SIE 321 Probabilistic Models in OR Midterm Exam

Name

Problem 1 (25%) Of all 40-year-old women, 9% have breast cancer. If a woman has breast cancer, a
mammogram with give a positive indication for cancer 90% of the time. If a woman does
not have breast cancer, a mammogram will give a positive indication for cancer 1% of the
time. If a 40-year-old woman’s mammogram gives a positive indication for a cancer, what
is the probability that she has cancer?

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Problem 2 (25%) An individual makes decisions according to the expected payoff decision rule. For
her current problem, she has constructed the following payoff table.

Action s1 s2 s3
a1 3x 40 10
a2 35 50 90
a3 25 2x 30
Probability 0.2 0.5 0.3

The value of x currently is 50, but there is an opportunity to increase x by spending some
money now. What is the maximum amount that should be spent to increase x to 75?

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Problem 3 (25%) Management of the Telemore Company is considering developing and marketing a
new product. It is estimated to be four times as likely that the product would prove to be
successful as unsuccessful. It it were successful, the expected profit would be $3 million. If
unsuccessful, the expected loss would be $6 million. A marketing survey can be conducted
at a cost of $0.25M to predict whether the product would be successful. Past experience
with such surveys indicates that successful products have been predicted to be successful 67
percent of the time, whereas unsuccessful products have been predicted to be unsuccessful
89 percent of the time.

(a) [15%] Find the optimal policy regarding whether to conduct the market survey and
whether to develop and market the new product.
(b) [5%] What is the maximum cost of survey that makes it worth conducting?
(c) [5%] What is the survey methods could be improved so that it provides more accurate
estimates of market success, what is the maximum cost of such an improved survey?

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Problem 4 [25%] An amateur gardener with training in botany is experimenting with scientific cross
pollination of pink irises with red, white, and orange irises. His annual experiments show
that pink can produce 60% pink and 20% white and 20% red, red can produce 40% red,
50% pink and 10% orange, orange can produce 25% orange, 50% pink and 25% white,
and white can produce 50% pink and 50% white.

(a) [10%] Express the gardener situation as a Markov chain.

(b) [15%] If the gardener started the pollination with equal number of irises then what
would be the distribution after many years?

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