Operations Analytics MOOC: Practice Problems for Week 4

1. Power Cycle
a) Structure the suppliers choices using a decision tree. Make sure you explicitly define
all of the elements of the tree: decisions, events, cash flows and probabilities
associated with decisions and events, and payouts associated with the final outcomes.
Here is the suppliers decision tree:

How Much
to Produce
Now?

50,000 now
-125,000
- 2 * 50,000
+ 5 * 50,000
25,000

100,000 now
-125,000
- 2 * 100,000
+ 5 * 50,000
-75,000

Power Cycle
Places
2nd Order
of 50,000?

0.4
0.6

Power Cycle
Places
2nd Order
of 50,000?

0.4
0.6

no
0

yes
-125,000
- 2 * 50,000
+ 5 * 50,000
25,000

no
0

yes
+ 5 * 50,000
250,000

25,000

50,000

-75,000

175,000

b) What are the maxi-min, maxi-max, and expected value maximizing decisions for the
supplier? What are the monetary values associated with those choices?
The suppliers maxi-min decision is to produce only 50,000 units
now. The maxi-min value is 25,000.
50,000 now
25,000
How Much
to Produce
Now?

Maxi-Min
Values

100,000 now
-75,000

Operations Analytics MOOC

25,000

Page 1

-75,000

Week 4

Operations Analytics MOOC: Practice Problems for Week 4

The suppliers maxi-max decision is to produce all 100,000 units
now. The maxi-max value is 175,000.

50,000 now
25,000
How Much
to Produce
Now?

50,000

Maxi-Max
Values

100,000 now
-75,000

175,000

The suppliers expected-value-maximizing decision is to produce

all 100,000 units now.
Its expected value associated when
producing all 100,000 units now is 75,000.

50,000 now
25,000
How Much
to Produce
Now?

Expected
Values

100,000 now
-75,000

Operations Analytics MOOC

0.4 * 25,000
+ 0.6 * 50,000
= 40,000

Page 2

0.4 * -75,000
+ 0.6 * 175,000
= 75,000

Week 4

Operations Analytics MOOC: Practice Problems for Week 4

2. Cygnet Health Care
a) Structure Noahs choices using a decision tree. Make sure you explicitly define all of
the elements of the tree: decisions, events, cash flows and probabilities associated
with decisions and events, and payouts associated with the final outcomes.
Here is Noahs decision tree. Observe that the payouts to Noah
are all negative, since they represent costs or losses. Note also
that, by showing the costs as (negative) payouts to Noah, we can
proceed to determine the maxi-min, maxi-max, and expected value
maximizing policies as usual.

Annual
Claims

yes
-$2,000

0.3
0.7

low
-$500

-$2,500

high
-$1,000

-$3,000

Buy
Insurance?

Annual
Claims

no
$0

0.3
0.7

low
-$500

-$500

high
-$4,000

-$4,000

b) What are Noahs maxi-min, maxi-max, and expected value maximizing decisions?
What are the dollar values associated with those choices?
Noahs maxi-min decision is to buy insurance.
is -$3,000.
yes
-$2,000

Buy
Insurance?

-$3,000

Maxi-Min
Values

no
$0

Operations Analytics MOOC

The maxi-min value

-$4,000

Page 3

Week 4

Operations Analytics MOOC: Practice Problems for Week 4

Noahs maxi-max decision is not to buy insurance.
value is -$500.
yes
-$2,000

Buy
Insurance?

The maxi-max

-$2,500

Maxi-Max
Values

no
$0

-$500

Noahs expected-value-maximizing decision is to buy insurance. The

expected value when buying insurance is -$2,850.
yes
-$2,000

Buy
Insurance?

Expected
Values

0.3 * -$500
+ 0.7 * -$4,000
= -$2,950

no
$0

Operations Analytics MOOC

0.3 * -$2,500
+ 0.7 * -$3,000
= -$2,850

Page 4

Week 4