20
40
50

Demand
20 40 50
20 20 20
20 40 40
20 40 50

20
40
50

Surplus
20 40 50
0 0
0
20 0
0
30 10 0

20
40
50

Lost Sales
20 40 50
0 20 30
0 0 10
0 0
0

20
40
50

20
40
50

Profit from Sales

20
40
50
115
115
115
30
230
230
-12.5
187.5
287.5
Recoup from Shelter
20
40
50
0
0
25
0
37.5
12.5

20
20
40
50

20
20
40
50
I
P

Goodwill Loss
40
0
-5
0
0
0
0
Total Profit
40
115
110
55
230
25
200
115
230
0.2
0.3

0
0
0

50
-7.5
-2.5
0

50
Max
107.5 $ 115.00
227.5 $ 230.00
287.5 $ 287.50
287.5
0.5

Since the EMV is less than the $300 it will cost to open on Saturday, we won't!

Page 11

Min
$ 107.50
$ 55.00
$ 25.00

LaPlace
$ 110.83
$ 170.83
$ 170.83

14

Regret
$ 180.00
$ 60.00
$ 90.00
EVUPI=
EVPI=

EMV
$ 109.75
$ 193.75
$ 208.75
$ 235.75
$ 27.00

EOL
$ 126.00
$ 42.00
$ 27.00

Page 12

Here are the solutions to problems 15 -17.

You should try to solve them all yourself first based upon
the solutions in your notes, the lectures, and the book.
15) Suppose you are given a decision situation with three possible states of nature:S1, S2, and S3.
The prior probabilities are P(S1) = 0.2, P(S2) = 0.5, and P(S3) = 0.3.
Indicator information I is obtained and it is known that P(I|S1) = 0.1, P(I|S2) = 0.05 and P(I|S3) = 0.2.
Compute the revised or posterior probabilities:P(S1|I), P(S2|I), and P(S3|I).

Initial Conditional
P( I | S)
P( Not I | S )
chksum

P(S1)

P(S2)

Joint
P(I)
P(NOT I)
Tot

P(S1)

Posterior Conditional
P( S | I )
P( S | NOT I )

P(S1)
P(S2)
P(S3)
chksum
0.1904761905 0.2380952381 0.571428571
0.2011173184 0.530726257 0.268156425

0.1
0.9
1

P(S3)
0.05
0.95
1

P(S2)
0.02
0.18
0.2

0.2
0.8
1
P(S3)

0.025
0.475
0.5

Tot
0.06
0.24
0.3

0.105
0.895
1

1
1

16) The payoff table showing profit for a decision problem with two states of nature
and three decision alternatives is presented below:
The prior probabilities for S1 and S2 are P(S1) = 0.8 and P(S2) = 0.2
a) Using only the prior probabilities and the expected monetary value criterion, find the optimal decision.
Answer: D1
b) Find the EVPI.
Answer: $14
c) Suppose some indicator information I is obtained with P(I|S1) = 0.2 and P(I|S2)= 0.75.
Find the posterior probabilities P(S1|I) and P(S2|I).
Recommend a decision alternative based on these probabilities.
Answer: If I, make decision D3, if Not I, make decision D1.
S1
Probabilities
D1
D2
D3

S2
0.8
$15
$10
$8

EMV
0.2
$10
$12
$20

$14
$10
$10

Initial Conditionals
P(I | S)
P(Not I | S)
Chksum

S1

Joint Probabilities
P(I)
P(Not I)
Total

S1

Posterior Conditionals
P(S | I)
P(S | Not I)

S1

Given I
Probabilities
D1
D2
D3

S1

Given Not I
Probabilities
D1
D2
D3

S1

S2
0.20
0.80
1.00

0.75
0.25
1.00
S2

0.16
0.64
0.80

0.15
0.05
0.20

Total
0.31
0.69
1.00

0.48
0.07

Chksum
1.00
1.00

S2
0.52
0.93
S2
0.52
$15
$10
$8

EMV
0.48
$10
$12
$20

S2
0.93
$15
$10
$8

$13
$11
$14 *MAX*
EMV

0.07
$10
$12
$20

$15 *MAX
$10
$9

17) Hales TV Productions has a choice to make on a new series to which it has rights:
They can either produce a pilot itself and hope to find a network to carry it,
or they can sell the rights to a competitor.
It may turn out to a major, medium, or minor production.
The payoff table for Hale's TV Productions is as follows:

States of Nature
Minor
Medium
0.2
0.3
($100,000)
$50,000
$100,000
$100,000

Probability of states of nature

Produce pilot
D1
Sell to competitor
D2

Major
0.5
$150,000
$100,000

EMV
$70,000
$100,000 *MAX*

For a consulting fee of $2500 an agency will review the plans for the comedy series and indicate the
overall chances of a favorable network reaction to the series. If the special agency review results in
a favorable (I1) or an unfavorable (I2) evaluation, what should Hale's decision strategy be?
Assume Hale believes the following conditional probabilities are realistic appraisals of the agency's evaluation accuracy:
P(I1|S1)=0.3
P(I1|S2)=0.6
P(I1|S3)=0.9

P(I2|S1)=0.7
P(I2|S2)=0.4
P(I2|S3)=0.1

Initial Conditionals
P(Fav | SoN)
P(Unfav | SoN)

Minor

Medium
0.6
0.4

Major

0.3
0.7

Joint Probabilities
P(Fav)
P(Unfav)
Totals

Minor
0.06
0.14
0.2

Medium
0.18
0.12
0.3

Major
0.45
0.05
0.5

0.9
0.1
Totals
0.69
0.31
1

Posterior Conditionals
P(SoN | Fav)
P(SoN | Unfav)

Minor
0.09
0.45

a) Show the decision tree for this problem.

See solution on other sheet.

Medium
0.26
0.39

Major
0.65
0.16

Totals
1
1

b) What is the recommended decision strategy and the expected value, assuming the agency information is obtained?
Once the agency info is obtained, you would produce the pilot if the report came back positive and sell it otherwise.
c) What is the EVSI? Is the $2500 consulting fee worth the information?
What is maximum Hale should be willing to pay for the consulting information?
The EVIS is $1500, which is less than what it costs, and is the MOST he would be willing to pay for it.
If he couldn't get the information for less than $1500, he would simply sell the production based upon prior probabilities

0.2
Minor
-100000
0.3
Medium

Produce Pilot
0

-100000

70000

50000

50000

0.5
Don't Hire Agency

Major
2

100000

150000

150000

Sell
100000

100000

Produce Pilot
1
100000

0 99673.91
0.69
Favorable
1
0 99673.91

Sell
100000

97500

Hire Agency
-2500

99000

Produce Pilot
0 -4112.903
0.31

Unfavorable
2
0

97500

Sell
100000

97500

-100000

50000

150000

100000

0.09
Minor
-102500
-100000

-102500

0.26
Medium
47500
50000

47500

0.65
Major
147500
150000

147500

97500

0.45
Minor
-102500
-100000

-102500

0.39
Medium
47500
50000
0.16

47500

Major
147500
150000

147500

97500

ID
0
0
0
0
0
0
0
0
9
0
15
16
17
18
19

Name
Value
0 TreePlan
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19

Prob
0

Pred
0
0
0
0
0

0
0

0
0

0
0
0
1
1
3
3
3
2
2
8
8
10
10
10
9
9
15
15
15

Kind
D
D
E
E
T
T
T
T
D
D
E
T
T
T
T
E
T
T
T
T

NS

S1
2
2
2
3
0
0
0
0
2
2
3
0
0
0
0
3
0
0
0
0

S2
1
3
8
5
0
0
0
0
10
15
12
0
0
0
0
17
0
0
0
0

S3
2
4
9
6
0
0
0
0
11
16
13
0
0
0
0
18
0
0
0
0

S4
0
0
0
7
0
0
0
0
0
0
14
0
0
0
0
19
0
0
0
0

S5
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

Row
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

Col
27
12
42
7
17
2
7
12
32
52
27
37
22
27
32
47
57
42
47
52

Mark
1
5
5
9
9
13
13
13
9
9
13
13
17
17
17
13
13
17
17
17

1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1

Birmingham
3000
3000

3000

0.5
No Return Load

3750

2500
Charlotte

2500
0

3750

2500

0.5
Return Load
5000
5000

5000

ID

Name
Value
0 TreePlan
1
2
3
4

Prob
0

0
0
0

Pred
0
0
0
2
2

Kind
D
T
E
T
T

NS

S1
2
0
2
0
0

S2
1
0
3
0
0

S3
2
0
4
0
0

S4
0
0
0
0
0

S5
0
0
0
0
0

Row
0
0
0
0
0

Col
5
2
9
7
12

1
5
5
9
9

Mark
1
1
1
1
1

Birmingham
3000

3000

Dont't Call
2
0

0.5
Return Load

3750
Charlotte

5000
0

3750

5000

0.5
No Return Load
2500

2500

Birmingham

3840
0.55

3000

2990

Busy
2
0 4535.455
Charlotte
0 4535.455
Call
-10

3840

Birmingham
0.45

3000

2990

Slow
1
0

2990
Charlotte
0 2767.778

Prior Conditionals
Busy
Slow
RL
0.9
0.1
NRL
0.20
0.80

Tot
0.5
0.5

Joint Probabilities
Busy
Slow
RL
0.45
0.05
NRL
0.10
0.40
Tot
0.55
0.45

Posterior Conditionals
Busy
Slow
RL 0.818182 0.111111
NRL 0.181818 0.888889
Tot
1
1

Tot
0.5
0.5

3000

5000

2500

2990

0.82
Return Load
4990
5000

4990

0.18
No Return Load
2490
2500

2490

2990

0.11
Return Load
4990
5000

4990

0.89
No Return Load
2490
2500

2490

ID
0
0
0
0
0
0
0
0
0
0
0
17
18
0
0
16
0

Name
Value
0 TreePlan
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16

Prob
0

Pred
0
0
0

0
0

0
0
0
0

0
5
5
2
2
0
0
6
6
14
14
16
16
7
7
8
8

Kind
D
T
E
T
T
D
E
D
D
T
T
T
T
T
E
T
E

NS

S1
2
0
2
0
0
2
2
2
2
0
0
0
0
0
2
0
2

S2
5
0
3
0
0
1
7
13
15
0
0
0
0
0
10
0
12

S3
6
0
4
0
0
2
8
14
16
0
0
0
0
0
9
0
11

S4
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

S5
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

Row
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

Col
16
2
9
7
12
5
27
20
35
27
22
42
37
17
24
32
39

Mark
1
9
9
13
13
5
5
9
9
17
17
17
17
13
13
13
13

1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1

#19

Net Payoff
NoBusch,noMARTA
Busch,noMARTA
MARTA,noBusch
MARTA and Busch
Probability

Excellent
Fairly Good
Awful

P(Excellent | Weather)
P(Fairly Good | Weather)
P(Awful | Weather)

P(Excellent & Weather)

P(Fairly Good &Weather)
P(Awful & Weather)

P(Weather | Excellent)
P(Weather | Fairly Good)
P(Weather | Awful)

Excelent
No Busch, no MARTA
Busch, no MARTA
MARTA, no Busch
MARTA and Busch
Probability

Cold
Wet
($375,000)
($550,000)
($225,000)
($270,000)
0.1

Cold
Dry
($212,500)
($355,000)
($533,750)
($640,500)
0.15

Warm
Wet
$112,500
$35,000
$457,500
$549,000
0.4

Warm
Dry
$2,062,500
$2,375,000
$1,968,750
$2,362,500
0.35

Cold
Wet
5
10
35
50

Cold
Dry
10
30
10
50

Warm
Wet
15
25
20
60

Warm
Dry
80
15
5
100

Cold
Wet
0.1
0.2
0.7
1

Cold
Warm
Dry
Wet
0.2
0.25
0.6 0.416666667
0.2 0.333333333
1
1

Warm
Dry
0.8
0.15
0.05
1

Cold
Wet
0.01
0.02
0.07
0.1

Cold
Warm
Dry
Wet
0.03
0.1
0.09 0.166666667
0.03 0.133333333
0.15
0.4

Cold
Wet
0.0238095238
0.0607594937
0.2790697674
0.3636387849

Cold
Wet
-375000
-550000
-225000
-270000
0.0238095238

Cold
Dry
0.0714285714
0.2734177215
0.1196013289
0.4644476219

Cold
Dry

Warm
Wet
0.238095238
0.506329114
0.531561462
1.275985814

Warm
Wet

-212500
112500
-355000
35000
-533750
457500
-640500
549000
0.0714285714 0.238095238

EMV
697,500
737,000
769,500
923,400 *

110
80
70
260

Warm
Dry
0.28
0.42
0.0525 0.329166667
0.0175 0.250833333
0.35
1
Warm
Dry
0.666666667
0.159493671
0.069767442
0.895927779

1
1
1
3

Warm
Dry
EMV
2062500
1,377,679
2375000
1,553,214
1968750
1,377,946
2362500
1,653,536 *
0.666666667

Fairly Good

Cold
Wet

No Busch, no MARTA
Busch, no MARTA
MARTA, no Busch
MARTA and Busch
Probability

-375000
-550000
-225000
-270000
0.0607594937

Awful

Cold
Wet

No Busch, no MARTA
Busch, no MARTA
MARTA, no Busch
MARTA and Busch
Probability

Warm
Wet

-212500
112500
-355000
35000
-533750
457500
-640500
549000
0.2734177215 0.506329114

Cold
Dry

-375000
-550000
-225000
-270000
0.2790697674

Excellent
Fairly Good
Awful

Warm
Wet

-212500
112500
-355000
35000
-533750
457500
-640500
549000
0.1196013289 0.531561462

Warm
Dry
EMV
2062500
305,032
2375000
266,038
1968750
386,041
2362500
463,249 *
0.159493671

Warm
Dry
EMV
2062500
73,630
2375000
(11,645)
1968750
253,916
2362500
304,699 *
0.069767442

694,485
152,486
76,429
923,400
0
0

NoBusch,noMARTA
Busch,noMARTA
MARTA,noBusch
MARTA and Busch
Probability
Ideal

Cold
Dry

Cold
Wet
($375,000)
($550,000)
($225,000)
($270,000)
0.10
($225,000)

Cold
Dry
($212,500)
($355,000)
($533,750)
($640,500)
0.15
($212,500)

Warm
Wet
$112,500
$35,000
$457,500
$549,000
0.40
$549,000

Warm
Dry
$2,062,500
$2,375,000
$1,968,750
$2,362,500
0.35
$2,375,000

EMV
697,500
737,000
769,500
923,400
996,475 = EVUPI
73,075 = EVPI

20
# 20
P(Good) P(Bad)
0.9
0.1
Good
P(Given Credit | Risk)
P(Not Given Credit | Risk)
Joint
Given Credit
Not Given Credit

P(Risk | Credit)
P(Risk | No Credit)

Bad
0.9
0.1

Good

0.2
0.8
Bad

0.81
0.09

Tot
0.02
0.08

0.83
0.17

Good
Bad
0.975904 0.024096 = P(Guido will have to break his legs)
0.529412 0.470588

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