Administración de Operaciones

Homework 1

1.) The Technically Techno company has several patents for a variety of different Flash memory devices
that are used in computers, cell phones, and a variety of other things. A competitor has recently
introduced a product based on technology very similar to something patented by Technically Techno
last year. Consequently, Technically Techno has sued the other company for copyright infringement.
Based on the facts in the case as well as the record of the lawyers involved, Technically Techno
believes there is a 40% chance that it will be awarded $300,000 if the lawsuit goes to court. There is a
30% chance that they would be awarded only $50,000 if they go to court and win, and there is a 30%
chance they would lose the case and be awarded nothing. The estimated cost of legal fees if they go to
court is $50,000. However, the other company has offered to pay Technically Techno $75,000 to settle
the dispute without going to court. The estimated legal cost of this would only be $10,000. If
Technically Techno wished to maximize the expected gain, should they accept the settlement offer?
(10 points)

The competition is stealing Technically Techno's ideas.

The probability of Technically Techno to take legal actions in court:

Payments Probability
S1 $300,000 - $50,000 = $250,000 0.40
S2 $50,000 - $50,000 = $0 0.30
S3 $0 - $50,000 = $-50,000 0.30

Each payment we have to subtract off legal fees ($50,000) of going to court.
The negative result is because the company lost money. (S3)

Probabilities
Multiply each payout amount with their respective probability
Net payment Probability payout*probability
value
S1 $250,000 0.40 250,000*0.40 = $100,000
S2 $0 0.30 0*0.30 = $0
S3 -50,000 dollars 0.30 -50,000*0.30 = -15,000

Add up every result in that third column

100,000+0+(-15,000) = $85,000
This is the expected value

The company T expects, on average, the lawsuit payouts will bring in net winnings of $85,000

On the other hand, if company T settles, then they will net $75,000 - $10,000 = $65,000.

Summary:
Expected net winnings from the lawsuits = $85,000
Net amount from the settlement = $65,000

The lawsuits value is larger, so it is advantageous for the company to not settle.

2.) In the past few years, the traffic problems in Lynn McKell’s hometown have gotten worse. Now,
Broad Street is congested about half the time. The normal travel time to work for Lynn is only 15
minutes when Broad Street is used and there is no congestion. With congestion, however, it takes
Lynn 40 minutes to get to work. If Lynn decides to take the expressway, it will take 30 minutes
regardless of the traffic conditions. Lynn’s utility for travel time is: U ( 15 minutes )=0.9 ,
U ( 30 minutes )=0.7 , and U ( 40 minutes ) =0.2

Utility Values
Route Congestion No Congestion T
Broad Street 0.2 0.9 0.55
Expressway 0.70 0.70

Probabilities
Route Congestion No Congestion
Broad Street 0.5 0.5
Expressway 1.00

Lynn has given more utility for less travel time, in other hand, she has received less utility for more travel
time.

(a) Which route will minimize Lynn’s expected travel time? (5 points)
With expressway rout, Lynn will minimize the expected travel time showing a utility value of 0.70.

(b) Which route will maximize Lynn’s utility? (5 points)

Lynn maximum utility is when she travels in the expressway route.

(c) When it comes to travel time, is Lynn a risk seeker or a risk avoider? (5 points)