HW2Solutions - ESI 6321 APPLIED PROBABILITY METHODS FOR...

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Prof. Edwin Romeijn ESI 6321 Applied Probability Methods For Engineers Homework 2 - Solutions Spring 2008 1/5 ESI 6321 APPLIED PROBABILITY METHODS FOR ENGINEERS Homework 2 – Spring 2008 Solutions Exercise 13.2-10 Hiring a CPA has an expected utility of .2u(40,000-4,000-500) + .8u(40,000-8,000-500) = .2(35,500) 1/2 + .8(31,500) 1/2 = 179.7 while not hiring a CPA has an expected utility of u(40,000-8,000) = (32,000) 1/2 = 178.9. Since the expected utility of hiring the CPA (179.7) is > the expected utility of not hiring the CPA (178.9), the CPA should be hired. Exercise 13.4-2 We can just minimize the costs = purchase cost + 10 years of expected maintenance + cost of the report (if applicable) EVWSI = 3490 - 40 = 3450 EVWOI = 3500 EVSI = 3450 – (3500) = - $50 The EVSI (-50) exceeds the price of the test (-40), so it is optimal to conduct the test. We’re dealing with costs, so notice that the Expected Value With Original Information is greater than the Expected Value With Sample Information.
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HW2Solutions - ESI 6321 APPLIED PROBABILITY METHODS FOR...

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