MidtermReview - ESI 6321 APPLIED PROBABILITY METHODS FOR...

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Prof. Edwin Romeijn ESI 6321 Applied Probability Methods For Engineers Midterm Review Spring 2008 1/6 ESI 6321 APPLIED PROBABILITY METHODS FOR ENGINEERS Midterm review – Spring 2008 Exercise 1 (Utility theory) Consider an urn that contains 99 white balls and 1 black ball. You are offered a chance to play a game in which a ball will be drawn from this urn. Each ball is equally likely to be drawn. If a white ball is drawn, you must pay $10,000. If the black ball is drawn, you will receive $1,000,000. Should you play the game? Exercise 2 (Utility theory) You are a student at the University of Florida and desperately want to attend the next football game. Another student has a ticket and will sell it to you (at cost) for $10. However, you only have $5. You can bet the $5 in a poker game and thinking that you’re a better-than-average player, you can win with probability 60%, doubling your money. Or, you could lose and end up with nothing. Based on the actual value of your money, would you be willing to play in the poker game?
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Prof. Edwin Romeijn ESI 6321 Applied Probability Methods For Engineers Midterm Review Spring 2008 2/6 Exercise 3 (Decision Trees) A chemical company is faced with two related lawsuits for patent infringement. For each suit, the company has the option of going to trial or settling out of court. The trial date for suit A is scheduled for July 15 and the second suit, B, is scheduled for the next January. Preparation costs for either trial are estimated at $10,000. However, if the firm prepares for both trials, the preparation costs of the second trial will only be $6,000. These costs can be avoided by settling out of court. If the company wins suit A, it pays no penalty.
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MidtermReview - ESI 6321 APPLIED PROBABILITY METHODS FOR...

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