University of Tunis Fall 2023

Tunis Business School

Decision & Game Theory

Question 1
Medical studies have shown that 10 out of 100 adults have heart disease. When a person with heart
disease is given an EKG test, a 0.9 probability exists that the test will indicate the presence of heart
disease. When a person without heart disease is given an EKG test, a 0.95 probability exists that the
test will indicate the person does not have heart disease. Suppose that a person arrives at an
emergency room complaining of chest pains. An EKG is given and indicates that the person has heart
disease. What is the probability that the person actually has heart disease?

Question 2
TBS research team focusses on one of three research projects funded by H2020, Erasmus, and
World Bank, respectively. The time to submit a proposal is enough to no more than one project.
H2020 provides 250,000 TND at the end of the project period if it turns out to be a success. It is
believed that the team would make a good job in this project with 70% chance. Erasmus provides
80,000 TND to launch the project and perhaps another 50,000 TND if the project yields
satisfactory results. This may occur with 60% chance. The World Bank provides a sure 110,000
TND independently of the project outcomes.
1. What could be the objective of the TBS team in this problem?
2. Assume that the team is desperate to make some money to increase the self-financing of
the lab. Represent the problem through a decision tree and determine all relevant inputs.
3. What is the research funding option that the TBS team should select?
4. What is the EVPI regarding H2020 project?
5. What is the worth of an expert advice regarding TBS funding from the Erasmus project
given that his advice is 80% reliable?
Question 3
A company considers the introduction of a new product in the market. The company believes that
the product has 60% of chance to be accepted by customers. Possible profits are given below:
Success Failure
Produce 250000 -150000
Not to produce -50000 -50000
The company may use the service of an expert to obtain additional information concerning the
possible attitude of potential customers towards this product. Two experts have been selected.
Historically, the 1st expert predicts correctly 80% of the success cases and 60% of the failure cases.
However, the 2nd expert predicts without error 60% of the success cases and 70% of the failure
cases. If the 1st expert requires 8,000 TD and the 2nd request 6,000 TD, for fees which one should
the company choose?

1
Question 4
Company A has received a last minute order from an important customer C and does not want to
deny it to preserve the good relationships. However, this must be achieved at the expense of
incorporating new elements in the current production plan as explained below. First, the production
department considers that there is 40% chance to be able to add the order of C without making any
disturbance on the rest of activities, and hence, without incurring any additional cost. It is possible
however to outsource some of the activities at a cost of 120,000 TND to be at a risk-free situation.
1. With the available information, represent the current situation through an incomplete
decision tree.
In case of perturbated activities, the Company may still opt for outsourcing either through an
express service requiring 30% additional charges to warrant the completion on time or through a
regular service that can guarantee the completion of the activities only with 90% chance. If the
Company fails to complete the related activities on time, then it incurs losses (due to image
degradation) estimated at 200,000 TND.
2. Complete the decision tree and determine the optimal decision policy that minimizes the
expected cost of Company A.
3. It is possible to acquire at a cost an expert opinion on the ability of the current capacity to
accommodate customer C order without any production disturbance. The expert judgement
is 80% reliable. How much Company A is willing to pay for this expert service?
4. What is the expected value of perfect information on the ability of the regular outsourcing
service to complete all activities on time when receiving a late request?

Question 5
An art dealer’s client is willing to buy a painting at 50,000 TD. The dealer can buy the painting
today for 40,000 TD or can wait a day and buy the painting tomorrow (if it has not been sold) for
30,000 TD. The dealer may also wait another day and buy the painting (if it is still available) for
26,000 TD. At the end of the third day, the painting will no longer be available for sale. Each day,
there is a 0.60 probability that the painting will be sold.
1. What strategy maximizes the dealer’s expected profit?
2. How much is the dealer willing to pay to acquire perfect information regarding the
availability of the piece of art the day after tomorrow?