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Chapter 2

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Chapter 2
I

Chapter Outline

2.1 Outcomes, Probabilities and Events


The following concepts are introduced:
Random experiment
Outcome of an experiment
Mutually exclusive and collectively exhaustive outcomes
Probability of an outcome
Event
2.2 The Laws of Probability
Review of basic probability rules including addition rules, conditional probability,
and product laws, and an introduction of the concept of independence.
2.3 Working with Probabilities and Probability Tables
Review of decision tree analysis in the context of conditional probabilities.
2.4 Random Variables
2.5 Discrete Probability Distributions
2.6 The Binomial Distribution
Definition of a binomial random variable and its parameters. Introduction of the
combinatorial formula for the computation of a binomial probability.
2.7 Summary Measures of Probability Distributions
Definition of mean or expected value, variance, and standard deviation.
Derivation of mean and standard deviation of a binomial random variable.
2.8 Linear Functions of a Random Variable
Evaluation of mean, variance, and standard deviation of a random variable
expressed as a linear function of another random variable (Y = aX + b).
2.9 Covariance and Correlation
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2000, South-Western College Publishing. Prepared by Manuel Nunez, Chapman University.

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2.10

Joint Probability Distributions and Independence


Definition of the joint probability distribution of two random variables. Review of
independence of random variables under this context. Formula for the expectation
of the product of two independent random variables. Independence and the
relation to covariance and correlation.

2.11

Sums of Two Random Variables


Expectation, variance, and standard deviation of the linear combination of two
random variables.

2.12

Some Advanced Methods in Probability


Discussion of Bayes' theorem, law of total probability, and alternate formula for
the variance.

2.13

Summary

II

Teaching Tips

1.

It is recommendable to produce several examples stressing the difference between


the classical approach to computing probabilities and the relative frequency
(empirical) approach. Many students have little intuition concerning the
difference between both of them. This can be done by engaging the students in a
quick classroom survey of a given characteristic of the students, and then
contrasting the probabilities from the survey to the classical probabilities from a
binomial variable associated to this characteristic.

2.

It is good idea to remind students that the expectation should be interpreted in a


long-run sense, that is, if the experiment is repeated many times, the average of
the observations approaches the expectation. Same remarks apply to the variance.

3.

To help understand the meaning of the variance, the instructor may want to
introduce the coefficient of variation (/) as a relative measure of the variability
within a population and its possible use to compare populations of very different
nature.

III

Answers to Chapter Exercises

2.1
(a) P(X>=5) = P(1,4) + P(2,3) + P(2,4) + P(3,2) + P(3,3) + P(3,4) + P(4,1) +
P(4,2) + P(4,3) + P(4,4) = 10/16.
(b) P(X>=5 | First is 3) = P(X>=5 and First is 3)/P(First is 3) = (3/16)/(4/16)=3/4.
(c) P(X>=5 | At least 3 in one die) = P(X>=5 and At least 3 in one die)/P(At least
3 in one die) = (5/16)/(7/16)=5/7.

Manual to accompany Data, Models & Decisions: The Fundamentals of Management Science by Bertsimas and Freund. Copyright
2000, South-Western College Publishing. Prepared by Manuel Nunez, Chapman University.

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2.2
(a)
(b)
(c)
(d)

A total of 8 outcomes: HHH, HHT, HTH, HTT, THH, THT, TTH, and TTT.
P(HHT) = 1/8.
P(First two tosses are heads) = 2/8.
P(Two heads in a row) = 3/8.

2.3
(a) P(At least 4 years experience) = P(4 years experience) + P(5 or more years
experience) = 15/100 + 35/100 = 50/100.
(b) P(At least 4 years experience | At least 3 years experience) = P(At least 4
years experience)/P(At least 3 years experience) = (50/100)/(80/100) = 50/80.
2.4
(a) P(Oil at all three places) = (0.70)x(0.85)x(0.80) = 0.476.
(b) P(No oil at any site) = (0.30)x(0.15)x(0.20) = 0.009.
2.5
(a) P(Sunny on Wednesday) = P(Sunny on Tuesday and sunny on Wednesday) +
P(Cloudy on Tuesday and sunny on Wednesday) = (0.3)x(0.60) + (0.7)x(0.3)
= 0.18 + 0.21 = 0.39.
(b) P(Sunny on Tuesday and Wednesday) = (0.30)x(0.60) = 0.18.
2.6
(a) According to the table below the prime time slot would yield the highest
expected net profit ($112,000).
Time Slot
Morning
Afternoon
Prime Time
Late Evening

Ad Cost Estimated Viewers


$120,000
1000000
$200,000
1300000
$400,000
3200000
$150,000
800000

Estimated Earnings
$160,000
$208,000
$512,000
$128,000

Expected Net Profit


$40,000
$8,000
$112,000
-$22,000

(b) The company should buy the morning and the prime time slots, with a total
expected contribution to earnings of $152,000.
2.7

P(Long-term success) = P(Long-term success | Regular-season show) x


P(Regular-season show) + P(Long-term success | Middle-season show) x
P(Middle-season show) = (0.10) x (0.60) + (0.05) x (0.40) = 0.08.

2.8

Consider the decision tree below. We assume that the boxes are labeled A, B, and
C. Without loss of generality, we assume that the initially chosen box is A. Hence,
there are four possible scenarios, each with the same probability: the prize is in A
and the host shows B, the prize is in A and the host shows C, the prize is in B and
the host must show C, or the prize is in C and the host must show B. Therefore,

Manual to accompany Data, Models & Decisions: The Fundamentals of Management Science by Bertsimas and Freund. Copyright
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the host shows B with probability 2/4 = 0.50, and it shows C with probability 2/4
= 0.50. According to this decision tree, you should always change your pick.

2.9

Let H denote the person has HIV, R the test is positive, and N the test is negative.
Then P(H) = 550000/250000000 = 0.0022, P(R | H) = 0.99, and P(N | not H) =
0.99.
(a) We want to compute P(H | R). Notice that P(R) = P(R | H)xP(H) + P(R | not
H)xP(not H) = 0.002178 + 0.009978 = 0.012156. Therefore, P(H | R) = P(R |
H)xP(H)/P(R) = 0.002178/0.012156 = 0.18.
(b) Let D denote that the person is a drug user. We want to compute P(H | R and
D). Notice that P(H and D) = 275000/250000000 = 0.0011 and P((not H) and
D) = (10000000 - 275000)/250000000 = 0.0389. We assume that P(R | H and
D) = P(R | H) = 0.99 and P(N | (not H) and D) = 0.99. Then P(R and D) =
(0.99)x(0.0011) + (0.01)x(0.0389) = 0.001478. Therefore, P(H | R and D) =
P(H and R and D)/P(R and D) = P(R | H and D)xP(H and D)/P(R and D) =
(0.99)x(0.0011)/(0.001478) = 0.74.

2.10

Let S1 denote the lamp comes from first shipment, S2 denote the lamp comes
from second shipment, and D denote the lamp is defective. We want to compare
P(S1 | D) to P(S2 | D). We have P(S1) = 100/150 = 2/3, P(S2) = 50/150 = 1/3, P(D
| S1) = 0.04, and P(D | S2) = 0.06. First, P(D) = P(D | S1)x P(S1) + P(D | S2)x

Manual to accompany Data, Models & Decisions: The Fundamentals of Management Science by Bertsimas and Freund. Copyright
2000, South-Western College Publishing. Prepared by Manuel Nunez, Chapman University.

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P(S2) = 7/150. Therefore, P(S1 | D) = P(D | S1)x P(S1)/P(D) = 8/14, and P(S2 | D)
= P(D | S2)x P(S2)/P(D) = 6/14. In conclusion, the lamp is more likely to come
from the first shipment.
2.11

Let TB denote the person is infected with the TB bacteria, and let D denote the
person has the disease. We have P(TB) = 1/3 and P(D | TB) = 0.10.
(a) P(D) = P(D | TB)x P(TB) + P(D | not TB)xP(not TB) = 0.10x(1/3) + 0x(2/3) =
1/30.
(b) P(TB | not D) = P(not D | TB)xP(TB)/P(not D) = 9/29.

2.12

Let X be the portfolio's return.


(a) 0.07 + 0.15 + 0.23 + 0.25 + 0.15 + 0.12 + 0.03 = 1.
(b) P(X >= 12%) = 0.25 + 0.15 + 0.12 + 0.03 = 0.55.
(c) E(X) = 11.74%.
(d) VAR(X) = 2.2924*10-4 and (X) = 1.51%.

2.13

Let X be the microwave ovens sold per week.


(a) P(1 <= X <= 3) = 0.07 + 0.22 + 0.29 = 0.58.
(b) E(X) = 2.98, VAR(X) = 1.68, and (X) = 1.3.

2.14
(a) The distributions are given below.
Time Task A
1
2

P(Time)
0.40
0.60

Time Task B
1
2
3

P(Time)
0.20
0.58
0.22

Time Job
1
2
3

P(Time)
0.07
0.71
0.22

(b) E(Time A) = 1.6, E(Time B) = 2.02, and E(Time job) = 2.15; (Time A) =
0.49, (Time B) = 0.65, and (Time job) = 0.52.
(c) The distribution is given below. E(Cost) = $4,160 and (Cost) = $958.75.
Cost
$2,200
$3,400
$3,600
$4,400
$5,000
$5,800

2.15

P(Cost)
0.07
0.13
0.27
0.31
0.06
0.16

Let X be the number of courses per week.


(a) 0.05 + 0.15 + 0.25 + 0.25 + 0.15 + 0.10 + 0.05 = 1.
(b) P(X=0) = 0.05.
(c) P(X >= 3) = 0.25 + 0.15 + 0.10 + 0.05 = 0.55.
(d) P(X >= 1) = 1 - P(X = 0) = 1 - 0.05 = 0.95.

Manual to accompany Data, Models & Decisions: The Fundamentals of Management Science by Bertsimas and Freund. Copyright
2000, South-Western College Publishing. Prepared by Manuel Nunez, Chapman University.

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(e) and (f) Let R denote the net revenue. The following table summarizes the
available options. E[R] = $50,500 and (R) = $22,600. The best option is to
add one more instructor (marginal increase of $800 in net revenues).
R
P(R) R (1 instr.) R (2 instr.) R (3 instr.)
$0
0.05
-$2,500
-$5,000
-$7,500
$20,000
0.15
-$2,500
-$5,000
-$7,500
$40,000
0.25
-$2,500
-$5,000
-$7,500
$60,000
0.25
-$2,500
-$5,000
-$7,500
$69,000
0.15
$8,500
$6,000
$3,500
$78,000
0.10
$8,500
$17,000
$14,500
$87,000
0.05
$8,500
$17,000
$25,500
Expectation
$800
-$50
-$2,000

2.16

Let X be the number of boats constructed each month and let C be the monthly
cost of the operation. Notice that C = 4800X + 30000.
(a) E(X) = 4 and (X) = 1.3.
(b) E(C) = 4800x4 + 30000 = $49,200 and (C) = 4800x(1.3) = $6,240.
(c) E(C) = 49200 + 23000 = $72,200 and (C) = $6,240.
(d) E(C) = 49200 + 4x(7000-4800) = $58,000 and (C)=7000(1.3) = $9,100.

2.17

Let M be the mileage of a customer.


(a) 130 + 0.2 M = 195 implies M = 325. Bill drove 300 + 325 = 625 miles.
(b) ECR rate is better if and only if M > 625. P(M > 625) = 0.13 + 0.09 + 0.08 =
0.30.
(c) Since DRA is less expensive, that means M <= 625. From the table below, it
follows that E(Cost) = $151.
Miles Cost P(Cost) P(Cost | M <= 625)
200 130
0.07
0.10
300 130
0.19
0.27
400 150
0.23
0.33
500 170
0.14
0.20
600 190
0.07
0.10
Total
0.70
1.00

Cost x P
13
35
49
34
19
151

2.18

The standard deviation is (B) = (5/9) x (A) = 10 degrees Celsius.

2.19

Let T be the employee's total weekly salary and let V be the overtime per week.
Notice that T = 40x12 + 18xV = 480 + 18V. E(T) = 480 + 18x15 = $750, (T) =
18x4 = $72, and VAR(T) = 5184.

2.20

Let A, B, and C be the daily production rate of the Andover, Bedford, and
Concord plants, respectively. Notice that X = A + B + C.
(a) E(X) = E(A) + E(B) + E(C) = 91 + 67 + 69 = 227.

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2000, South-Western College Publishing. Prepared by Manuel Nunez, Chapman University.

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(b) VAR(X) = VAR(A) + VAR(B) + VAR(C) = 47.47 and (X) = 6.9.


2.21

Let S denote the size of the sales force and let R denote the yearly sales revenue.
(a) E(S) = 26.25, VAR(S) = 39.7, and (S) = 6.3.
(b) E(R) = 2.8, VAR(R) =1.35, and (R) = 1.16.
(c) COV(S, R) = 6.8 and CORR(S, R) = 0.93.

2.22

Let U1 be the umbrellas sold at the department store, U2 be the umbrellas sold at
the outlet, and S be the total sales revenue. Then S = 17U1 + 9U2. E(S) =
17x(147.8) + 9x(63.2) = $3,081, VAR(S) = 289VAR(U1) + 81VAR(U2) +
2x17x9x51x37xCORR(U1, U2) = 1266773 and (S) = $1,125.51.

2.23

CORR(X, Y) = -(17.7)/(7x6.2) = -0.41.

2.24

Let R = 0.5X + 0.5Y represent the return.


(a) E(R) = (0.5)(0.15) + (0.5)(0.2) = 0.175, VAR(R) = 0.25VAR(X) +
0.25VAR(Y) + 2(0.5)(0.5)(0.05)(0.06)CORR(X, Y) = 0.002, and (R) =
0.045.
(b) The expected return is always the same E(R) = 0.175. See table below for
variance and standard deviation.
CORR(X,Y)
-0.60
-0.30
0.00
0.30
0.60

VAR(R)
0.0006
0.0011
0.0015
0.0020
0.0024

(R)
0.0250
0.0328
0.0391
0.0444
0.0492

(c) and (d) See graph below.

Return Plots

S.D.

0.0040
0.0030

CORR=-0.6

0.0020

CORR=-0.3
CORR=0
CORR=0.3
CORR=0.6

0.0010
0.0000
0.14

0.15

0.16

0.17

0.18

0.19

0.20

0.21

Mean

Manual to accompany Data, Models & Decisions: The Fundamentals of Management Science by Bertsimas and Freund. Copyright
2000, South-Western College Publishing. Prepared by Manuel Nunez, Chapman University.

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2.25

Let A denote the inspector accepts a microchip and D denote a microchip is


defective.
(a) (0.95)10 = 0.6.
(b) P(A) = P(A | D)P(D) + P(A | not D)P(not D) = (0.1)(0.05) + 1(0.95) = 0.955.
(c) P(Accepts 9 out of 10) = 10(0.95)9(0.05) = 0.32.
(d) P(not D | A) = 0.95/0.955 = 0.995.
(e) P(no defects | accepts all 10) = (0.99)10 = 0.95.

2.26

Let X be the number of years that both movements agree.


(a) P(Agree) = (0.6)(0.9) + (0.4)(0.1) = 0.6.
(b) (0.6)20 = 0.00003.
(c) Using a binomial distribution with n = 20 and p = 0.6, P(X >= 15) = 0.125.
(d) Using same distribution, P(X >= 17) = 0.015.
(e) According to (d), if the theory is false, then there is a 99% probability that the
number of years that both movements agree in a 20-year period is less than
17, that is, it is an unusual event to have X >= 17. So that, if in several
random samples of 20 years each, the event X >= 17 occurs very frequently,
then there is indication that the theory might be true. Using hypothesis testing
can make a more formal statement, which at this moment is beyond the
material covered.

2.27

Let X be the number of persons (out of 11) who show up. X is binomial with
parameters n = 11 and p = 0.8.
(a) P(X<=5) = 0.012.
(b) P(X = 10) = 11(0.8)10(0.2) =0.236.
(c) E(X) = 11(0.8) = 8.8. E(Profit) = 1200E(X) - 3000P(X=11) = $10,302.
(d) 1200(0.8)10 = $9,600.
(e) Yes, because if one person shows up, then it is very likely that his/her
companions will also show up. Therefore, the event a person shows up is not
independent of the event the next person shows up.

2.28
(a) 500(0.15) = 75.
(b) 7.98.
2.29
(a) P(Exactly one) = 9(0.06)(0.94)8 = 0.33. P(more than one) = 1 - P(exactly one)
- P(none of them) = 1 - 0.33 - 0.57 = 0.10.
(b) P(Exactly one) = 6(0.12)(0.88)5 = 0.38. P(more than one) = 1 - P(exactly one)
- P(none of them) = 1 - 0.38 - 0.46 = 0.16.
(c) (0.94)3(0.88)2 = 0.64
2.30
(a) P(At least 4) = 0.06 + 0.01 + 0.001 = 0.071.
(b) P(At most 2) = 0.118 + 0.303 + 0.324 = 0.745.

Manual to accompany Data, Models & Decisions: The Fundamentals of Management Science by Bertsimas and Freund. Copyright
2000, South-Western College Publishing. Prepared by Manuel Nunez, Chapman University.

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Chapter 2

25

(0.15)4 = 0.0005.

2.32
(a) The preference of a given customer is independent of the preference of
another customer and the probability that a customer prefer thin crust pizza is
the same for all 6 customers.
(b) The distribution is in the table below.
X
0
1
2
3
4
5
6

P(X)
0
0.002
0.015
0.082
0.246
0.393
0.262

(c) P(X = 3) = 0.082


(d) E(X) = 6(0.8) = 4.8 and (X) = 0.98.
2.33

Let X be the number of times the Fund will increase over the next 12 months. X is
Binomial with n = 12 and p = 0.65.
(a) P(X = 7) = 0.204.
(b) E(X) = 12(0.65) = 7.8. Expected change = E(5X - 4(12-X)) = 9E(X) - 48 =
9(7.8) -48 = 22.2%.

2.34

Let X be the number of customers (out of 10) who are frequent ATM users. X is
Binomial with n = 10 and p = 0.4.
(a) P(X >= 4) = 0.62.
(b) P(X <= 6) = 0.945.
(c) P(4 <= X <= 6) = 0.563.

2.35

Let X be the number of clubs (out of 5) which will accept Jim. X is Binomial with
n = 5 and p = 0.65.
(a) P(X = 3) = 0.3364.
(b) P(X >= 3) = P(X=3) + P(X=4) + P(X=5) = 0.3364 + 0.3124 + 0.11603 =
0.765.
(c) 1 - (0.35)3 = 0.96.

Manual to accompany Data, Models & Decisions: The Fundamentals of Management Science by Bertsimas and Freund. Copyright
2000, South-Western College Publishing. Prepared by Manuel Nunez, Chapman University.

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2.36

Let X be the number of passengers (out of 6) who will become ill. X is Binomial
with parameters n = 6 and p = 0.12. P(X <= 2) = P(X=0) + P(X=1) + P(X=2) =
0.46 + 0.38 + 0.13 = 0.97.

2.37

Let X be the number of devices (out of 5) which will sound an alarm when no
intruder is present. X is Binomial with parameters n = 5 and p = 0.1. P(X >= 2) =
P(X=2) + P(X=3) + P(X=4) + P(X=5) = 0.073 + 0.008 + 0.000 + 0.000 = 0.081.

2.38

Let X be the number of customers (out of 16) who come from houses in which
gas is used for residential heating. X is Binomial with parameters n = 16 and p =
0.9. P(X >= 12) = P(X=12) + P(X=13) + P(X=14) + P(X=15) + P(X=16) = 0.051
+ 0.142 + 0.275 + 0.329 + 0.185 = 0.982.

IV

Answers to Chapter Cases

ARIZONA INSTRUMENTATION, INC. AND THE ECONOMIC


DEVELOPMENT BOARD OF SINGAPORE
Consider the decision tree on the next page. According to this tree, the optimal
decision strategy is to implement the AESS plan, with an EMV of $75.5 millions.
To compute the probabilities of favorable events under the EDB&AII plan, we did
the following:
P(4 favorable events) = (0.70)x(0.60)x(0.50)x(0.90) = 0.189,
P(3
favorable
events)
=
(0.70)x(0.60)x(0.50)x(0.10)
+
(0.70)x(0.60)x(0.50)x(0.90)
+
(0.70)x(0.40)x(0.50)x(0.90)
+
(0.30)x(0.60)x(0.50)x(0.90) = 0.417,
P(2 or less favorable events) = 1 - 0.189 - 0.417 = 0.394.
Similarly, we found that under the AESS plan:
P(4 favorable events) = 0.1396,
P(3 favorable events) = 0.453,
P(2 or less favorable events) = 0.407.

Manual to accompany Data, Models & Decisions: The Fundamentals of Management Science by Bertsimas and Freund. Copyright
2000, South-Western College Publishing. Prepared by Manuel Nunez, Chapman University.

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SAN CARLOS MUD SLIDES


Consider the decision tree on page 29. According to this tree, the optimal strategy
is to use the test as long as its cost is less than $2,217 = EMV(Test) - EMV(Not
test) = -7,783 - $10,000. If the result of the test is positive, then it is better to build
the retaining wall. If the result of the test is negative, then it is better not to build
the wall. If the test is not taken, then do not build the wall.

Manual to accompany Data, Models & Decisions: The Fundamentals of Management Science by Bertsimas and Freund. Copyright
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Let N denote the event that the result of the test is negative and S denote the event
that the slide occurs. Notice that P(not N | S) =0.9, P(N | not S) = 0.85, and P(S) =
0.9. To compute the probabilities on the branches we do the following:
P(N) = P(N | S)P(S) + P(N | not S)P(not S) = (0.1)(0.01) + (0.85)(0.99) =
0.8425
P(S | N) = (0.1)(0.01)/(0.8425) = 0.0012
P(S | not N) = (0.9)(0.01)/(0.1575) = 0.06

Manual to accompany Data, Models & Decisions: The Fundamentals of Management Science by Bertsimas and Freund. Copyright
2000, South-Western College Publishing. Prepared by Manuel Nunez, Chapman University.

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Manual to accompany Data, Models & Decisions: The Fundamentals of Management Science by Bertsimas and Freund. Copyright
2000, South-Western College Publishing. Prepared by Manuel Nunez, Chapman University.

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GRAPHIC CORPORATION
Consider the decision tree below. According to this tree, the optimal decision
strategy is to install the G-LAN using normal production techniques, with an
EMV of $637,000. Let R, S, and T denote the event we get a positive, neutral, and
negative result from the test, respectively. Let G denote the event that the G-LAN
installation is successful, and B that it is not successful. To compute the
probabilities on the branches of the tree, we do the following:
P(R) = P(R | G)P(G) + P(R | B)P(B) = (0.7)(0.92) + (0.15)(0.08) = 0.656,
P(S) = P(S | G)P(G) + P(S | B)P(B) = (0.2)(0.92) + (0.1)(0.08) = 0.192,
P(T) = P(T | G)P(G) + P(T | B)P(B) = (0.1)(0.92) + (0.75)(0.08) = 0.152,
P(B | R) = (0.15)(0.08)/(0.656) = 0.0183,
P(B | S) = (0.10)(0.08)/(0.192) = 0.0417,
P(B | T) = (0.75)(0.08)/(0.152) = 0.3947.

Manual to accompany Data, Models & Decisions: The Fundamentals of Management Science by Bertsimas and Freund. Copyright
2000, South-Western College Publishing. Prepared by Manuel Nunez, Chapman University.