THE HONG KONG POLYTECHNIC UNIVERSITY

DEPARTMENT OF APPLIED MATHEMATICS

AMA4840 Decision Analysis
Tutorial 1

1. David teaches two undergraduate statistics courses at Victoria College. The class for Statistics
201 consists of 7 seniors and 3 juniors. The more advanced course, Statistics 301, has 2 seniors
and 8 juniors enrolled. As an example of a business sampling technique, David randomly
selects, from the stack of Statistics 201 registration cards, the class card of one student and
then places that card back in the stack. If that student was a senior, David draws another
card from the Statistics 201 stack; if not, he randomly draws a card from the Statistics 301
group. Are these two draws independent events? What is the probability of

(a) a junior’s name on the first draw?

(b) a junior’s name on the second draw, given that a senior’s name was drawn first?
(c) a junior’s name on the second draw, given that a junior’s name was drawn first?
(d) a senior’s name on both draws?
(e) a junior’s name on both draws?
(f) one senior’s name and one junior’s name on the two draws, regardless of order drawn?

2. There are three axioms of probability. Use these axioms to show that

P (X ∪ Y ) = P (X) + P (Y ) − P (X ∩ Y ).

3. If P (A) = 61 , P (B) = 5
12 , and P (A|B) + P (B|A) = 7
10 , find P (A ∩ B).

4. Urn I contains 2 white and 2 black balls and Urn II contains 3 white and 2 black balls. An
urn is chosen at random with equal probability, and a ball is randomly selected from that
urn. Find the probability that the ball chosen is white.

5. Urn I contains 2 white and 2 black balls and Urn II contains 3 white and 2 black balls. One
ball is chosen at random from Urn I and transferred to Urn II, and then a ball is chosen at
random from Urn II. The ball chosen from Urn II is observed to be white. Find the proba-
bility that the ball transferred from Urn I to Urn II was white.

6. Identical twins come from the same egg and hence are of the same sex. Fraternal twins have
a 50-50 chance of being the same sex. Among twins, the probability of a fraternal set is p and
an identical set is 1 − p. If the next set of twins are of the same sex, what is the probability
that they are identical?

7. A computer manufacturer produces batches of laptops from time to time. Each time a ran-
dom check is conducted before accepting the produced batch. Assume there are three possible
events: A, B and C, which represent the batch that may contain 5%, 7% or 10% defectives,
respectively. Further assume the event A, B and C occurs with probabilities 0.2, 0.5 and
0.3 respectively. A random sample of 3 laptops from one batch was drawn. Calculate the
probabilities that r defectives out of 3 laptops were found and the revised probabilities (of

1
 defective rate).
Hint: The probabilities that r defectives out of 3 laptops are found and the revised probabil-
ities (of defective rate) were respectively given by
X
P (r̃ = r| 3) = Cr3 pri (1 − pi )3−r f 0 (pi )
i
C 3 pr (1 − pi )3−r f 0 (pi )
f 00 (pi | Hr3 ) = P r 3i r 3−r f 0 (p )
.
i Cr pi (1 − pi ) i

8. The random variable s̃ satisfies the standard normal distribution. Find the 0.9718th fractile
a0 of s̃.

9. What is the meaning of mutually exclusive events? What is meant by collectively exhaustive?
Give an example of each.

10. (Review on lecture 2) Given lotteries `0 and `00 , and the utilities of decision maker as follows:

Lottery `0 :

Label on ball Probability of the ball is picked Prize

1 0.1 −$9000
2 0.3 $0
3 0.6 $9000

Lottery `00 :

Label on ball Probability of the ball is picked Prize

1 0.1 $0
2 0.9 $3000

Utilities of the decision maker on the consequences:

c c∗ := −$10000 −$9000 $0 $3000 $9000 c∗ := $10000

π(c) 0 0.2 0.85 0.9 0.98 1

Find the expected utilities of the two lotteries and pick the better one.

11. (The St.Petersburg Paradox) Let ` represent the following lottery. I toss a coin until it comes
up heads. If the first head is obtained on the nth toss of the coin, I receive a payoff of $2n .

(a) If I were a risk-neutral decision maker, what would be the certainty equivalent or cash
equivalence of `? Is this reasonable?
(b) If a decision maker’s utility function for increasing wealth by $x is given by u(x) = log2 x,
what would be the certainty equivalent or cash equivalence of `?

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12. Solve the following linear programming problems by using MATLAB command:
linprog(c,A,b,Aeq,beq,L,U):

Remark. The linear programming solver finds the minimum of a problem specified by

min f'*x subject to A*x ≤ b, Aeq = beq, lb ≤ x ≤ ub

x = linprog(f,A,b,Aeq,beq,lb,ub) defines a set of lower and upper bounds on the design

variables, x, so that the solution is in the range lb ≤ x ≤ ub. Use empty matrices for lb
and ub if no bounds exist. Set lb(i) = -Inf if x(i) is unbounded below; set ub(i) = Inf
if x(i) is unbounded above.

(a)

max v
s.t.
5x1 + 5x2 + 6x3 + 3x4 ≥ v
2x1 + 5x2 + 3x3 + 4x4 ≥ v
x1 + 2x3 ≥ v
x1 + x2 + x3 + x4 = 1
x1 , x2 , x3 , x4 ≥ 0

(b)

min v
s.t.
5y1 + 2y2 + y3 ≤ v
5y1 + 5y2 ≤ v
6y1 + 3y2 + 2y3 ≤ v
3y1 + 4y2 ≤ v
y1 + y2 + y3 = 1
y1 , y2 , y3 ≥ 0