NOT FOR CIRCULATION

THE UNIVERSITY OF HONG KONG

FACULTY OF BUSINESS AND ECONOMICS
2019 - 2020 (SEMESTER TWO) MIDTERM EXAMINATION

Course: IIMT3636 Decision and Risk Analysis I

Instructor: Dr. Wang, Liao (EF), Dr. Ouyang, Huiyin (GH)
Date: March 28, 2020 (Saturday)
Time: 9:30 a.m. - 11:30 a.m. (Hong Kong Time)
Venue: Online

INSTRUCTIONS
1. Attempt all questions in Section I (5 questions in total) and Section II (5 questions in total). Points are
as indicated.
2. Answer all questions in Section III (20 questions in total). Points are as indicated.
3. Input your answers in the provided ANSWER SHEET (WORD file) and save the file in PDF format.
Submit only the answer sheet (in a SINGLE PDF file) to Moodle.
4. Find the z-table at the end of the exam paper.
5. This exam paper has 6 pages (including this cover page).
6. This exam is OPENBOOK.
7. This exam is to be completed INDIVIDUALLY.

Section Points
I. True/False 5
II. Multiple Choice 10
III. Fill in the Blanks 85
Total 100

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 SECTION I: TRUE/FALSE. Enter your answers on the ANSWER SHEET. Choose 'A' if the statement
is true and 'B' if the statement is false. (1 point for each question.)
1) Let X be a continuous random variable, then we have 𝑃(𝑋 ≤ 11.2) > 𝑃(𝑋 < 11.2).

2) Independent events are mutually exclusive.

3) The “shadow price” means the price the decision maker should at most pay to obtain
one more unit of a resource.

4) A constraint is “binding” if the optimal solution achieves equality for it.

5) For a risk seeker, the marginal utility from obtaining one more dollar is smaller at a
wealth level of $200 compared to that at $300.

SECTION II: MULTIPLE CHOICE. Choose the one alternative that best completes the statement or
answers the question. Enter your answers on the ANSWER SHEET. (2 points for each question.)
6) Suppose that 100 sophomores enter a business case study contest and that their respective skill
levels are approximately the same. Half of the entrants are female and twenty of the female entrants
are engineering majors. Thirty of the men are engineers. What is the probability that the winner will
be a male engineering major?

A) 0.50 B) 0.40 C) 0.30 D) 0.20

E) None of the above.

7) Strawberry Inc. has developed two products: product A and product B. Due to the constraints in the
production facility, it can produce at most one product. The manager, John, asked you to help him
make decisions. Assume John gives you the Opportunity Losses Table for Products A and B.

State of Nature
Alternatives Good market Poor market
Product A 0 300
Product B 200 200
Do nothing 300 0

Denote the probability of good market as p. To maximize Expected Monetary Value (EMV), what
value of p below will lead him to choose Product B?
A) p ≤ 1/3
B) Any value of p that is between 1/3 and 2/3
C) p ≥ 2/3
D) He will never choose product B.
E) None of the above.

8) The host has ten locked boxes. Eight of them contain rocks, and two contain diamonds. The host
knows what is inside in each of the boxes. You are asked to randomly select one box (without
opening it). After you select a box, the host opens a box which contains a rock from the rest nine
boxes and shows you. Then, the host asks you whether to switch to another unopened box. If you
choose to switch and randomly select one unopened box, the probability of getting the diamond is:

A) 11/15 B) 1/5 C) 4/5 D)9/40

E) None of the above.

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 9) In a linear program, redundancy means
A) One or more constraints can be dropped without affecting the optimal solution.
B) There are multiple optimal solutions.
C) Constraints are conflicting with each other.
D) There are multiple feasible regions.
E) None of the above.

10) The difference between Isoprofit Line Method and Corner Point method lies in:
A) different ways of drawing the feasible region.
B) different ways of picking the optimal solution.
C) whether or not the objective function is used.
D) All of the above.
E) None of the above.

SECTION III: Fill in the Blanks. Input the FINAL answer in the space provided in ANSWER SHEET.
(See detailed point allocation below.)
11) (5 points) A teacher gives students a True or False question which the students need to decide whether
one statement is true or false. Initially, the teacher has a belief that 75% of the students know the right
answer. If a student does not know the right answer, he or she simply randomly selects from true or
false. Given that a student answers the question correctly, the probability that the student indeed knows
the right answer is: ________________________.
(Round your answer to four decimal places.)

12) (3 points) The time required to complete a project is normally distributed with a mean of 50 weeks and
a standard deviation of 10 weeks. The construction company must pay a penalty if the project is not
finished by the due date in the contract. If a construction company bidding on this contract puts in a due
date of 42 weeks, the probability that they will have to pay a penalty is:_________________.
(Round your answer to four decimal places.)

13) (2 points) The lifespan of the lightbulb in your bedroom follows an exponential distribution with a mean
of ½ years. The expected number of lightbulbs to be burnt out in two years is: _______.

Answer 14) ~ 16) based on the following problem description.

An MBA director has decided to improve the profile of her program by admitting only the finest students based
on their GMAT scores. After an exhaustive search on the internet, she learns that GMAT scores average 550 with
a standard deviation of 100 (You can safely assume the scores are normally distributed).

14) (4 points) If she wants to consider only applicants scoring in the top 1%, the cutoff score should
be:_______________. (Round final answer to nearest integer)

15) (4 points) If she uses 700 as her minimum score, the probability that the next applicant will meet this
requirement is: __________________. (Round your answer to four decimal places.)

16) (4 points) The probability that the next applicant will have the GMAT score in the range of 550 to 600
is: _________________. (Round your answer to four decimal places).

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 Answer 17) ~ 18) based on the following problem description.
Customers arrive at Lily’s Barber Shop during a day in any particular business hour according to a Poisson
distribution with a rate of 𝜆 = 2 per hour. Now the shop has two barbers who can each service a customer in
exactly 15 minutes. Suppose a customer, Lisa, arrives at 3:00pm and finds both barbers idle.
17) (5 points) The probability that we will observe customers waiting before 3:15pm is:_______________.
(Round your answer to four decimal places.)

18) (5 points) The probability that Lisa will find the shop empty when she leaves is: _________________.
(Round your answer to four decimal places.)

Answer 19) ~ 22) based on the following problem description.

Snow Entertainment is deciding whether to invest in two mobile games of similar styles (“Game 1” and “Game
2”). For each game, the initial development cost is 1 million dollars. The total expected profit (i.e., revenue minus
future costs) is 3 million dollars for each game. After initial development but before launching a game, the firm
must send the game to the government for approval. The initial belief is that the chance of getting approval is
50% for either game. Given one is approved, the chance of getting approval is 90% for the other one. Given one
is rejected, the chance of being rejected is 90% for the other one.

19) (4 points) Suppose the two games are simultaneously developed and sent to the government for approval.
The probability that both are approved is: ____________.

20) (4 points) Suppose the two games are simultaneously developed and sent to the government for
approval. The probability that one gets approved and the other is rejected is: ______________.

21) (4 points) What is the optimal decision for Snow Entertainment on the decision of developing the two
games? ____________________________________________________________________.
(Answer within twenty words.)
22) (10 points) The EMV of the optimal decision in 21) is: __________________.

Answer 23) ~ 27) based on following problem description.

As a manager of a production department, you must decide the daily production totals of a certain product that
has two models, the Regular and the Special. The profit on the Regular model is $10 per unit and the Special's
profit is $12. Each model goes through two phases in the production process, and there are only 120 hours
available daily at the construction stage and only 96 hours available at the finishing and inspection stage. Each
Regular model requires 15 minutes of construction time and 15 minutes of finishing and inspection time. Each
Special model requires 20 minutes of construction time and 10 minutes of finishing and inspection time. The
manager’s goal is to generate profit for the firm as high as possible.

Let X1 denote the number of Regular models to be produced and X2 denote the number of Special models to be
produced.

Formulate a Linear Program with X1 and X2 as decision variables.

23) (3 points) The objective of the LP is: _________________________________.

24) (5 points) List all the constraints of this LP.

25) (5 points) The corner points of the feasible region are: _____________________________.
(List the coordinates of all of them.)

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 26) (3 points) The optimal corner point’s coordinate is:______________________________.

27) (3 points) The optimal profit is:____________________________________.

Answer 28) ~ 30) based on following problem description.

Below is the sensitivity report generated by Excel solver after solving an LP problem on portfolio selection.

28) (4 points) If the objective coefficient of “Bonds” increases from 0.11 to 0.14, the new optimal solutions
is: _________________________.

29) (4 points) If the total budget (the R.H.Side of the fifth constraint) increases from 5 million to 5.5
million, the new optimal objective value is: _____________________.

30) (4 points) ) If the R.H.Side of the third constraint increases from 1.5 million to 2.5 million, how will
such a change affect the optimal objective value? (Answer within ten words.)
_______________________________________________________________.

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