1. Unicorn Inc is adding a new product.

In order to accommodate the anticipated capacity needs of the

new product the firm believes that the new plant must be built. The firm has to make a decision to build a
larger plant or a small plan with probabilities 0.6 and 0.4 for each plan. In either case the demand may be
favorable with a probability of 0.55 or unfavorable with a probability of 0.45 respectively. If a large plant is
built and the demand is favorable the profit is estimated at $1.5mn and if the demand is unfavorable there
is an estimated loss of $50000/- for the large plant. If the plant is small and the demand is favorable the
expected profit is $0.7mn and with an unfavorable demand the small plant can expect a loss of $40000/-
a. Develop a decision tree to exhibit the course of events
b. What is the probability of a favorable market
c. What is the total revenue expected due to each type of market.
d. Find the probability of a large plant given the markets is favorable.
2. There is a 70% chance that the market will be a strong one. Mr. Andrews is considering three options -
Innovate the current product for an expected revenue of $50000/-, Improve marketing strategies for the
current product with an expected revenue of $ 45000/- or shelve the production for a loss of $ 12000/- .
The probabilities that the three options will be exercised in a strong market are 38%, 42% and 20%.
Alternatively if the market is weak he will choose to improve the marketing strategies with an expected
revenue of $ 30000/-, innovate the current product for an expected revenue of $ 25000/- or shelve the
production for a loss of $ 12000/-. The choice between the three alternatives in a weak market is in the
ratio 2:2:3. The Product innovation will incur a cost of $5000/- and improving market strategies will cost
Mr. Andrews a sum of $2000/-
a. What is the expected pay off due to improving market strategies?
b. What is your suggestion to Mr. Andrews?

3. According to Runzhiemer International, a travel agency the average cost of domestic trip for
business travelers in the financial industry is $1250. A market research agency that contested this claim
conducted a survey among 120 business travelers in the financial industry and found the sample average to
be $1150 with a s.d of $ 279. Using a 95% CI verify if the travel agencys claim is true. Verify the research
teams claim that that their estimate with a confidence of 95% will show an error of no more than $ 50 w.r.t
to the average cost
4. A survey of 275 executives is taken in an effort to determine what qualities are most important
for a CEO to be effective. 121 of the participants opined that Good Communication is the most important
quality. Is the sample size a good number for an error of 5% in estimation of population proportion at a
95% confidence? What is your opinion about the same if the error allowed is raised to 8%? What range of
proportion values will you suggest for a lack of confidence of 2% using the given data?
5. At the Masafi Juice factory, 1 liter cartons were being observed for the quantity per carton. Data
showed that the average quantity is 994.8ml with s.d of 75ml per pack. A sample of 22 packs was used in
the survey. The Production manager assures that an adjustment will be made at the filling station if there is
an error margin of more than 0.75 ml as he feels that sample variance estimated is highly skewed. Using a
98% CI comment on the managers claims
6. The Dallas IRS auditing staff is concerned with identifying potentially fraudulent tax returns
and is of the opinion that one in every 5 of the IT companies indulge in fraudulence, while the probability
for a non-IT firm is 0.15. In a total of 325 firms in the city there are 193 IT firms. If identified as fraudulent
the audited company will be charged with a penalty of $ 80K and if the manipulations go unnoticed the
company gets to retain their ROI which stands at an average of $500K for an IT firm and $ 750K for a non-
IT firm. The average ROI was computed based on a sample of 57 IT companies and 29 non- IT firms in the
city. The sample showed a s.d. of $25K/- & $ 38K/- respectively. New firms, irrespective of the nature of
industry are emerging in the city and the last decade saw an average of 8 new firms every year.
a. Generate the errors in estimates for population-mean-ROI for both the types of firms at a 95%
confidence.
b. If a resampling is suggested among IT firms, what is the expected cost of sampling given that per
unit cost of sampling is $ 385/-? The error margin is expected to be no more than $5000 at 95% CI
c. What is the probability that the new firm will be established within the next 4 months?
d. What is the net payoff for the two types of firms?
e. What is the expected loss due to fraudulence?
f. If 7 firms are randomly selected from the non-IT sector, what is the probability that at least 3 of
them will be identified for manipulations?
g. Will it be justified if the non IT firms make a claim that their sd from mean will not cross $45K?
Prove your inference.

7. An oil extraction company in Kuwait receives two types of exercises - 1. Working on
exploration wells that are drilled purely for exploratory (information gathering) purposes in a new area. 2-
Appraisal wells that are used to assess characteristics (such as flow rate) of a proven hydrocarbon
accumulation. 65% of the projects received by the company are for Exploratory Wells. Preliminary
geologic studies assigned the likelihood probabilities for High Quality Oil, Medium quality oil & No oil as
0.5, 0.2 & 0.3 in the case of exploratory wells, while the probabilities are 0.4, 0.35 and 0.25 in the case of
appraisal wells. High quality oil will generate revenue of AED 5mn; Low quality oil will generate revenue of
AED 3.5mn. The cost of drilling is at an estimated AED 100000.
1. Generate the expected revenue per
(i) Exploration project (ii) Appraisal project
2. What is the probability that the project is of an Exploration well given that there is High
Quality oil?
3. What is the probability that the project is of an Appraisal well given that there is no oil
found?