ATTENTION This is the version of Exercise 2 corresponding to the solution posted in the video lecture

#22: When site A is chosen and the market share remains the same, the MV is 22 Me (and not 18 Me as
in the previous version). Traccia A v2

Decision Analysis
Midterm exam - 11.4.2019

Student’s Name:................................................................................................................

Exercise 1. A supplier of yours delivers a batch of material that is compliant with the specifications 95%
of the times (5% of the times the material is not compliant). You do not know if the received material is
compliant until you use it for your production. If you use a non compliant material for your production,
you will incur a cost of 50 ke (if the material is compliant, you do not incur any cost). You have also the
possibility to reject the received material (i.e., send it back to the supplier) and not use it for production.
However, if the material that you reject is compliant, you will incur a cost of 10 ke (if you reject a non
compliant material you do not incur any cost).
You have received a new batch of material from your supplier. Initially, you must decide if to use the
received material for your production or to make a test to try to identify the compliance of the material. Such
a test costs 1 ke and it returns a false negative (i.e., the material is not compliant but the test identifies it as
compliant) with probability 0.3. Conversely, the test does not return false positives. If you decide to make
the test, after looking at the test result, you must choose among: i) use the material for your production,
ii) reject the material or iii) make a second test. The second test costs 2 ke, returns a false negative with
probability 0.1 and does not return false positives. If you make the second test, after looking at the test
result, you must finally decide whether to use the material for your production or reject it.

a) Build an influence diagram modeling the decision problem at hand. Include all the necessary tables,
clearly defining the meaning of all the nodes, alternatives and results.

Exercise 2. A manufacturing company wants to build a new production plant and has to select one out of
two candidate sites. In site A, the company would build a medium-size plant costing 20 Me. With this new
plant, the revenue would be either 25 Me or 22 Me, depending on the company market share increasing
(event that occurs with probability 1/3) or remaining the same (event that occurs with probability 2/3),
respectively. In site B, the company would build a large-size plant costing 30 Me. With this new plant, the
revenue would be either 40 Me or 25 Me, depending on the company market share increasing or remaining
the same, respectively. If the site B is selected, the company will ask for a financial contribution from the
European Union. However, the request for the financial contribution can be presented only after 5 Me have
already been invested for building the plant in site B. The financial contribution is granted with probability
0.2 and covers 1/3 of the total cost of the plant (i.e., 1/3 of 30 Me, including the 5 Me already spent).
Should the financial contribution not be granted, the company has two alternatives. The first one is to build
a new plant in site A, thus losing the 5 Me already spent. The second one is to complete the building of
the new plant in site B at its own expense.

a) Build a decision tree modeling the decision problem at hand and find the strategy maximizing the
expected monetary value.
b) Suppose the company wants to limit the probability of a loss below 0.5. Is the strategy determined
at point a) acceptable? Why?
c) Denote by p the probability that European Union grants the financial contribution. Compute the
minimum value of p such that site B is preferable with respect to site A.
d) How much should the company be willing to pay for knowing for sure and in advance the increasing
or not of the market share? Why?

Exercise 3. Bag A contains 10 balanced coins. Bag B contains 10 unbalanced coins. When a coin drawn
from bag B is tossed, the result is HEAD with probability α ∈ [0, 1]. Consider the following game. A player
chooses a bag at random and draws a coin from it. The bags are externally identical so that when the coin
is tossed the player does not know which bag the coin was drawn from. After looking at the result of the
toss, the player can choose between two alternatives: i) accept 49 e and leave the game, or ii) make a guess

1
about which bag the coin was drawn from. In the latter case, if the guess is correct the player wins 144 e,
otherwise she does not win nor lose anything (i.e, 0 e). Let the player’s utility function be
√
U (x) = x, x ≥ 0.

Moreover, assume that the coin has already been tossed and the result has been HEAD.
a) Build a decision tree modeling the decision problem at hand. NB. Consider only the case in which
the result of the coin toss is HEAD.
b) Find the strategy that maximizes the expected utility, as a function of the parameter α ∈ [0, 1].
c) Give an interpretation of the strategy found at point b) as a function of α.
d) Let α = 0.5. How does the optimal strategy change if the objective is now to maximize the expected
monetary value? Why?