Traccia A

Corso di Analisi delle Decisioni

Midterm exam - 11.4.2017
Exercise 1. A company trading natural gas for residential heating has to decide the amount
r of gas (expressed in m3 ) to buy in advance for the next winter. The gas demand d of the
company’s customers (expressed in m3 ) is uncertain and can take one of three possible
values: 150k, 200k o 220k (where “k” denotes the factor 103 ). The probabilities of the
possible demand values depend on the climate of the next winter. If there will be a cold
winter (event that occurs with probability 0.6), then P (d = 150k) = 0.4, P (d = 200k) = 0.3
and P (d = 220k) = 0.3. If there will be a very cold winter (event that occurs with probability
0.4), then P (d = 150k) = 0.2, P (d = 200k) = 0.4 e P (d = 220k) = 0.4. The unit profit p
(i.e., the profit for one m3 of gas bought in advance and consumed by the customers later
on, expressed in e/m3 ) is uncertain and depends on the winter climate as well. Specifically,
during a cold winter, P (p = 1) = 0.7 and P (p = 1.1) = 0.3. By contrast, during a very cold
winter, P (p = 1) = 0.4 and P (p = 1.1) = 0.6. As balancing cost, the company has to pay a
penalty of 0.1 e/m3 on the difference between the amount of gas bought in advance and the
amount of gas really consumed by the customers during the winter season. A preliminary
analysis suggested two possible alternatives for the amount of gas r: 180k o 210k. The
objective is to determine which alternative maximizes the overall expected profit Π over the
winter season, computed as
(
pd − 0.1(r − d) if r ≥ d
Π=
pr − 0.1(d − r) if r < d.
Before making the final decision, the company decides to consult a meteorological service to
predict if the next winter will be cold (“C”) or very cold (“VC”). In case the next winter
will be very cold, the result of the weather forecasts will be “VC” for sure. In case of a cold
winter, the result of the weather forecasts will be “C” with probability 0.8.
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 company must choose which cost reduction action to adopt between the
following ones.
• i) Propose the trade union a 10% increase of the working hours (at equal wage),
corresponding to a 100 ke increase of the profit company. The probability that such
an offer is accepted by the trade union is estimated in 0.5. If the offer is rejected, the
company will have to decide whether or not to delocalize the production. In case of
delocalization, with probability 0.5 there will a 80 ke increase of the company profit.
By contrast, there is a chance of getting a 90 ke loss due to political instability of
the hosting country (with probability 0.5). If the trade union rejects the offer, the
company can decide not to delocalize, incurring a profit decrease of 10 ke due to bad
publicity.
• ii) Increase the efficiency of the production line by acquiring a new machine. This action
would bring a profit increase which depends on the future demand of the company’s
products. Should future demand be at least as high as the current level (event that
occurs with probability 0.8) the profit increase is 50 ke (after deduction of the machine
cost). If future demand falls below the current level (event that occurs with probability
0.2), a profit decrease of 20 ke is expected.

1
 a) Find the strategy maximizing the expected monetary value (EMV) and compute the
associated EMV.

b) Let α denote the probability that the union trade accepts the offer. Compute the
minimum value of α that makes action i) preferable over action ii).

Consider the following modifications of the previous problem. If the union trade rejec-
ts the offer, before deciding whether to delocalize or not, the company consults a political
analyst to predict the political stability of the hosting country. Assume the following pro-
babilities. Given that stability occurs, the analysts predicts stability with probability 0.7.
Given that instability occurs, the analysts predicts instability with probability 0.8.

c) How does the optimal strategy change?

d) How much would the company pay for the analyst service?

Exercise 3. You have to send out a package worth 10 ke. You estimated a 0.001 probability
that the package gets lost or destroyed. A company offers you an insurance policy against
theses occurrences for 15 e (i.e., if you buy the insurance policy at a cost of 15 e and the
package gets lost or destroyed, you will receive 10 ke back).

a) Assume you are risk-neutral. Would you buy the insurance policy? Why?

b) If you are not risk-neutral, the answer to the previous point may change. In particular,
this can happen if you are risk-taking or risk-averse? Justify your answer by assuming
a suitable utility function (provide mathematical expression) and showing that your
preferences change with respect to point a).