Freemark Abbey

Winery
Saurabh Chandra

Case facts
25000 cases of wine bottled each year
Cabernet Sauvignon & Chardonnay
1000 cases of Riesling
1 case = 12 bottles (300,000 bottles of wine with 12000
bottles of Riesling)

Winemaker influences the type of wine produced by

varying processes
Proper balance of sugar and acidity sought while
harvesting
Exquisite Botrytised Riesling wine
grapes attacked by Botrytis mold

Decision problem:

50%

Rainstorm in Napa Valley

40% chance that it would lead to botrytis mold (B) $8.00 /bottle
30% reduction in total juice

50%

60% chance that rainwater simply dilutes the berries

(D) - $2.00 /bottle
Option of selling the grapes directly (G) - $1.00 /equiv.
of a bottle
40% Ripened grape wine in favorable weather (R)$3.50 /bottle
40% Ripened grape light wine in unfavorable weather (R)$3.00 /bottle
20% low acid wine (L) - $2.50 /bottle
Unripen grapes wine harvested before rainstorm(U) -

Quiz 415 marks Time: 30 minutes

Q1. Draw the correct decision tree for the problem faced by the
winery. Present all outcomes and their expected values clearly.
The problem data considers the 1000 cases (12 bottles/case) of Riesling grapes
only.
(13 marks)
Q2. What is the expected value of prior information about storm

occurring?
(2 marks)
Q3. What is the expected value of overall outcome?
(+2 marks)

Harvest unripen
grapes
34
20
0

[$2.85*12000 =
34200]

Botrytis
2

[$5.60*12000 =
67200]

0.50

67200*0.4 +
24000*0.6
= 41280

Berries
0.60
diluted
240
00

42000*0.4+36000*0.4+300
00*0.2
0.50= 37200

No
rainstorm

Favorabl
e

[$2.00*12000 =
24000]

41280*0.5 +
37200*0.5
= 39240

[$1.00*12000 =
12000]
[$3.50*12000 =
42000]
[$3.00*12000 =
36000]

Direct
grapes/bulk

0.40

Unfavora
ble0.40
Low acid
0.20

[$2.50*12000 =
30000]

$3924
0

Wine?

Rainstorm

0.40

Value of Information
Michelles Movers

Michelles movers

Rents out trucks to homeowners or small businesses

On a particular day need to hire from a local truck rental
Large truck (40% chances of demand) - $200 /day
Small truck (60% chances of demand) - $130 /day
Cost of making second trips - $150

Rent large

Q1. Should
they go with a
large or a
small truck?

Small load

$190

[$20
0]
0.60

[$13
0]

Rent Small
Large load
0.40

[$28
0]

Q2. What would it be worth to Michelle to know for sure

whether a small truck would be adequate for job?
Small load

Small Hire

0.60

[$13
0]

Collect
information
Large load

$158

0.40

X
Dont collect
information
Answer: $190 - $158 = $32

$190

Large Hire

[$20
0]

Q2. What if the person send to

collect information in not 100%
reliable and he can be considered
80% correct?
Inform
Large

Large
demand
0.80

[$20
0]

Hire large

0.40

Collect
information

Small
demand
0.20

[$20
0]

$176

$190

Dont collect
information
Answer: $190 - $176 = $14

Large
demand
0.20

Inform
small
0.60?

[$28
0]

Hire small
Small
demand
0.80

[$13
0]

Imp: Assuming that the informant will make a

40:60 selection is not consistent.
Large
demand
0.80

0.80*0.40 =
0.32

Inform
Large
0.40

Small
demand
0.20
Large
demand
0.20

0.20*0.40 =
0.08

0.60*0.20 =
0.12

Pr(Large
Demand) =
0.32 + 0.12
= 0.44
Pr(Small
Demand) =
0.08 + 0.48
= 0.56

Inform
small
0.60
Small
demand
0.80

0.60*0.80 =
0.48

Not consistent
with original data

Large
demand

0.80p

0.80

Inform
Large
p

Small
demand
0.20

0.20p

Large
demand

0.20(1-p)

Small
demand
0.80

0.80(1-p)

0.20

Inform
small
1-p

p = 0.67 -> Prob(informs

large)
1-p = 0.33 -> Prob(informs
small)

Bayes Rule:
Out of all the entrepreneurs:
Probability that successful entrepreneurs have an MBA
= 0.6
40% dont have an MBA

Probability that unsuccessful entrepreneurs have an MBA =

0.2
80% dont have an MBA

Proportion of successful entrepreneurs = 0.05

What we actually need to know is what is the probability

that the person with an MBA is successful?

(S)
Entrepreneu
r is
successful
0.05

(U)
Entrepreneu
r is
unsuccessful
0.95

(M
Has)MBA
0.60
(N)
Doesn't
have MBA
0.40

JOINT
PROBABILITIES
p(M S) =
0.03
Probability that the
person with an MBA is
successful:
p(N S) =
0.02

(M
Has) MBA
p(M U) =
0.20
0.19

Pr(S/M) = Pr(M
S)/Pr(M)
Pr(M) = 0.19 + 0.03 =
0.22
Pr(S/M) = 0.03/0.22 =

(N)
Doesn't
have MBA p(N U) =
0.80
0.76

13.6%