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Q 1 2 3 4 5 Total
Max marks 8 15 15 15 7 60
Obtained


Indian Institute of Management Bangalore
PGP 2008-09
Introduction to Statistical Methods: QM-I
Mid Term Examination

Time: 2 hours 30 minutes Name:____________________________

Maximum Points: 60 Roll. No.________________ Section____

Instructions: Please do not seek any clarifications, but state any assumptions that you
make. Assumptions made should be reasonable. Please show calculations and provide
reasons to support your answers.

1. The Health Foods Company (HFC) is negotiating with a major TV channel for airing
advertisements during the 2008 Beijing Olympics. Each exposure of 30 seconds costs $1
million. HFC estimates that the breaks between and during events will occur at the rate of
1 every 5 minutes. Assume that its advertisement is aired during every break.

(a) What is the probability of getting 2 exposures in 5 minutes? (2 marks)











(b) What is the probability of getting 4 exposures in 10 minutes? (2 marks)









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(c) The CEO of HFC has a probability of 0.6 of seeing an exposure. Over a given one
hour interval, suppose there were 10 exposures of HFCs advertisement. What is the
probability that he saw 5 of these 10 exposures? (2 marks)













(d) What is the probability that the CEO will see 5 exposures in one hour? Hint: Assume
that the rate at which he sees exposures equals the rate at which exposures are aired
multiplied by the probability of his seeing an exposure. (2 marks)













2. Sabari is collecting wild ber (a fruit) from the forest to give to Lord Rama. She tastes
each one, and if it is sweet, she puts it in her basket. Otherwise, she throws it away.

(i) What is the probability of getting of getting the first sweet ber in her third
attempt? Assume that the probability of a sweet ber at this time of the year
is 0.2 . (2 marks)








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(ii) A kind soul collects 5 bers and gives it to her. If there is one sweet one in
this lot, what is the probability Sabari will find it in her third attempt?
(3 marks)











(iii) Suppose she has n bers with one sweet one amongst them. What is the
expected number of attempts she needs to makes to find the sweet ber?
(4 marks)
















(iv) Sabari starts feeling that she will get full satisfaction and punyam only if
she collects the bers herself from the forest. She decides that she has time
for tasting 100 bers. What is the probability she will get 20 sweet ones?
(3 marks)








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(v) Lord Rama finally arrives. He notices that out of devotion, Sabari has bit
into the bers but does not mind it. He also notices that some of them have
large bites and some small ones (Sabari has a missing tooth on one side of
her jaw). He decides to take three of them at random one each for
Lakshman, Sita and himself. What is the probability Rama gets 2 with
small bites and one with a large bite? Assume Sabari offers Rama 20 bers
and half of them have big bites. (3 marks)

















3. A start up company has to decide what technology to use for developing a new
product. The probability of a favourable market launch is 0.75, and that of an
unfavourable one, 0.25. It can use cutting edge, premium or average technology. If it
decides to go for cutting edge technology, it can wait for the initial market launch and
then decide what next to do. If the launch is favourable, it can either choose to develop a
futuristic technology or continue with the so far developed cutting edge technology. If it
goes for the futuristic technology, the returns are 10 (all figures are in hundreds of crores
of rupees) with probability 0.8, or a loss of 5 with probability 0.2. If it continues with the
thus far developed cutting edge technology after a favourable market launch, the returns
are 5. If the launch is unfavourable, there is a loss of 1 and the company will not be able
to do anything further. If it decides to go for premium technology, then a favourable
launch has a return of 5, and an unfavourable launch has a return of 2. The third option of
average technology gives a return of 4 whether the market launch is favourable or not.
The premium or average technologies do not provide the option of developing alternate
technologies after market launch.


5
(a) What is the optimal expected return? Draw a decision tree and show the returns
for all alternatives and state clearly the optimal sequence of decisions. (5 marks)













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The start up can go for an initial market test with selected customers. Past data show that
whenever the market launch is favourable, the test says it will be so with probability 0.8.
Similarly, whenever market launch is not favourable, the test says it will be so with
probability 0.9.
(b) What is the optimal sequence of decisions for the company? Show the decision
tree and returns for all alternatives. (7 marks)

































(c) What is the value of this study to the company? (1 marks)






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(d) What is the value of perfect information? (2 marks)












4. The Perfect Distribution Company (PDC) ships goods over long distances. A
competitor offers a full refund to customers if shipment is delayed by 10 hours or more
over one of the most sought after routes. PDC reckons that the competitor can do this if
the probability of such a delay is at most 1%.Assume that the average time of delivery of
the two companies is the same, and that the competitor promises a delivery time equal to
the average time it takes to ship over the route, which equals 72 hours.
a) What is the standard deviation of the delivery time of the competitor? (3 marks)















b) PDCs standard deviation is 3.5 hours. What should it offer customers regarding
refunds if it also wants to keep the probability to at most 1%? Assume PDC
promises a delivery time equal to the average time it takes to ship over the route,
which is also 72 hours. (3 marks)







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c) PDC wonders if it can offer to ship goods faster than the competitor and retain the
same offer of refund as the competitor, i.e., full refund for delay of 10 hours or
more. By how much can PDC reduce the promised delivery time? Assume that
the average delivery time remains the same and the probability of delay of 10
hours or more over the new promised delivery time is at most 1%. (3 marks)










d) If it does as in part (c), what is the probability of PDC delivering within the
promised time? (3 marks)












e) PDC is worried that it will meet the promised delivery time less frequently if it
promises a lower delivery time. It decides that it needs to meet the promised
delivery time 90% of the time. By how much should it reduce its mean delivery
time if it has to match the competitors promised delivery time? Assume standard
deviation for PDC remains the same. (3 marks)
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5. People are concerned whether health and pollution are related in Bangalore. The
following table gives the joint probability distribution.


Level of Pollution
Level
of
Health 1 2 3 4
1 0 0.08 0.07 0.1
2 0.05 0.15 0.2 0.1
3 0.15 0.07 0.03 0


a) Find the marginal distributions of health and pollution, the covariance, and the
coefficient of correlation. Assume that level equals the value for each variable. (5 marks)























b) Does the level of health go up or down as the level of pollution goes up? Give a brief
reason for your answer. (2 mark)