42
More Examples
Problem from
(someone else’s)
Midterm
•
A PCB manufacturer needs to run tests on 2 separate components
of a board, R & Q. These can be tested in either order and if either
test fails the board is scrapped (Board is worthless if R works but Q
doesn’t, and viceversa)
•
Given the costs and probabilities of failure, construct the decision
tree and determine the expected cost.
(You can assume that (P(R
pass)) is independent of P(Q pass))
–
Also you have to pay for the test, even if the component fails What is
the preferred test order?
Construct a decision tree
.1
8.00
Q
.15
6.50
R
P(failure)
cost
test
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43
Extra problem #1
A man wants to invest $1 million for 1 year. After analyzing and eliminating numerous
possibilities, he has narrowed his choice to one of three alternatives. These
alternatives are referred to as “acts” and are denoted Ai;
A1: Invest in a guaranteed income certificate.
A2: Invest in a bond.
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 Spring '07
 Eng
 Interest Rates, Net Present Value, Mathematical finance

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