Reviewer in Operations Research (Midterms) If an event has a number of possible outcomes then, We now quantify the production risk

outcomes then, We now quantify the production risk by calculating the Expected Monetary Value of each
risk.
Lesson 2: Decision Theory EV = P1 (X1) + P2 (X2) + P3 (X3) + ….. + Pn (Xn)
Calculation of EMV:
Decision Theory Problem 1:
Negative Risk Positive Risk
− Also known as theory of choice A coin is tossed. If the coin lands heads, Carol will collect P50, and will shell out P20 if its
− Areas of study, specifically in Economics, Psychology, Sociology, Philosophy, lands tails. Find the expected value. Weather Cost of production materials
Mathematics, Computer science, and Statistics.
Let : P1 = 0.5 X1 = 50 Labor Disorder
− Basis of logical and mathematical concepts, intended at assisting managers in
devising policies that may direct to a most beneficial and/or profitable course
of action under the given circumstances. P2 = 0.5 X2 = -20
EMV
SIX STEPS IN DECISION MAKING Solution:
Weather (10/100) (-250,000) -25,000
1. Rationally define the problem at hand EV = 0.5 ( 50 ) + 0.5 ( -20 )
2. List the potential options or alternatives Cost of production (8/100) (300,000) 24,000
EV = 25 – 10 materials
3. Recognize the possible outcomes
4. List the payoff or profit of each combination of alternatives or outcomes Labor Disorder/Setback (6/100) (-420,000) -25,200
EV = P15 , which means that Carol is expected to gain
5. Opt for one of the mathematical decision theory models
6. Apply the model and make a decision
The operation’s Expected monetary value based on this production risk is:
3 Types of Decision-making Environments EXPECTED MONETARY VALUE (EMV)
(-25,000) + (24,000) + (-25,200) = P-26,200
Steps to calculate EMV
Therefore, if all risks occur in the production, the operations would lose P26,200. In this
• Assign a probability of occurrence for the risk. situation, the production manager ca include P26,000 to the funds or budget to
compensate for this.
• Assign monetary value of the impact of risk when it occurs.

Sample case problem:

EXPECTED VALUE OF PERFECT INFORMATION (EVPI)
Suppose you are on production of cement. Weather, cost of materials, and labor
problems are key production risk found in most assembly line operations management. In decision theory, the Expected value of Perfect Information (EVPI) is the cost or price
1. Decision making under Certainty
that one would be willing to shell out in order to acquire access to perfect information.
2. Decision making under Uncertainty
• Risk 1 – Weather: there is a 10 percent chance of excessive rain fall that will
3. Decision making under Risk
delay the production for one and a half weeks which will, in turn, cost the Formula:
production P250,000.
EXPECTED VALUE (EV)
EVPI = EV with PI – maximum EMV
• Risk 2 – Cost of production Materials: There is an 8 percent of probability of
Formula:
the price of construction material dropping, which will save the production Where: Maximum EMV = EV without EVPI

EV = P (X) P300,000.

Where: • Risk 3 – Labor Disorder: There is a 6 percent probability of production coming

to a halt if the workers go on strike. The impact would lead to a loss of
P= probability value P420,000.

X= represent the amount of money

Sample problem: EXPECTED OPPORTUNITY LOST (EOL) For DECLINING state of the nature

Below is a payoff table. Calculate the EMV and EVPI. − Expected Opportunity Loss is simply put as the cost of not picking the best
Townhouse 20 – 20 0
solution. Opportunity Loss, also known as Regret, is the difference between
ECONOMY the payoff from the chosen alternative given a state nature. Condominium 20 – (-2) 22
− Expected Opportunity Loss – Expected Regret Rule
Apartment 20 – (-10) 30
Alternatives Growing Stable Declining − Chose the alternative with the minimum EOL.
(in 000) (in 000) (in 000)
Sample problem:
Townhouse 55 60 20 Regret Table.

Condominium 85 45 -2 Below is a payoff table. Calculate the EOL.

Alternatives Growing Stable Declining
Apartment 68 60 -10 (in 000) (in 000) (in 000)
Alternatives Growing Stable Declining
(in 000) (in 000) (in 000) Townhouse 30 0 0
probability 0.2 0.5 0.3
Townhouse 55 60 20
Condominium 0 15 22
Condominium 85 45 -2 Apartment 17 0 30
Step 1. To compute for EMV:
Apartment 68 60 -10
EMV is the weighted average of the payoffs for a decision alternatives.
probability 0.2 0.5 0.3 Step 2. Compute for EOL.
Alternatives EMV
probability 20% = 0.2 50% = 0.5 30% = 0.3
Townhouse 0.2(55,000) + 0.5(60,000) + 0.3(20,000) 47,000 Regret = best payoff – payoff received

Condominium 0.2(85,000) + 0.5(45,000) + 0.3(-2,000) 38,900

Step 1. Construct a Regret table.
Apartment 0.2(68,000) + 0.5(60,000) + 0.3(-10,000) 40,600 EOL (Townhouse) 0.2(30) + 0.5(0) + 0.3(0) 6
1. Choose the higher value in the “Growing” column, It is 85,000.
EOL (Condominium) 0.2(0) + 0.5(15) + 0.3(22) 14.1
2. Subtract the highest value with that of the other values in the given column.
Note: Maximum EMV – EV without PI
EOL (Apartment) 0.2(17) + 0.5(0) + 0.3(30) 12.4
3. Repeat the process for the remaining columns.
Therefore: EV without PI = 47,000
Hence, for GROWING state of nature (in 000) Expected Opportunity Loss
Step 2. To compute for EVPI:

EVPI is the maximum payment for additional information. Townhouse 85 – 55 30 Alternatives Growing Stable Declining EOL
(in 000) (in 000) (in 000) (in 000)
Condominium 85 – 85 0
EV with PI = P85000(0.2) + 60000(0.5) + 20000(0.3)
Townhouse 30 0 0 6
Apartment 85 - 68 17
= P17000 + 30000 + 6000 EV with PI = P53,000
Condominium 0 15 22 14.1

For STABLE state of nature Apartment 17 0 30 12.4

EVPI = EV with PI – maximum probability 0.2 0.5 0.3

Townhouse 60 – 60 0
EVPI = P53000 – 47000
Condominium 60 – 45 15
EVPI = P6,000 Apartment 60 - 60 0
Min EOL Decision = Max EMV Decision Maximax Approach (optimistic) Maximin Approach

- Best of the best - Best of worst

Alternatives EMV EOL
(in 000) (in 000) - Maximizing the maximum - Maximizes the minimum payoff.
- Maximizes the maximum payoff. - A pessimistic decision making criterion. This techniques maximizes the
Townhouse 47 6 53 - An optimistic decision making principle that prefers alternative with the minimum payoff. It is the best of the worst possible payoff.
utmost feasible payoff or return.
Condominium 38.9 14.1 53
Example 1. Using the same payoff table
Apartment 40.6 12.4 53 Example 1. Using the same payoff table
ECONOMY
ECONOMY
Alternatives Growing Stable Declining
EVPI = min EOL
Alternatives Growing Stable Declining (in 000) (in 000) (in 000)
(in 000) (in 000) (in 000)
6000 = 6000 Townhouse 55 60 20
Townhouse 55 60 20
Condominium 85 45 -2
Condominium 85 45 -2
Apartment 68 60 -10
Min EOL Decision = Max EMV Decision
Apartment 68 60 -10 probability 20% = 0.2 50% = 0.5 30% = 0.3
Townhouse = Townhouse
probability 20% = 0.2 50% = 0.5 30% = 0.3

Procedure: Locate the minimum payoff within each alternative and then pick the one
Note: The Minimum EOL is 6 with the highest value.
Procedure: Locate the maximum payoff within each alternative and then pick the one
with the highest value.
The decision, therefore, is to invest in Townhouse. Alternatives Growing Stable Declining Worst
(in 000) (in 000) (in 000)
Alternatives Growing Stable Declining Best
(in 000) (in 000) (in 000) Townhouse 55 60 20 20
Decision making under Uncertainty. Townhouse 55 60 20 60 Condominium 85 45 -2 -2

Condominium 85 45 -2 85 Apartment 68 60 -10 -10

Apartment 68 60 -10 68 probability 0.2 0.5 0.3

probability 0.2 0.5 0.3

Decision: Invest in Townhouse

Decision: Invest in Condominium

Equally likely (Laplace) Approach Minimax Regret Decision Tree

- Best of averages - Minimizes the maximum Regret. - A decision tree is a decision support device that employs a tree-like diagram
- Maximizes the average payoff. - Regret = Best Payoff – Payoff Received or model of assessments and their probable outcomes, as well as chance and
results, and resource costs.
Example 1. Using the same payoff table - It is used as a visual (to illustrate) and analytical decision support tool, where
Example 1. Using the same payoff table
the expected values ( or expected utility) of competing alternative are
calculated.
Alternatives Growing Stable Declining
Alternatives Growing Stable Declining
(in 000) (in 000) (in 000)
(in 000) (in 000) (in 000)
Townhouse 55 60 20
Townhouse 55 60 20
Condominium 85 45 -2
Condominium 85 45 -2
Apartment 68 60 -10
Apartment 68 60 -10

probability 20% = 0.2 50% = 0.5 30% = 0.3

Step 1: Choose the highest value in each column and get the difference.

Procedure: Average payoff = Payoff 1 + Payoff 2 + Payoff 3 Alternatives Growing Stable Declining
3 (in 000) (in 000) (in 000)
Townhouse = (55 + 60 + 20) / 3 = 45
Townhouse 55 60 20
Example case problem:
Condominium = (85 + 45 - 2) / 3 = 42.67 85 – 55 = 30 60 – 60 = 0 20 – 20 = 0
Assume that both business venture has a 50 - 50 chance of success – failure rate.
Apartment = (68 + 60 – 10) /3 = 39.33 Condominium 85 45 -2 However, there’s a catch. Let’s say, if the Burger joint succeeds, then it will earn P25,000.
but if its fails, then it will lose P12,000. On the other hand, with the 50% rate of success
Decision: Invest in Townhouse 85 – 85 = 0 60 – 45 = 15 20 – (-2) = 22 for the Pizza parlor business, it will generate P20,000. in the event that it fails, the said
business would lose P6,000. will the additional information change your decision?
α = 0.3 Apartment 68 60 -10
85 – 68 =17 60 – 60 = 0 20 – (-10) = 30 Assume that both business venture has a 50 - 50 chance of success – failure rate.
1 – α = 0.7 However, there’s a catch. Let’s say, if the Burger joint succeeds, then it will earn P25,000.
but if its fails, then it will lose P12,000. On the other hand, with the 50% rate of success
for the Pizza parlor business, it will generate P20,000. in the event that it fails, the said
Alternatives Growing Stable Declining Weighted Average
Step 2: Construct the Regret table using the values generated in step 1. business would lose P6,000. will the additional information change your decision?
(in 000) (in 000)

Townhouse 55 60 20 32 Step 3: Choose the highest value in each row.

Condominium 85 45 -2 24.1
Alternatives Growing Stable Declining Maximum
Apartment 68 60 -10 13.4 (in 000) (in 000) (in 000)

Townhouse 30 0 0 30

formula: α (best payoff) + (1 – α)(worst payoff) Condominium 0 15 22 22

Apartment 17 0 30 30
Townhouse = 0.3(60) + 0.7(20) = 18 + 14 = 32

Condominium = 0.3(85) + 0.7(-2) = 25.5 – 1.4 = 24.1

Step 4: Choose the one with the lowest value.
Apartment = 0.3(68) + 0.7(-10) = 20.4 – 7 = 13.4
Decision: Invest in Condominium
Decision: Invest in Townhouse
Chapter 3: Introduction to Basic Linear Equations & Inequalities 5. If a variable has a numerical coefficient other than 1, multiply both sides by
the reciprocal of the numerical coefficient or divide both sides of the
Most Essential Learning Competencies equation by the numerical coefficient or by MPE

- Identify and understand the basic assumptions and properties of linear 𝟏 𝟏 𝟑𝒙 𝟔

programming ( ) 𝟑𝒙 > 𝟔 ( ) → ( )>( )
𝟑 𝟑 𝟑 𝟑
- Solve linear equations in one and two variables,
- Graph the solution set of linear equations on a Cartesian plane,
6. Substitute the solved value to the variable in the equation to check if you get
- Introduce the systems of linear equations. Solving Linear Equations in Two Variables
the right answer.
INTRODUCTION TO LINEAR EQUATIONS Linear equations in two variable is in the form of ax + by + c = 0, where a, b and c are
real numbers, and the coefficients of x and y are not equal to zero.
What is an equation?

Equation is a mathematical sentence that shows two equal expressions.

Example:

3x + 5 = 20

Linear equation in one variable is in the form of ax + b = c, where a, b and c are real
numbers and a ≠ 0.

Examples:

3x + 5 = 20

2x – 10 = -14

5x = 45

Solving Linear Equations in One Variable

For solving x:
To solve equations, apply the properties of equality and follow some steps.

1. Simplify both sides of the equation. This includes applying Distributive

Property of Multiplication over Addition (DPMA) and/ or combining similar In order to find the solution of Linear equation in 2 variables, two equations should be
terms. known to us.
2. If the equation has a fraction clear the denominators by multiplying both
sides of the equation by the LCD of all the denominators. Consider for Example: 5x + 3y = 30

𝟑 The above equation has two variables namely x and y.

(𝟒) 𝒙 + 𝟐 (𝟒) > 𝟓
𝟒 For checking:
Graphically this equation can be represented by substituting the variables to zero.
3. If equation has decimal, clear the decimal by multiplying every term of the
The first number is x = 25
equation by powers of 10 depending on the greatest number of decimal The value of x when y=0 is To check:
places in the term has.
Second number is x + 2 therefore 25 + 2 = 27
5x + 3(0) = 30 5x + 0 = 30
(𝟏𝟎)𝟐. 𝟓𝒙 + 𝟒(𝟏𝟎) > 𝟐(𝟏𝟎) 5x = 30 5(6) + 0 = 30
Third number is x + 4, therefore 25 + 4 = 29
5 5 30 =30
4. If a constant is added to a term with a variable, add its opposite to both x=6
Check if the sum of these odd numbers is 81:
sides of the equation or apply APE.
25 + 27 + 29 = 81
𝟓𝒙 + 𝟐 + (−𝟐) > 𝟐 + (−𝟐)
 Substitution Method Translate the following verbal sentence to mathematical sentence. Use variable x to
represent number.
The substitution method is a technique for solving systems of linear equations.
1) The sum of a number and 5 is 12. x + 5 = 12

2) Twice a number is 54. 2x = 54

3)Thrice a number increased by 2 is greater than 50. 3x + 2 > 50

𝟏
4)One half the sum of a number and 4 is less than 28 . (x + 4) < 28
𝟐
It is now understood that to solve linear equation in two variables, the two equations
𝟏
have to be known and then the substitution method can be followed. 5) A number increased by one-third of the number is 5 𝒙 + 𝟑𝒙 = 5

System of Linear Equations

Important Note:

Relational Verbal Translations

Symbols

= is, is equal to, results to, yields to, gives, will be

INTRODUCTION TO LINEAR INEQUALITIES
In mathematics, a system of linear equations (or linear system) is a collection of two or < is less than, is smaller than, is under, is below, is lower than, is
more linear equations involving the same set of variables. Inequality is a mathematical sentence that shows two unequal quantities. One might be
shorter than
greater or lesser than the other.
Examples:
5 > 1 is a true inequality > is greater than, is more than, is over, is above, exceeds, is larger
than, is higher than
2x + 1 < 10, may be true or false, depending on the values of x.

More than one value of x can make the inequality true. ≤ is less than or equal to, is at most, does not exceed, is no more than,
has maximum value
An inequality uses the symbols >, <, ≥, ≤, and ≠.

≥ is greater than or equal to, is at least, is not less than, has minimum
value
Elimination Method
EXAMPLES: Determine if the following statements represent linear equation, linear
inequality, or neither.
In this method, it's either add or subtract the equations to get the equation in one ≠ is not equal to, is not the same as, is different from
variable.
1) x + 5 = 30 Liner Equation

2) 12x + 3 Neither

3) x – 5 > 2 Linear Inequality

4) 2x = 40 Linear Equation

5) x ≤ -10 Linear Inequality

Solving Linear Inequality in One Variable Solving Linear Inequality in Two Variables Example:

To solve inequality, you must use the properties of inequality and follow the same steps A linear inequality with two variables
in solving for the equation. has a solution set consisting of a region that
defines half of the plane.
There are three ways to present the solutions of a linear inequality in one variable:
In inequality, the line defines the boundary of
1) set notation the region that is shaded. This indicates that any
2) interval notation ordered pair in the shaded region, including the
3) graphical method boundary line, will satisfy the inequality.

Suppose a is a real number:

When the answer is in the form x > a, then STEPs IN GRAPHING LINEAR INEQUALITIES IN TWO VARIABLES

a) Set Notation: {x|x > a} read as “set of all x such that x is greater than a” 1. Rewrite the inequality as an equation and solve for the intercepts.
2. Plot and draw the boundary line; solid line ( ̶ ) if the inequality is either ≥ or ≤
b) Interval Notation: (a, +∞) the symbol +∞ means positive infinity and broken line (------) if the inequality is < or >.
3. Decide which half-plane contains the solution set. Pick a test point that is on
c) Graphical Method
one side of the boundary line. Use (0,0) if possible. Replace x and y in the
inequality with the coordinates of that point.
4. If the resulting is TRUE, shade the side that contains the test point.
Example 1 If the resulting inequality is FALSE, shade the other side of the boundary

To solve inequality, you have to use the properties of inequality and follow the same
steps in solving for the equation.

𝑥
Example 1: Solve for 3 + 4 > 5

Solution: Clear fraction by multiplying each term in the inequality by the denominator
which is 3.

𝑥
(3)3 + 4(3) > 5(3)
x + 12 > 15
Example 2:

Find the value of x that satisfy both inequalities -3 < 2x + 1 and 2x + 1 ≤ 9

Solution: You can write the inequality as -3 < 2x + 1 ≤ 9

-3 - 1 < 2x + 1-1 ≤ 9 - 1 by API

-4 < 2x ≤ 8 Simplify
2 2 2
-2< x ≤ 4 by MPI
The solution set are numbers between -2 and 4, including 4

(a) by set notation {x|- 2 < x ≤ 4 }

(b) By interval notation: (-2, 4] , parenthesis means that –2 is not included in the solution
set while bracket means that 4 is included in the solution set. - Goodluck

(c) Graphical method: