ISYE 3232C Fall 2015 Midterm 1 Solution

Total # of
Exam Takers
68

Min

Max

Mean

Median

47

100

83.4

88

25%
quantile
74.25

75 %
quantile
96

std
14.6

Bonus
avg.
12.17

1. (15) Suppose that X1 , ..., Xn are independent and identically distributed with expected value and
n
X
variance 2 . Let X = i=1n i . (Class Performance 50.8%)
(a) (3) What is E[3X1 X2 ]?
E[3X1 X2 ] = 3E[X1 ] E[X2 ] = 3 = 2
(b) (3) What is Var(X1 + 4 X2 + 2X1 )?
Var(X1 + 4 X2 + 2X1 ) = Var(3X1 X2 ) = 32Var(X1 ) +Var(X2 ) = 10 2
by independence.

(c) (3) What is E[X]?

= E[
E[X]

ni=1 Xi
n E[Xi ] n
] = i=1
=
=
n
n
n

(d) (3) What is Var(X)?

= Var(
Var(X)

Var(ni=1 Xi ) ni=1 Var(Xi ) ni=1 2 2

ni=1 Xi
)=
=
=
=
n
n2
n2
n2
n

(e) (3) If Cov(X1 ,Y ) = 2,Var(Y ) = 3, what is Var(2X1 Y )?

Var(2X1 Y ) = 22Var(X1 )+(1)2Var(Y )+22(1)Cov(X1 ,Y ) = 4 2 +34(2) = 11+4 2
2. (10) An airline knows that 5 percent of the people making reservations on a certain flight will
not show up. Consequently, their policy is to sell 52 tickets for a flight that can hold only 50
passengers. What is the distribution for the number of passengers that show up in this flight?
What is the probability that there will be a seat available for every passenger who shows up?
(Class Performance 42.5%)
(5 points) Let X be the number of passengers that show up in this flight. Then X Bin(52, 0.95).
(5 points) The probability that there will be a seat available for every passenger who shows up is
P(X 50):
 
 
52
52
51
P(X 50) = 1 P(X = 51) P(X = 52) = 1
(0.95) (0.05)
(0.95)52 (0.05)0
51
52

3. (25) Suppose you are running a restaurant having only one menu, fruit salad, in the Student
Center. You should order fruit salad every day 10pm after closing. Then, your supplier delivers
the ordered amount of fruit salad 5am next morning. Store hours is from 10am to 5pm every
day. The demand for the fruit salad for a day (10am - 5pm) has the following distribution. (Class
Performance 90%)
d
P(D=d)

20
0.1

25
0.2

30
0.4

35
0.2

40
0.1

The selling price of a fruit salad is $6, the buying price of a fruit salad is $1. Of course, leftover
fruit salad of a day cannot be used for future and you have to pay 50 cents per fruit salad for
disposal.
(a) (4) What is the optimal order-up-to quantity of fruit salad for a day?(a numerical answer is
expected)
Cp = 6,Cv = 1,Cs = 0.5.
(2points)F(y )

Cp Cv
61
5
=
=
0.769
Cp Cs
6 + 0.5 6.5

Hence, (2points)y = 35.

(b) (6) Assume you order 25 units of fruit salad every day, what are the expected number of sold
salad, expected number of unsold salad, and expected number of lost sale?
(2 points)E[# of sold] = E[25 D] = 20 0.1 + 25 0.2 + 25 0.4 + 25 0.2 + 25 0.1 =
2 + 25 0.9 = 24.5.
(2 points)E[# of unsold] = E[(y D)+ ] = 5 0.1 = 0.5.
(2 points)E[# of lost sale] = E[(D y)+ ] = 5 0.4 + 10 0.2 + 15 0.1 = 5.5.
(c) (5) Assume you order 25 units of fruit salad, what is your expected daily profit?
E[Profit] = 6E[25 D] 0.5E[(25 D)+ ] 25 1 = 6 24.5 0.5 0.5 25 = 121.75
(d) (5) Assume the distribution of demand for the fruit salad changes over time, can you still use
(a) for the optimal order-up-to quantity? Why?
No. In fact, we cannot apply the newsvendor model since newsvendor model is based on the
Strong Law of Large Numbers (SLLN). SLLN requires the distribution of demand for each
day to be i.i.d. If the distribution of demand is changing over time, the SLLN will not be
applicable. Hence, the result from (a) cannot be used.

(e) (5) What is the optimal order-up-to quantity of fruit salad if the daily demand is exponentially
distributed with mean 30 units? Note that the pdf of exponential is f (x) = e x for x 0
where mean is 1/ . Its CDF is given as F(x) = 1 e x for x 0.
= 1/30.
1
30
y

1e

= 0.77, y = 30ln(0.23)

4. (50) Next months production at a manufacturing company will use a certain solvent for part
of its production process. You need to prepare solvent in prior and the demand of solvent is
random. Assume that there is an ordering cost of $1,500 incurred whenever an order for solvent
is placed and the solvent costs $20 per liter. Due to short product life cycle, unused solvent
cannot be used in following months. There will be a $10 disposal charge for each liter of solvent
left over at the end of the month. If there is a shortage of solvent, the production process is
seriously disrupted at a cost of $110 per liter short. Assume the demand is uniformly distributed
1
(continuous distribution) between 400 to 800 liters. (Note: D Uniform(a,b) has the pdf ba
and
xa
1
CDF ba , E[X] = 2 (a + b).)(Class Performance 79.6%)
(a) (5) What is the optimal ordering quantity (assume there is no initial inventory. A numerical
answer is expected.)
C f = 1500,Cv = 20,Co = 10,Cu = 110
Cu Cv
110 20
=
= 0.75
Cu +Co 110 + 10
y 400
= 0.75, y = 700.
800 400
(b) (5) Assume that the company currently has 400 liters in stock. What is the total expected cost
when no additional quantity is ordered?
F(y ) =

E[Cost] = Cu E[(D 400)+ ] +Co E[(400 D)+ ] = 110(E[D] 400) = 200 110 = 22000
since D 400.
(c) (8) Assume that the company currently has 400 liters in stock and additional quantity is
ordered. How many liters should be ordered if the answer for (a) is assumed to be 700
liters? (A numerical answer is exptected.)What is the total expected cost when the additional
quantity is ordered?
(3 points)order 700 - 400 = 300 liters.
E[Cost] = 1500 +Cv (y 400) +Cu E[(D 700)+ ] +Co E[(700 D)+ ]
= 1500 + 20 300 + 110E[(D 700)+ ] + 10E[(700 D)+ ]
= 1500 + 20 300 + 110

Z 800

(x 700)/400dx + 10

700

= 7500 + 110 12.5 + 10 112.5 = 10000

The integrals can be found in (e) (5 points).
4

Z 700
400

(700 x)/400dx

(d) (7) Assume the total expected cost for no order is 22000 (question (b)) and the total
expected cost for order is 10000 (question (c)), should you order? What is the range of s
for the (s, S) policy?
(5 points) Since the cost for order is low, you should order. (2 points) And 400 < s < 700
since when x = 400, you should order.
(e) (15) Assume s > 400, give an equation that the parameter s of the (s, S) policy has to satisfy.
It can only involve s; it cannot have integrals, expectations or the variable S. For example,
2(s 400)2 = 8(400 + s)2 + 5(790 s) is acceptable. You may use the following quantities
to save time.
for any constant c,
for any constant c,

1 R 800
1
2
400 Rc (x c)dx = 800 (c 800)
c
1
1
2
400 400 (c x)dx = 800 (c 400)

1 R 800
400 700 (x 700)dx
1 R 700
400 400 (700 x)dx

= 12.5
= 112.5

(5points)E[ Cost for Order] = C f +Cv (y s) +Cu E[(D y )+ ] +Co E[(y D)+ ]
= 1500 + 20(700 s) + 110E[(D 700)+ ] + 10E[(700 D)+ ]
800
1
1
(x 700)dx + 10
400 700
400
= 1500 + 20(700 s) + 110 12.5 + 10 112.5

= 1500 + 20(700 s) + 110

= 4000 + 20(700 s)
(5points)E[ Cost for no Order] = Cu E[(D s)+ ] +Co E[(s D)+ ]
= 110E[(D s)+ ] + 10E[(s D)+ ]
800
1
1
(x s)dx + 10
400 s
400
110
10
=
(s 800)2 +
(s 400)2
800
800

Z s

= 110

(s x)dx

400

(5points)E[ Cost for Order] = E[ Cost for no Order]

800(4000 + 20(700 s)) = 110(s 800)2 + 10(s 400)2
(f) (5) Assume the possible value of s could be 400, 600, 800. You know the optimal decision is
order, order, when the initial inventory is x = 300, 500, respectively. Assume the answer
for (a) is 700, what is s?
Since the optimal decision for x = 500 is order, s > 500 and s < S = 700, hence, s = 600.

Z 700
400

(700 x)dx

(g) (5) Identify the range of initial inventory level x such that the optimal order size is less or
equal to 500, assume (s = 900, S = 1200).
S x 500, x 700.
When x s = 900, the optimal order size is 0.