Solution to Decision Problems
Q1: Bayes Theorem for Machine Defect Identification
(a) Prior probabilities
P(A) = 0.40
P(B) = 0.50
P(C) = 0.10
(b) Conditional probabilities (Defect Rates)
P(Defect | A) = 0.06
P(Defect | B) = 0.01
P(Defect | C) = 0.10
(c) Joint probabilities
P(A and Defect) = P(A) * P(Defect | A) = 0.40 * 0.06 = 0.024
P(B and Defect) = P(B) * P(Defect | B) = 0.50 * 0.01 = 0.005
P(C and Defect) = P(C) * P(Defect | C) = 0.10 * 0.10 = 0.01
(d) Posterior probabilities
P(Defect) = P(A and Defect) + P(B and Defect) + P(C and Defect) = 0.024 + 0.005 + 0.01 =
0.039
P(A | Defect) = 0.024 / 0.039 = 0.615
P(B | Defect) = 0.005 / 0.039 = 0.128
P(C | Defect) = 0.01 / 0.039 = 0.256
(e) Summary Table
Machine Prior Conditional Joint Posterior
Probability Probability Probability Probability
(Defect)
A 0.40 0.06 0.024 0.615
B 0.50 0.01 0.005 0.128
C 0.10 0.10 0.01 0.256
Total 1.00 0.039
Q2: Decision Making for ABC Corporation
(a) Influence Diagram
See the influence diagram above.
(b) Payoff Table
Decision Favorable Market Unfavorable Market
Large Facility $200,000 -$180,000
Small Facility $100,000 -$20,000
Do Nothing $0 $0
(c) Minimax Regret Approach
1. Calculate the maximum possible profit for each market condition:
- Favorable market: $200,000 (Large Facility)
- Unfavorable market: $0 (Do Nothing)
2. Regret table:
| Decision | Favorable Market Regret | Unfavorable Market Regret |
| Large Facility | $0 | $180,000 |
| Small Facility | $100,000 | $20,000 |
| Do Nothing | $200,000 | $0 |
Thus, the Small Facility minimizes the maximum regret.
(d) Expected Value (EV)
If the probability of a favorable and unfavorable market is equal (0.5):
- EV (Large Facility) = (0.5 * $200,000) + (0.5 * -$180,000) = $10,000
- EV (Small Facility) = (0.5 * $100,000) + (0.5 * -$20,000) = $40,000
- EV (Do Nothing) = $0
Therefore, the Small Facility provides the highest expected value.
(e) Decision Tree
A decision tree would show the choice of building a large facility, small facility, or doing
nothing, with branches showing the market conditions and corresponding profits or losses.
