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Group 3 - Lucia Horta, Kaylen Malley, Mitchell Young

IE 417

1-19-11

Problem 2 - Pg 772

A nuclear power company is deciding whether or not to build a nuclear power


plant at Diablo Canyon or at Roy Rogers City. The cost of building the power plant is
$10 million at Diablo and $20 Million at Roy Rogers city. If the company builds at
Diablo, however, and an earthquake occurs at Diablo during the next fve years,
construction will be terminated and the company will lose $10 million (and will still
have to build a power plant at Roy Rogers City). A priori, the company believes
there is a 20% chance that an earthquake will occur at Diablo during the next fve
years. For $1 million, a geologist can be hired to analyze the fault structure at
Diablo Canyon. He will either predict that an earthquake will occur or that an
earthquake will not occur. The geologist's past record indicates that he will predict
an earthquake on 95% of the occasions for which an earthquake will occur and no
earthquake on 90% of the occasions for which an earthquake will not occur. Should
the power company hire the geologist?

Build at
Roy $-20 M
Rogers 9
$-30 M
Don’t hire Earthqua
2 1
ke occurs
0.20 0
1 Build at 4 $-10 M
0.80
Diablo 1 $-31 M
Earthquake
1 Earthqua 1
doesn’t
hire ke occurs 2
occur 19/2
Says Build at
3 Earthquake Diablo
7
8/27
occurs
0.27
7 $-11 M
5 Earthquake 1
Build at doesn’t 3
Says 0.73 Roy 1 $-21 occur $-31 M
Earthquak
Earthquake Rogers 4
Build at Diablo 1
e occurs
doesn’t occur 8 1/7 5
6 72/73
Earthquake $-11 M
1
Build at Roy doesn’t
$-21 6
occur
1
7
*Dollar values in millions

Highlighted = given information Baye's Theorem


P(Si) P(Qj|Si) P(Si and Oj) P(Oj) P(Si|Oj)
Prior Prob Likelihood Joint Prob Probability of outcome Posterior Prob.

P(E) = 0.2 P(PE|E) = 0.95 P(PE and E) = P(E)P(PE|E) P(PE) = P(PE and E)+P(PE and NE) P(E|PE) = P(E and PE)/P(PE)
=(0.20)(0.95) = 0.19 = 0.19+0.08 = 0.27 = 0.19/0.27 = 0.704
P(NE) = 0.8 P(PNE|E) =0.05 P(PN and E) = P(E)P(PN|E) P(PN) = P(PN and E)+P(PN and NE) P(NE|PE) = P(NE and PE)/P(PE)
= (0.20)(0.05) = 0.01 = 0.01+0.72= 0.73 = 0.08/0.27 = 0.296
P(PE|NE) = 0.1 P(PE and NE) = P(NE)P(PE|NE) P(E|PN) = P(E and PN)/P(PN)
= (0.80)(0.10) = 0.08 = 0.01/0.73 = 0.014
P(PNE|E) = 0.9 P(PN and NE) = P(E)P(PN|NE) P(NE|PN) = P(NE and PN)/P(PN)
= (0.80)(0.90) = 0.72 = 0.72/0.73 = 0.986

Explanation of given probability information:

From the problem, we are given the probabilities that an earthquake will occur and
will not occur within the next 5 years. We are also given the probability of the
geologist predicting correctly given that there is or isn’t an earthquake. Given that
there is an earthquake, 95% of the time the geologist predicts correctly by
determining that an earthquake will occur. Given that there is no earthquake, 90%
of the time the geologist predicts correctly by determining that no earthquake will
occur. We also determined the compliments of these probabilities. 5% of the time,
the geologist will predict that there will be no earthquake when there is actually an
earthquake and 10% of the time the geologist will predict that there will be an
earthquake given that no earthquake actually occurs.
WinQSB:

Input:

Output:
Sensitivity Analysis: How much can we spend on the geologist?

Spend 1.05 million

Input:

Output:

Spend 1.08 million

Input:
Output:

Spend 1.09 million

Input:

Output:
Spend 1.095 million

Input:

Output:

Spend 1.096 million


Input:

Output:

Spend 1.1 million

Input:
Output:

SA Summary Table:

Amt to
Expect
spend on
ed
Geologist WinQSB Output Decision to make
Outco
($ in
me
millions)
Hire 
Hire geologist, if predicts
If Predict earthquake 
earthquake build at Roy
1 -$13.9 BuildRR
Rogers, if predicts no
If predict no earthquake 
earthquake build at Diablo
Build Diablo
Hire 
Hire geologist, if predicts
If Predict earthquake 
earthquake build at Roy
1.05 -$13.95 BuildRR
Rogers, if predicts no
If predict no earthquake 
earthquake build at Diablo
Build Diablo
Hire 
Hire geologist, if predicts
If Predict earthquake 
earthquake build at Roy
1.08 -$13.98 BuildRR
Rogers, if predicts no
If predict no earthquake 
earthquake build at Diablo
Build Diablo
Hire 
Hire geologist, if predicts
If Predict earthquake 
earthquake build at Roy
1.09 -$13.99 BuildRR
Rogers, if predicts no
If predict no earthquake 
earthquake build at Diablo
Build Diablo
Hire 
Hire geologist, if predicts
If Predict earthquake 
earthquake build at Roy
1.095 -$14 BuildRR
Rogers, if predicts no
If predict no earthquake 
earthquake build at Diablo
Build Diablo
Don’t hire  BuildRR/D1  E/ Don’t hire geologist, build at
1.096 -$14 NE Diablo
Don’t hire  BuildRR/D1  E/ Don’t hire geologist, build at
1.1 -$14 NE Diablo
 Turning point between 1.095 and 1.096 million (if geologist charges more
than 1.095 million for services, don’t hire)

Utility Function:

Line Equation

y = mx + b

Finding Slope:

m = 1 / (di erence of Smallest and Largest net return)

m = 1 / [ -10 - (-31)]

m = 1/21

Finding y-intercept:

Solve for b and use one given point.

b = y - mx

b = 0 - (1/21)(-31)

b = (31/21)

Line equation:
y = (1/21)x + (31/21)

U(-10 M) = 1

U(-31 M) = 0

U(-11 M) = .95

U(-20 M) = .5

U(-21 M) = .476

U(-30 M) = .0476

WinQSB Input with Utility Values


WinQSB Output with Utility Values
Decision Tree
Dear Manager,

After performing analysis on whether or not the company should decide to


build the new nuclear plant in Diablo Canyon or Roy Rogers City, and whether or not
to hire a geologist to predict future earthquakes at Diablo, we have found the
following decisions to be most benefcial to the company.

The company should hire the geologist to predict if an earthquake will hit
Diablo in the next fve years. If the geologist predicts that an earthquake will occur,
the company should decide to build the plant at Roy Rogers. However, if the
geologist predicts that no earthquake will occur, then the company should build the
plant at Diablo. Following this plan would cost the company an expected amount of
$13.9 million dollars. It is important to realize that this expected amount is not an
exact value that the company will be spending after one trial, but is instead the
amount the company would expect to spend after repeating this decision many
times. However, making this decision of hiring the geologist will cost the company
either $31 million or $11 million if the hired geologist predicts that no earthquake
will occur and we build at Diablo, or it could cost the company a total of $21 million
of the geologist predicts an earthquake to occur, in which case the company would
instead build at Roy Rogers City.

It is also important to know that if the geologist decides to raise his prices, we
would still want to use his predictions for up to an additional $95,000 and pay him a
total of $1,095,000. However, if the geologist decides to raise his prices to
$1,096,000 or more, the company is better o to not use his services and instead
build at Diablo Canyon.