Operations Research

Class Notes: Fundamentals of Operations Research

Document: I
****************************************************

Introduction to Operations Research

Session 1
========== ==========================================================

OPERATIONS RESEARCH: definition and relationship with other similar

subjects
OR: Operations Research
DS: Decision Sciences
QADM: Quantitative Analysis for Decision Making

Managers keeps on takings decisions for a variety of situations related to the

operation of the firms. At times a manager takes a decision purely based on the
gut feeling. The disadvantage of taking a decision based on gut feeling is that, if
the decisions come out as a wrong decision, then it becomes tough to justify the
reasons for such decisions.
Managers are evaluated primarily on the results of their decisions thus most of
the successful managers relies on the scientific tools to aid them in taking
decision. This has resulted in the wide scale use of tools of Quantitative Analysis
for taking decisions.

1
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
What is Quantitative Analysis?

Quantitative analysis is the scientific approach to managerial decision making.

Whims, emotions, and guesswork are not part of the quantitative analysis
approach. This approach starts with data. Like raw material for a factory, these
data are manipulated or processed into information that is valuable to people
making decisions. This processing and manipulating of raw data into meaningful
information is the heart of quantitative analysis. Computers have been
instrumental in the increasing use of quantitative analysis.

The Operations Research approach

Quantitative analysis has been in existence since the beginning of recorded

history, but it was Frederick W. Taylor who in the early 1900s pioneered the
principles of the scientific approach to management. During World War II, many
new scientific and quantitative techniques were developed to assist the military.
These new developments were so successful that after World War II many
companies started using similar techniques in managerial decision making and
planning.

The term 'Operations Research (OR)' was Coined by Mc Closky and Trefthen in
1940 (UK), During WW II, military management called on scientists from
various disciplines and organized them into teams to assist in solving strategic
and tactical problems, i.e., to discuss, evolve and suggest ways and means to
improve the execution of various military projects.

OR can be defined as

“OR is an application of scientific methods, techniques and tools to problems

involving the operations of a system so as to provide those in control of the
system with optimum solutions to the problem.”

------------- Churchman, Ackoff and Arnoff----------------

2
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
Prof. Mahalnobis made the first important application of OR in India. He
formulated the Second FYP with the help of OR techniques to forecast the trends
of demand, availability of resources and for scheduling the complex schemes
necessary for developing our country's economy.

The quantitative analysis approach consists of defining a problem, developing a

model, acquiring input data, developing a solution, testing the solution, analyzing
the results, and implementing the results.
One step does not have to be finished completely before the next is started; in
most cases one or more of these steps will be modified to some extent before the
final results are implemented. This would cause all of the subsequent steps to be
changed. In some cases, testing the solution might reveal that the model or the
input data are not correct.
Today, many organizations employ a ‘staff of operations research’ or
‘management science personnel’ or ‘consultants’ to apply the principles of
scientific management to problems and opportunities.

 All organization practice Operations Research. A specific example can be

DRDO (Defense Research and Development Organization).
 Banks do have elaborate Department of Operations. They follow set
processes and procedures which are commonly known as banking
operations. In the event of any improvement or rectification of errors,
banks continuously carry out Operations Research. OR leads to process
improvement and enhance of operational efficiency.
 The manufacturing companies adopts production operations activities and
they also conduct various researches to reduce the wastages and achieve
TQM (Quality Circle, Kaizen: it started in TOYOTA motors.)
 The continuous improvement in the operations of the organization has the
objective of process improvements and achievement of optimal levels of
output.

3
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
 A BRIEF DISCUSSION ON OPERATIONS RESEARCH
Types of Research
Descriptive Research
Descriptive research includes surveys and fact-finding enquiries of different
kinds. The major purpose of descriptive research is description of the state of
affairs as it exists at present.

Analytical Research
The researcher has to use facts or information already available, and analyse these
to make a critical evaluation of the material.

Applied Research
Applied research aims at finding a solution for an immediate problem facing a
society or an industrial/business organization.

Quantitative Research

Quantitative research is based on the measurement of quantity or amount. It is

applicable to phenomena that can be expressed in terms of quantity.

Qualitative Research

Qualitative research, on the other hand, is concerned with qualitative

phenomenon, i.e., phenomena relating to or involving quality or kind. For
instance, when we are interested in investigating the reasons for human behaviour
(i.e., why people think or do certain things), we quite often talk of ‘Motivation
Research’, an important type of qualitative research.

4
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
Conceptual Research

Conceptual research is that related to some abstract idea(s) or theory. It is

generally used by philosophers and thinkers to develop new concepts or to
reinterpret existing ones.

Empirical Research
Empirical research relies on experience or observation alone, often without due
regard for system and theory.

OPERATIONS RESEARCH

Operations research is an example of decision-oriented research since it is a

scientific method of providing executive departments with a quantitative basis for
decisions regarding operations under their control.

The Origin of Quantitative Analysis

Quantitative analysis has been in existence since the beginning of recorded

history, but it was Frederick W. Taylor who in the early 1900s pioneered the
principles of the scientific approach to management. During World War II, many
new scientific and quantitative techniques were developed to assist the military.
These new developments were so successful that after World War II many
companies started using similar techniques in managerial decision making and
planning.

The term 'Operations Research (OR)' was Coined by Mc Closky and

Trefthen in 1940 (UK), During WW II, military management called on
scientists from various disciplines and organized them into teams to assist in
solving strategic and tactical problems, i.e., to discuss, evolve and suggest
ways and means to improve the execution of various military projects

5
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
The Decision Modeling Approach

A. Formulation Stage
1. Defining the problem
2. Developing a model
3. Acquiring Input Data

B. Solution Stage
1. Developing a solution
2. Testing the solution (Feedback)

C. Implementation Stage
1. Analyzing the results
2. Implementation of the results

The above approach has been given by Render and Stair

6
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
Important features of OR

1. Decision Making: helps in managerial decision making. Irrespective of

the situation involved, can be considered as a general systematic process.

2. Scientific Approaches: Uses scientific methods for solving the problems.

It is formalized process of reasoning

3. Objective (Objectivity of the Researcher / Decision Maker): OR

attempts to locate the best optimal solution of the problem under
consideration. Example: Saddle point (Optimal Strategy)

4. Inter–disciplinary team Approach: Requires a blend of people with

expertise in the area of Mathematics, Statistics, Engineering, Economics,
Management, Computer Science and so on.

5. Use of Computers: Computer may be required due to the complexity of

the problem, volume of data required and the computations to be made.

7
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
Illustration 1: Numerical to understand the Quantitative Approach to
Decision Making.

Practical Problem 1
An electronics company produces certain components which is sold at a uniform
price of Rs 8 per unit. The variable cost of producing the component amounts to
Rs 4.80 per unit. The fixed cost of the company is Rs 24000. How many units of
the component must be produced and sold so that the company achieves break
even. How much sales would be made this level of activity?
Selling Price = SP = Rs 8
Variable Cost = VC = Rs 4.80
Variable Cost: It is the cost of manufacturing one unit of the product. Variable
cost for any organization / company is calculated on the basis of all the products
manufactured. In another words, We calculate the total variable cost by using
the following formula.
Assume that the company manufactures ‘x’ number of articles and cost of
producing one article is ‘v’, the total variable cost can be calculated by using the
formula:
VC (x) = v. x
Total Cost = Fixed Cost (FC) + Variable Cost (VC)
Assume FC is constant = K
TC (x) = K + v x
Total Revenue = TR (x) = p . x
Assume that selling price = p
TP (x) = TR (x) - TC (x)
= px - ( K + vx)
TP (x) = px - K - vx)
= (p – v) x – K
At BEP, there is no profit and no loss
Hence, TP (x) = 0
0 = (p – v) x – K
8
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
 (p – v) x = K

K
x* = --------------------------
p–v
Assume, C=p–v

x* = K / C
x= 24000 / (8.00 – 4.80)
= 24000 / 3.20
x* = 7500
TR ( x = 7500) = 8.00 * 7500 = Rs 60,000

Answer the following questions on the basis of the data provided in the practical
problem (No. 1)
(a) What will be the Profit if the company produces 10000 units of the
product:
TP (x) = (p – v) x – K
TP (x = 10000) = (8.00 – 4.80) * 10000 – 240000
= 3.2 * 10000 – 24000
= 32000 – 24000
= 8000
(b) How much is the sensitivity of profits towards the variable cost.
Assume that the variable cost increases by Rs 0.60, Find out the impact on the
profits
TP (x = 10000) = (8.00 – 5.40) * 10000 – 240000
= 2.60 * 10000 – 24000

9
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
 = 26000 – 24000
= 2000
Percentage drop in profits is:

(2000 – 8000)
= -------------------- * 100
8000
= - 75%
Percentage increase in variable cost is:
(5.40 – 4.80)
= -------------------- * 100
4.80
= 12.5 %
Conclusion: If the variable cost increases by 12.5 %, we have seen that there
is drop of 75% in the profits of the company.
(c) What will happen to the profits if the selling price increases by 1.20
New SP = 8.00 + 1.20 = 9.20 and New VC = 5.40
TP (x) = (p – v) x – K
TP (x = 10000) = (9.20 – 5.40) * 10000 – 240000
= 3.80 * 10000 – 24000
= 38000 – 24000
= 14000

Percentage change in profits is:

(14000 – 8000)
= -------------------- * 100
8000
= 75 %

10
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
Percentage increase in Sales price is:

(9.20 – 8.00)
= -------------------- * 100
8.00
= 15 %

Practical Problem 2
There is a company which is in the business of manufacturing Wall Clocks. They
have selling price of Rs 200 per clock. The manufacturing unit is located at the
outskirts of Mumbai in the small town of Talegaon (Chakan). They manufacture
all the clocks at this facility and the cost of infrastructure of the company was Rs
60 lakhs. The variable cost of the company including advertisement costs and
others are Rs 80 per unit. Based upon the above data, answer the following
questions:
a) What do we understand by the terms fixed cost and variable cost?
b) At what level of production the company will achieve breakeven in
quantity as well as sales revenue
c) What will be the profits of the company, if they produce 1.5 times of the
breakeven quantity?
d) What will be the impact on the profits at this level (mentioned in ‘c’
above if the variable cost increases to Rs 100 and Selling price increases
to Rs 250).
e) Interpret the results?

Solution:

Fixed Cost: It is the cost that the company has incur even without producing a
single unit of the product. All the amount of investment which are needed for
starting the company is known as fixed cost. Once the company has started
operating and further investments are made for technological upgradation,

11
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
Mergers & Acquisitions, Construction of New Assembly line etc will also be a
part of the fixed costs.

Examples of fixed cost are : Land and Building, Machinery, Cars, Automobiles,
trucks, and many more.

Variable Cost: It is the cost of producing items or the product of the company. It
keeps on changing based upon various external factors like price of raw materials,
quality of raw materials, Power shortages (availability of uninterrupted power
supply), Punctuality of the staff members of production operations units and
others.
Examples of Variable costs:
Raw materials costs
Electricity
Ordering Cost and Transportation Cost

K
X* = --------------------------
p–v
X* is the quantity which the Breakeven quantity
Assume, C = p – v (C is Contribution)
Contribution can be defined as the difference between unit SP and the unit VC.
Mathematically, C=p–v
Contribution is always towards the profits of the company.

X* = K / C
X* = 6000 000 / (200 – 80)
= 6000 000 / 120
X* = 50000

12
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
TR (x = 50000) = 200 * 50000 = Rs 100 00 000

(c) Calculation of profits of the company when the items produced is 1.5 * X*
x = X* * 1.5 = 75000
TP (x) = (p – v) x – K
TP (x = 75 000) = (200 – 80) * 75 000 – 6000 000
= 120 * 75 000 – 600 000
= 9000 000 – 6000 000
= 30 lakhs

(d) Calculation of profits of the company when the items produced is 1.5 * X*
TP (x) = (p – v) x – K
TP (x = 75 000) = (250 – 100) * 75 000 – 6000 000
= 150 * 75 000 – 600 000
= 1 12 50000 – 6000 000
= 52 50 000

(e) we can conclude that if the price of the product increases more than the
variable cost it results in the company getting in a position of enhancing the
profits by a huge margin.

13
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
Practical Problem 3 (UNSOLVED: For Practice)
An organization is engaged in the production and distribution of a precision
equipment which is used in the automobile pistons. The company has imported
machines from Germany at a price of Rs 7.5 crores. They have large orders for
the products however the capacity is limited regarding the production and supply
of the equipment.
They sell one piece of equipment at a price of Rs 10000 and cost of production is
Rs 2000 per item with packing and transportation cost of Rs 500 per item. No
other costs are incurred by the company. The manufacturing unit is located at the
outskirts of Mumbai in the small town of Talegaon (Chakan).
Based upon the above data, answer the following questions:
a) Give the break-up of fixed and variable cost of the company.
b) Differentiate between Marginal Cost and Variable cost
c) At what level of production the company will achieve breakeven in
quantity as well as sales revenue?
d) What is the average cost of the company at the BEP level of production?
e) What will be the profits of the company, if they produce 1.5 times of the
breakeven quantity? Also calculate the average cost at this level of
production?
f) What will be the impact on the profits at this level (mentioned in ‘e’ above
if the variable cost increases by 10% and Selling price increases by 4%?
[Hint: New VC per unit = 2750 and New SP per unit = 10400]
g) Interpret the results?

a) Break-up of Fixed and variable cost of the company:

FC = 7,50,00,000
VC (x) = 2500
Brief Explanation of part (b) above
Marginal Cost: It is the cost of producing one additional unit of the product.
For example, if the total cost of producing 100 items for any company is Rs 5000
and cost of producing 101 items is Rs 5050. The marginal cost will be Rs 50.
Marginal Revenue: It is the revenue generated by selling one additional unit of
the product.

14
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
For example: A company has sold 2345 products for Rs 23450 and it has earned
Rs 23460 by selling 2346 units of the product. Find out the Marginal Revenue.
MR = Rs 10
Marginal Profit: It is the additional profit that any company earns by
manufacturing and selling one additional unit of the product.

c)
Selling Price per unit = 10000
K
x* = --------------------------
p–v
x* is the quantity which the Breakeven quantity
75000000
x* = --------------------------
10000 – 2500
= 10 000

Sales Revenue at BEP (x* = 10000) = 10000 * 10000 = 10 Cr

Average Cost = Total Cost / quantity produced
Avg Cost = TC (x) / x
Avg Cost at BEP = TC (x*) / x*
TC (x*) = 75000000 + 2500 * 10000
= 75000000 + 25000000
= 100000000 = 10 Cr

Avg Cost at BEP = 1 00 00 00 00 / 1 00 00

= 1 00 00

15
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
Explain the meaning of average cost = 10K (to be discussed during
Optimization techniques)

e) What will be the profits of the company, if they produce 1.5 times of the
breakeven quantity? Also calculate the average cost at this level of production?

TP (x = 15000) = (10000 – 2500) * 15 000 – 75 000 000

= 7500 * 15 000 – 75 000 000
= 1 12 500 000 – 75 000 000
= 3 75 00 000
Avg cost = 112500 000 / 15 000
= 7500
Avg Profit = 375 00 000 / 15 000
= 2500

TP (x = 20000) = (10000 – 2500) * 20 000 – 75 000 000

= 7500 * 20 000 – 75 000 000
= 150 000 000 – 75 000 000
= 75 000 000

Avg cost = 150 000 000 / 20 000

= 7500

Avg Profit = 75 000 000 / 20 000

= 3750

Conclusion: In the long production operation process, it can be seen that Average
of Production tends to reduce and Average Profits has a tendency to increase.

16
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
 Decision Making Situations in OR / Quantitative Analysis

Session
********************************************************
In OR, there are various situation in which the decision makes has to arrive at a
decision.
There are many such situations, however, few of them have been given below:

A. Decision making under the conditions of Competition or Conflict (Game

Theory)
B. Decision making under the conditions of Uncertainty (Decision Theory
with 5 approaches / principles)
C. Decision making under the conditions of Risk (Expectation Principle)
D. Decision making under the conditions of Certainty (LPP)

17
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
 Theory of Games

The mathematical analysis of competitive problems is fundamentally based upon

the minimization or maximization of benefits or losses. This concept was
propounded by J Von Neumann (he is called as father of Game Theory). This
criterion implies the assumption of rationality from which it is argued that each
player will act in such a manner that they will maximize their gains. If
maximization of gains is not possible, then they will try to minimize the benefits
of opponents.
The difficulty lies in deduction from the assumption of ‘rationality’ that the other
player will maximize the minimum gains (known as maximin).
Game theory is generally interpreted as an ‘as if’ theory, that is, as if rational
decision maker (player) behaved in some well-defined and well-decided way.

Examples:
 Candidates fighting and Election in India. For Simplicity, suppose there
are only two candidates and there are total 100000 votes. Thus gain of
one vote to any candidate would automatically mean loss of one vote to
the other candidate.
 In Sports, one point gain in the Games of Volleyball, Table Tennis,
Badminton means loss of a point to the opponent.
 Airbus and Boeing (3rd player is marginal manufacturer – Embraer
(Brazil)
 Only Two companies manufacture the Aircraft Engines: GE and Rolls
Royce
 There are two large Bus Manufacturers in India: Ashok Leyland and Tata
(Now a days: VOLVO)
 Two competitors in Trucks: Tata and Ashok Leyland
 Two major soft drink companies in India: PepsiCo and Coke

Illustration I: There are two parties namely the Union and the Management. They
have a dispute and Labour Union has gone for strike. The management reaches
out to the Union and askes their demand. The following ultimatums is presented
by the Labour Union:
1. An increase of 10% salary across the board

18
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
 2. One month Salary as bonus
3. One-month Sick Leave to be credited in the Leave account

If the management accepts first proposal, they will have to incur extra cost of
10% which will be their loss. Hence, if there only two parties involved and gain
of one party is exactly equal to the loss other party. It is known as ZERO SUM
GAME.
ZERO SUM GAME means the sum and loss of the gains and losses are equal to
zero.
For example, if the benefit is of 10% to the employees, there is a loss of 10% to
the company. Which means that the sum of losses and games will be

- 10% + 10% = 0.
Hence, the sum of loss and gain is exactly zero. Accordingly, it is known as
ZERO SUM GAME.
When there are two players (parties or two companies), it is known as TWO
PERSON ZERO SUM GAME.

GAME THEORY: Theoretical framework

Game theory is the body of knowledge which concerns itself to the study of
human behaviour under the situation of conflict or competition. It assumes that
the companies (companies are called as players in Game Theory) or decision
maker are rational opponents in taking a decision. Rational opponents means that
they want to maximize their minimum benefits or gain. The decision which leads
to maximization of minimum gains is known as Maximin. Simultaneously, the
other player tries to minimize the maximum benefit of the opponent. This strategy
is known as ‘Minimax’. Hence, the first player (i.e., Player A) is called as
Maximizer and the opponent (or second player) is called Minimizer. The second
player or the opponent of player A is referred to as Player B.
The objective of game theory is to determine the rules of rational behaviour in
taking decision under conditions of conflict or competition. The outcome
resulting from a decision made by one individual or player (Player A) not only

19
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
depends on his choice but also on the course of action or strategy adopted by the
other party or player or opponent (Player B).

Few of the terminologies used in Game Theory

Two-person Games: If the number of players are TWO. It is known as Two-
person games.
Zero-sum Games: If the gain of one player is exactly equal to the loss incurred
by the other player, i.e., the sum of net losses and gains is zero, it is known as
Zero-sum game.
Two-person Zero-sum Games: If there are two players and net of gains and
losses is zero.

20
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
 Session
********************************************************

Strategy
A strategy of a player can be defined as the set of alternative courses of action
that are available to the player. Any player can select any of these alternatives to
maximize minimum gains or minimize the maximum losses. Strategy can broadly
be classified into the following categories:
Examples of strategies: Price Cut, Advertisements, Quality improvement, No
action and others.
 Pure Strategy
 Mixed Strategy
 Optimal Strategy
Pure Strategy: If the player selects the same strategy each time, then it is referred
to as pure strategy. In this case each player knows exactly what the other player
is going to do and the objective of the players is to maximize or minimize the
gains or losses.
Mixed Strategy: When the players use a combination of strategies and each
player keeps on guessing about the course of action that will be adopted by the
other player. It is known as Mixed Strategy.
Optimal Strategy: The course of action that leaves a player in the most preferred
position regardless of the action of the competitor is called as optimal strategy.
Most preferred position means that any deviation from the strategy will lead to
reduced payoff.
Payoff: A quantitative measure like profits, market share, sales revenue that
player will get at the end of the game is called payoff or outcome.
When payoffs are written in matrix for all the available strategies of the players,
the matrix is known as payoff matrix.
Value of the Game: It is the expected outcome per play when players follow the
optimal strategy.

21
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
Illustration 1:
Consider the two-person zero sum games matrix which represents payoff to the
Player A. Find the optimal strategy (if any):
Payoff Matrix (Profits in Rs Cr)
Strategies B1 B2 B3 Row Minima Maximin
A1 -3 -2 -3 -3
A2 2 0 2 0 0
A3 5 -2 -4 -4
Colm Maxima 5 0 2
Minimax 0

A1: Improvement in the quality of the product

B1: Advertisements
A2= Price Cut and B2 = Price Cut
Maximin= It is the maximum value among the minimums (Highest among
Lowest).
Minimax= It is the minimum value among the maximums (Lowest among the
Highest)
At the strategy A2 B2, we get,
Maximin = Minimax
SADDLE Point: It is the point where both Maximin and Minimax are equal to
each other. We can also say that we have a Maximin and Minimax at the same
point, a saddle point is arrived. All pure strategies will have saddle point.

Value of the Game (V): The value of the game is considered as the value of the
element which is lying at the Saddle Point. In the above Payoff matrix, the Value
of the element at the Saddle point is 0.

Hence, V = 0
Value of the games leads to the conclusion that how much will be the gain or
loss to the player A.

22
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
Since the value of the Game is 0. Hence there is no gain or loss to the player A.
Since there is no loss to the player A, it further means that there is no gain for
the Player B.
OPTIMAL STRATEGIES
The final strategies adopted by both the players will A2 and B2. It means that
they will settle for price cut every time they face a tough situation. These two
strategies at the end of the games are known as Optimal Strategies.

Illustration 2:
Payoff Matrix (Gain / Loss)
Strategies M1 M2 Row Minima Maximin
U1 15 10 10 10
U2 10 5 5

Colm Maxima 15 10
Minimax 10

A labour Union and Management enters into a collective bargaining situation.

The Union is bargaining with the following strategies (Player A):
U1: 15% wage increase
U2: Additional 10% salary for leave with full pay remaining protected.
The position adopted by the Management (Player B) are:
M1: 10% wage increase (As demanded under U2)
M2: On 5% acceptable
Maximin= It is the maximum value among the minimums.
Minimax= It is the minimum value among the maximums
At the strategy U1 M2, we get,
Maximin = Minimax
SADDLE Point: It is the point where both Maximin and Minimax are equal to
each other. We can also say that we have a Maximin and Minimax at the same
point, a saddle point is arrived. All pure strategies will have saddle point.

23
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
Value of the Game (V): The value of the game is considered as the value of the
element which is lying at the Saddle Point. In the above Payoff matrix, the Value
of the element at the Saddle point is 10.
Hence, V = 10
Value of the games leads to the conclusion that how much will be the gain or loss
to the player A.
Since the value of the Game is 10. Hence there is there is a gain of 10% to the
player A. Since there is a gain of 10% to the player A, it further means that there
is a loss of 10% for the Player B.
OPTIMAL STRATEGIES
The final strategies adopted by both the players will U1 and M2. It means that
they will settle for 10% increases in the wages. These two strategies at the end
of the games are known as Optimal Strategies.
Illustration 3:
There are two companies A and P, which are competing for the same product in
the same market. Each of these companies attempts to raise its share of the
market. An advertising campaign by A can increase its share of the market by 7
percent provided P does nothing. Company P contemplates invoking a price cut
if it is worthwhile. The price cut shall cause a 5 percent gain to the company P,
but the gain is subject to the condition that A takes no action. Price cut by P,
accompanied by the advertising campaign of A shall lead to a 2 percent rise in P's
share of market. No action on part of both the companies shall leave the market
share for them undisturbed at 40:60.
Write the information in form of a pay-off table. Find out the optimal strategies
and the value of the game. Comment on the results.
Solution:
Company A (Market share at present = 40%)
A1= Advertising Campaign
A2= No action (Nothing)
Company P (Market share at present = 60%)
P1= Price Cut
P2= No Action (Nothing)

24
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
 Payoff Matrix (Market Share)
Strategies P1: Price Cut P2: No Action Row Maximin
Minima
A1: -2 7 -2 -2
Advertisement
A2: No -5 0 -5
Action
Colm Maxima -2 7
Minimax -2

Maximin = Minimax = -2
Saddle point is reached at the strategies of Advertisement by A and Price Cut by
P. Hence the optimal strategy will be A1 and P1.
Value of the Game (V) = -2
Current market share for company A is 40 and after they adopt the strategy of
Advertisement while Company P will adopt the strategy of Price Cut, it is
expected that Company will lose 2 % of market share and new market shares will
be 38% for A and 62 % for P.
Conclusion: It is always seen that the customers are more attracted by the price
cut than by the advertisements.

GAMES WITHOUT SADDLE POINT: Games with Mixed Strategies

Games without Saddle Point are solved by employing the mixed strategies. A
mixed strategy is a combination of two or more strategies that are selected one at
a time by the player. The second player remains unclear about the strategy that
will be adopted by the first player and vice-versa. Hence, the solution of games
without Saddle Point used the concept the Probability to find out the chances of
application of any strategy.

25
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
 Payoff Matrix (Market Share)
Strategies P1: Adv P2: PC Row Maximin
Minima
A1: Adv 8 -7 -7
A2: PC -6 4 -6 -6
Colm Maxima 8 4
Minimax 4

Maximin ≠ Minimax
Hence, we do not have a Saddle point

Mixed Strategy: When the players mix two of their strategies in such a manner
that the Game do not have a Saddle Point, we refer the situation as Games with
Mixed Strategies.
In this case, both the players, keep on guessing the action (or strategies) of the
other player. They use the concept of Probability to find out the probability of the
strategies.
The probability of A playing the first strategy(A1) is considered as ‘x’
Automatically, the strategy A2 will have the probability of ‘1-x’
Payoff Matrix (Market Share)
Strategies P1: Adv (y) P2: PC (1-y) Row Maximin
Minima
A1: Adv (x) a11 a12
A2: PC (1-x) a21 a22
Colm Maxima
Minimax

The probability of x is calculated by the formula:

a22 - a21
x = --------------------------------------
(a11+a22) - (a12 + a21)

26
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
 4 - (-6) 2
x = ----------------------------------- = ------- = 40%
(8+4) - (-7 -6) 5

The probability of y is calculated by the formula:

a22 - a12
y = -------------------------------------------
(a11+a22) - (a12 + a21)

4 - (-7) 11
y = ----------------------------------- = ------- = 44%
25 25
a11 * a22 - a21 * a12
V = -----------------------------------------
(a11+a22) - (a12 + a21)

8 * 4 – (-7) * (-6) 32 - 42
= --------------------------- = ------------ = - 2 /5
(8+ 4) – (-7 – 6) 25
Conclusion: Company will lose market share by 0.40 %

27
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
 Dominance Rule
The concept of Dominance can be applied to any two-person Zero-sum games
with any number of strategies for each player. For a payoff matrix of large size,
the ‘Rule of Dominance’ can be used to reduce the size by carefully eliminating
certain rows and/or columns prior to final analysis to determine the optimal
strategy for each player.
Rules of Dominance:
1. If all the elements in a column are greater than or equal to the
corresponding elements in another column, then that column is
dominated and can be deleted from the matrix.
2. Similarly, if all the elements in a row are less than or equal to the
corresponding elements in another row, then that row is dominated and
can be deleted from the matrix.

Illustration 4:
Strategies B1 B2 B3 Row Minima Maximin
A1 1 7 2 1
A2 6 2 7 2 2
A3 5 1 6 1
Colm Maxima 6 7 7
Minimax 6

Maximin ≠ Minimax
The game does not have a Saddle Point. Since the game does not have a Saddle
point, hence this is game of mixed strategy and we need to use the concept of
probability.
However, the concept of probability works on games with only TWO strategies
for each player. We have a game matrix which is 3 x 3. Hence, the formula cannot
be applied.

28
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
Rule of Dominance or Dominance Rule

Reduced Matrix
Strategies B1 B2 Row Minima Maximin
A1 1 7 1
A2 6 2 2 2

Colm Maxima 6 7
Minimax 6

The probability of x is calculated by the formula:

a22 - a21
x = --------------------------------------
(a11+a22) - (a12 + a21)

2 -6 -4
x = ----------------------------------- = ------- = 40%
(1+2) - (7+ 6) -10

The probability of y is calculated by the formula:

a22 - a12
y = ---------------------------------- =
(a11+a22) - (a12 + a21)

2 -7 -5
y = ----------------------------------- = ------- = 50%
-10 -10

29
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
 a11 * a22 - a21 * a12
V = -----------------------------------------
(a11+a22) - (a12 + a21)

2 - 42 - 40
= --------------------------- = ------------ = 4
-10 -10

Conclusion: Company will gain market share by 4 %

Illustration 5:
Solve the following game theory matrix by using rule of Dominance
Strategies B1 B2 B3
A1 12 -8 -2 -8
A2 6 7 3 3
A3 -10 -6 2 -10
12 7 3

Illustration 6:
In a locality, there are two retail stores selling consumer durables. It is assumed
that the total number of customers are equally divided between both these retail
stores since both the shops are offering similar products at the same price.
To increase the sales in the recession hit Indian economy and attract more
customer the stores want to offer special gifts to the customers. They want to
create awareness among prospective customers about the special offer.
They use various media for advertising like Newspapers, Cable Television
network-based advertisements and Door to Door Campaigns.
The payoff matrix in favour of Retailer A is given below:

30
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
Strategies B1: B2: Door to B3: Cable
Newspaper Door Network
A1: Newspaper 30 40 -80 -80
A2: Door to Door 0 15 -20 -20
A3: Cable Network 90 20 50 20
90 40 50

Determine the Optimal Strategies, Value of the Game and Comment on the
results.
Ans: x = 1/5
y = 13/15
Value of Game (V) = 24

PRACTICE NUMERICAL QUESTIONS

Theory of games: Game Models, Two-person Zero Sum Game, Solution of 2 x

n and n x 2 games, Games of Pure and Mixed Strategy, Principle of Dominance.

Qt 1: Two competing firms R and S, must open their next branch at one of the
three cities A, B and C, whose distance profile has been given below. If both the
companies open their branches in the same city, they will split the business
evenly. If, however, they build the branches in different cities, the company that
is closer to a given city will get all that business. If all the cities have the same
amount of business, where should the firm open the branch?
From A to B : 25 Km
From A to C : 18 Km
From B to C : 22 Km

Qt: 2 Answer the following questions. Write down only the correct option in your
answer sheet.
(a) The solution to the mixed strategy 2 x 2 game can be found by:
(i) equating a player's expected winning for one of the opponent's strategies
with opponent's other strategy

31
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
(ii) equating the value of the game for player A with the value of the game for the
player B.
(iii) setting 'q' equal to 'p' and solving
(iv) setting the maximin and minimax as equality and solving the game.
(v) Taking out the saddle point and getting the value of the game.

(b) Which of the following methods are used to reduce the size of the game of
mixed strategy:
(i) Inversion and Reduction
(ii) Rotation and Reduction
(iii) Co-factorization and Reduction
(iv) Transposition and Reduction
(v) None of the above

(c) Index of Optimism is : (Hurwicz Principle)

(i) Discretionary
(ii) Confusion
(iii) Subjective Probability
(iv) Opportunity Cost / Penalty
(v)Expectation Principle

Qt 3: There are two companies in a competitive market. Both these companies

compete to increase their market share. Assuming that, at present both the
company's market share is at equilibrium and it will move in favour of Company
A by 8 %. The payoff matrix from company A's perspective has been given
below which was used for arriving at the movement of market share.

32
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
 3 4 5
9 8 Q 8
4 P 5

9 8
Q>= 8 and P< =8
And V = 8

Find the possible value(s) for p and q. Mention further assumption (if any) made
for solving the game.

Qt 4: There are two companies A and P, who are competing for the same product
in the same market. Each of these companies attempts to raise its share of the
market. An advertising campaign by A can increase its share of the market by 7
percent provided P does nothing. Company P contemplates invoking a price cut
if it is worthwhile. The price cut shall cause a 5 percent gain to the company P,
but the gain is subject to the condition that A takes no action. Price cut by P,
accompanied by the advertising campaign of A shall lead to a 2 percent rise in P's
share of market. No action on part of both the companies shall leave the market
share for them undisturbed at 40:60.

Write the information in form of a pay-off table. Find out the optimal strategies
and the value of the game. Comment on the results.

33
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
 Revision of All concepts and Numerical for Mid-term test

Session
********************************************************

PRACTICE QUESTIONS ON NASH EQUILIBRIUM

Qt: Game theory is the study of interactions among players whose payoffs depend
on one another's choices and who recognize the interdependence in trying to
maximize their respective payoffs.

Consider, therefore, the pharmaceutical case study. One of the most profitable
products sold by the incumbent (hereinafter, I) dominated its category but faced
the introduction of a substitute product by a major competitor. As the late mover,
the entrant (hereinafter, E) was expected to launch its own product at a very large
discount. It was uncertain exactly how E's launch price would be, and whether I
should reduce its own price in anticipation or reaction. The cash flows involved
were very large enough, however, to compel careful analysis of I's options.
Since there were only two players, the information on their strategies and payoffs
could conveniently be captured in a payoff matrix, as depicted in table 1 with
rows representing I's strategic options, and the columns E's. The first entry in
each cell corresponds to the estimated NPV, in millions of rupees, for I, and
the second entry to the estimated NPV for E; the three crossed cells were
judged to be arithmetically infeasible. Within this set-up, firms select strategies –
rows or columns – and not individual outcomes, as in particular cells. It is in this
sense that payoff matrices capture the dependence of each firm's payoff on its
rival's strategies as well as its own.

34
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
Table 1 : The pharmaceutical Payoff Matrix (millions of rupees for I,E)

Incumbent (I's) Price Entrant's (E's) Price

Very Low Low Moderate High
No Price Change 358,190 507, 168 585,129 624,116 358
Large Price 418,163 507,168 X X 418
Advantage for E
Small Price 454,155 511,138 636,126 X 454
Advantage for E
Neutralization of E's 428,50 504,124 585,129 669,128 428
Price Advantage
454 511 636 669

SADDLE POINT = Small Price Advantage for (I) and Very Low Price (E)
Read the given literature carefully and observe the table keenly as well.
Answer the following questions:

(a) Briefly describe (Not more than five sentences) the contents of the case in
simpler words with some quantitative inputs.

(b) Recommend the optimal strategies for both the players.

(c) What we understand by first mover advantage. Does this concept has a fitment
in the given case?

(d) Do you think Nash Equilibrium holds true for the given case. Give
quantitative reasoning for your answer.

(Nash Equilibrium can be defined as - A strategy pair, one for each player, from
which neither player had an incentive to deviate unilaterally.)

35
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
Qt
Dilemma of two athletes winning GOLD medal in Commonwealth Games but
caught in doping test
Beedi, the retired sportsman is currently serving the nation as a coach of the
athletics team. These athletes are competing in the Common Wealth Games. In
the athletics arena, two of the team members have won a GOLD medal in a team
event. Subsequent to the awarding of the medal one of the athletes tested positive
in the dope test. Beedi as their coach objected vehemently to the results of the
dope test. As a result of the protest lodged by Beedi, a second sample was drawn.
To the dismay of all the organizers, this time, the second athlete tested positive.
Since both these two athletes were part of the team event, the organizers were in
a perplexed state, what to do with the awarded medal. Should the athletes be
stripped of the medal or should they be allowed to keep it. The problem is that,
as per rules, for stripping them from the medal both the samples should test
positive.
To come out of this interesting but complicated situation, the organizers decided
to adopt an entirely new strategy. Both the athletes will have to appear
individually before a jury. The jury will interrogate them and then will arrive at
conclusion. Accordingly, the first athlete appeared before the jury. The jury
promised no punishment to him if he confesses and a stringent verdict of life time
ban for the second athlete. Similarly, if the second athlete will confess, the first
athlete will be banned for life.
The jury had internally decided to award No Punishment, if none of them
confessed. The jury had further decided that if both of them confesses, they
would be awarded a two years ban.
Construct a game theory matrix arising out of the above facts. Discuss the
various strategies that are possible in the given situation.

36
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
 Mid-term test Questions (MCQs)

1. Operations Research explains which of the following correctly:

(a) decision taking approach based upon the ability of the manager to
communicate effectively with the top management
(b) decision making by the manager in which priority is made to the profits of the
company only
(c) decision making approach in which manager uses quantitative modeling tools
in a sequence of steps
(d) decision that is taken for human capital of the company
Answer: (c)

2. Identify the incorrect step in the Formulation Stage of any problem in the
Operations Research
a) Defining the problem

b) Developing a model
c) Acquiring Input Data
d) Purification of Data

Answer (d)

3. Decision Modeling Approach Does NOT include:

a) Formulation Stage
b) Predictive Stage
c) Solution Stage
d) Implementation Stage

Answer (b)

37
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
4. OR is an application of scientific methods, techniques and tools to problems
involving:
a) the operations of a system
b) the operations of an object
c) the operations of an individual
d) the operations of a society
Answer (a)

5. Which of the following is NOT considered as a feature of OR

a) Decision Making
b) Scientific Approach
c) Subjectivity of the Researcher
d) Inter-disciplinary approach
Answer (c)

6. One of the features of OR is the Scientific Approaches, it refers to:

a) building large scientific research center for core research

b) the formalized process of reasoning

c) creation of computerized laboratories

d) making scientific education mandatory

Answer(b)

7. Identify the INCORRECT pair:

a) Variable Cost: Ordering Cost

b) Fixed Cost: Machinery Cost

c) Contribution: towards Profits

d) Marginal Cost: Transportation Cost

38
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
Answer (d)

8. What will be contribution, if the variable cost of production is considered as

Rs 5 for Raw materials, Rs 4 for Electricity, Rs 3 for packaging and Rs 17 as the
selling price of the product:

a) 5

b) 4

c) 3

d) 17
Answer (a)

9. There is a company which is in the business of manufacturing Wall Clocks.

They have selling price of Rs 100 per clock. The cost of infrastructure of the
company was Rs 30 lakhs. The variable cost of the company including
advertisement costs and others are Rs 40 per unit.

At what level of production, the company will achieve breakeven in quantity as

well as sales revenue
a) 30 thousand
b) 40 thousand
c) 50 thousand
d) 60 thousand
Answer (c)

10. What will be the profits of the company, if they produce 1.5 times of the
breakeven quantity?

a) 5 lakhs
b) 10 lakhs
c) 15 lakhs
d) 20 lakhs

39
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
Answer (c)

11. What will be the impact on profits if variable cost increases to Rs 50 per
unit and sales prices remain constant with 1.5 times of BEP level of production:

a) 5 lakhs
b) 7.5 lakhs
c) 10 lakhs
d) 12.5 lakhs

Answer (b)

12. GAME THEORY is a decision making under the conditions of:

a) Uncertainty
b) Certainty
c) Competition
d) Risk

Answer (c)

13. What is a strategy under Game Theory:

a) Alternative courses of action
b) Payoffs of the Game
c) Value of the Game
d) Nash Equilibrium
Answer (a)

14. Which of the following is not a classification of strategy

40
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
 a) Pure strategy
b) Mixed strategy
c) Payoff strategy
d) Optimal strategy

Answer (c)

15. What is a Saddle point:

a) It is a point where there will be Break-even for the company
b) It is point where maximin is equal to the minimax of the players
c) It is the point where maximin is not equal to the minimax of the players
d) It is a rule of dominance
Answer (b)

16. Which among the following a rule of dominance:

a) If all the elements in a column are greater than or equal to the

corresponding elements in another column, then that column is dominated
and can be deleted from the matrix.
b) If all the elements in a row are not greater than or equal to the
corresponding elements in another column, then that column is dominated
and can be deleted from the matrix.
c) If all the elements in a column are lower than to the corresponding elements
in another matrix then that row is dominated and can be deleted from the
matrix.
d) If all the elements in a matrix are higher than the corresponding elements
in another row, then that row is not dominated and can be deleted from the
matrix.

Answer (a)

41
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
17. Payoffs are:
a) A quantitative measure
b) The strategies of the players
c) Games without Saddle Point
d) Rule of Dominance

18. Identify the Incorrect pair

a) Game Theory: Non-zero-sum Games

b) Pure Strategies: Saddle point
c) Optimal strategies: Not preferred by players
d) Mixed Strategies: probability of strategies
Answer: (c)

19. Nash Equilibrium is a method of solving:

a) Two person zero sum games
b) Two person non zero sum games
c) Two person negative games
d) Two person infinite games

Answer (b)

20. Find out the value of the game:

Strategies B1 B2 B3
A1 -13 -12 -13
A2 12 10 12
A3 15 -12 -14

a) -13

42
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
b) - 12
c) 10
d) -14

Answer : (c)

21. Calculate the Value of the game

Strategies B1 B2 B3
A1 30 40 -80
A2 0 15 -20
A3 90 20 50

a) 0
b) 15
c) 24
d) 50
Answer (c)

22. Nash Equilibrium is used for solving the games in which

a) Both the players are not interested in playing
b) Value of the game is infinity
c) Both the players get benefited
d) Value of the game is not possible to calculate
Answer (c)

43
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
 DECISION THEORY

Session
********************************************************

DECISION MAKING UDER THE CONDITIONS

OF
UNCERTAINTY & RISK

Uncertainty and Risk

It the body of knowledge which explains the benefits or losses for any strategy
adopted by decision maker in situation of uncertainty or risk.

Payoff Matrix:
Events or States of Nature: They are environmental factors or factors beyond the
control of the company.
Examples are demand, fiscal policies, purchasing power (in the pandemic many
people have lost their job and hence their purchase decision stands postponed)

Strategies or Course of Actions: They always remains under the control of the
decision maker or the company. The company has full control on these actions.

Examples are going ahead with advertisements, price cut, incentives or discounts
offered by the company, opening of new branches / showrooms, quantity of items
to be produced etc.

44
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
PRATICAL QUESTION 1
There is a book seller which has to decide about number of copies of a specialized
book that can be sold in the year. The book pertains to Income Tax Rules which
get changed every year hence the books that remains unsold at the end of the year
becomes obsolete.
The book seller is thinking of buying the copies of books between 18 to 23. If
buys less than 18 then he may face a situation in which demand for the book exists
however, the number of copies of book is not available with the book seller. If
there are any unsold copies of the book then they will have only scrap value of
Rs 30 per book.
The purchase price of the book for the book seller is Rs 80 per book and he sells
these books at a price of Rs 100 per copy.
Suggest the book seller that how many copies of the book should be bought?

Solution:
Payoff matrix for the book seller (Profit of the book seller)
Strategies (Courses of Actions)
Events A1: 18 A2: 19 A3: 20 A4: 21 A5: 22 A6: 23
E1: 18 360 360 – 50 = 310* 260 210 160 110
E2: 19 360 380 310 260 210 160
E3: 20 360 380 400 310 260 210
E4: 21 360 380 400 420 310 260
E5: 22 360 380 400 420 440 310
E6: 23 360 380 400 420 440 460
Averages 360 368.33 362 340 303.3 251.67
Maximums 360 380 400 420 440 460
Minimums 360 310 260 210 160 110
Hurwicz 360 352 344 336 328 320
Values
Regret
 Book seller has ordered 19 copies while demand is of 18 copies
Profit by selling 18 copies = 18 * 20 = 360
1 unsold copy of the book will be sold only as scrap. Scrap price is Rs 30
and the purchase price of the book seller is Rs 80.
Hence, he will make a loss of Rs 50 (Rs 80 – Rs 30)

45
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
 Thus, the total profit earned would be = 360 – 50 = Rs 310
There are 5 principles which are used to arrive at a decision under the conditions
of uncertainty. These are also known as criteria or principles:
A. Criteria of Rationality
B. Criteria of Optimism
C. Criteria of Pessimism
D. Criteria of Realism
E. Criteria of Regret

A. Criteria of Rationality is also known as Bayes’ principle or Laplace

Principle: In short, we calculate the average value under each strategy and
whichever strategy provides the highest average is selected as the optimal
decision.
As per the criteria of Rationality, the highest average payoff is 368.33
which is occurring for the strategy A2 which further means that the
decision maker (Book seller) should buy 19 copies of the Income Tax Rule
book.

B. Criteria of Optimism is also known as maxi-max principle. It means that

the decision maker will remain optimistic about the demand and will try to
get the maximum amounts of profits.
Maxi-max refers to achievement maximum out of maximums
Hence, the strategy giving highest profits is selected.
Under this strategy, the decision maker will go ahead with the purchase of
23 copies of IT Rule book because in this strategy there is a scope of
highest profits.
C. Criteria of Pessimism is also known as maxi-min principle. Under this
criterial, the decision is a pessimistic and only looks at the lowest values in
each of the strategies. The decision maker does not want to make losses
and hence will select the maximum among the minimums.
Hence the maxi-min is occurring at A1 and the decision maker will buy
only 18 copies of the IT Law book

46
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
 D. Criteria of Realism is also known as Hurwicz principles. The name
Hurwicz come from the person who had used this principle for the first
time. This principle assumes that neither Optimism nor pessimism is
appropriate. We need to remain realistic.
This principles works on a formula as given below:

HAi = ᵅ (Maximum Value of the strategy) + ( 1 - ᵅ) (Minimum Value

under the strategy)

Alpha is known ‘Index of Optimism’. Generally, it is an assumed value of

probability. Index of Optimism is considered as ‘Subjective Probability’

0 1
Pessimism 0.5 Optimism
(Neutral)
There are 3 types of probability as mentioned in the Theory of Probability:
(a) Axiomatic Probability or Priori or Classical Theory of Probability
(b) Relative Frequency Approach to Probability (Rf probability)
(c) Subjective Probability

Assume alpha = 0.6

HA1 = 0.6 (360) + ( 1 – 0.6) (360)

= 0.6 * 360 + 1 * 360 - 0.6 * 360

= 360

HA2 = 0.6 (380) + ( 1 – 0.6) (310)

47
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
 = 0.6 * 380 + 1 * 310 - 0.6 * 310
= 30 + 310
= 352

HA3 = 0.6 (400) + ( 1 – 0.6) (260)

= 0.6 * 400 + 1 * 260 - 0.6 * 260

= 84 + 260
= 344

HA4 = 0.6 (420) + ( 1 – 0.6) (210)

= 0.6 * 420 + 1 * 210 - 0.6 * 210

= 126 + 210
= 336

HA5 = 0.6 (440) + ( 1 – 0.6) (160)

= 0.6 * 440 + 1 * 160 - 0.6 * 160

= + 210
= 328

HA6 = 0.6 (460) + ( 1 – 0.6) (110)

= 0.6 * 460 + 1 * 110 - 0.6 * 110

48
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
 = 110 + 210
= 320

We are getting the highest value under the strategy A1 for the criteria of realism.
Hence the book seller should go ahead and buy 18 copies of the book.

E. Criteria of Regret: This criterion has a belief that the decision maker should
not regret for any wrong decision later on. The decision maker should take
a decision in such a manner that there is no feeling of decision having gone
wrong. This method needs a separate payoff matrix which is called as
Regret matrix.
The construction of regret matrix has been explained below

Regret matrix for the book seller

Strategies (Courses of Actions)
Events Prob A1: A2: 19 A3: 20 A4: A5: 22 A6: 23
18 21
E1: 18 0.10 0 50 100 150 200 250
E2: 19 0.15 20 0 50 100 150 200
E3: 20 0.20 40 20 0 50 100 150
E4: 21 0.25 60 40 20 0 50 100
E5: 22 0.18 80 60 40 20 0 50
E6: 23 0.12 100 80 60 40 20 0
Maximums 1.00 100 80 100 150 200 250

We should select the minimum regret among the maximum under each one of
these strategies. Hence the book seller should buy 19 copies of the book.

49
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
Illustration Numerical: Class room practice
Qt 1: A company has to choose one of the three types of Biscuits, Cream (C),
Coconut (Co) and Glucose (G). Sales expected during next year are highly
uncertain. Marketing Department estimates the profits considering manufacturing
cost, promotional efforts and distribution set up etc, as given in the table below:

Types of Biscuits Profits on estimated level of sales (in lakhs) for quantities
5000 10000 20000

Cream (C) 15 25 45

Coconut (Co) 20 55 65

Glucose (G) 25 40 70

Choose the course of action based upon all the FIVE principles of DECISION
MAKING under UNCERTAINTY.
Solution:
Payoff Matrix

Strategies available to the Decision Maker

A1: Cream (C) A2: Coconut (Co) A3 Glucose (G)

E1: 5000 15 20 25

E2: 10000 25 55 40

E3: 20000 45 65 70

Criteria of Rationality:
A1: 1/3 (15+25+45) = 28.33
A2: 1/3 (20+55+65) = 46.67
A3: 1/3 (25+40+70) = 45
Since, the highest average is at A2, hence Coconut Variant should be preferred
as per this criteria.

50
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
Criteria of Optimism
Highest payoff in the strategies are:
A1: 45
A2: 65
A3: 70
Since, A3 is providing the maxi-max, hence Glucose biscuits should be preferred.

Criteria of Pessimism
Lowest payoff in the strategies are:
A1: 15
A2: 20
A3: 25
Since, A1 is providing the mini-mix, hence Cream biscuits should be preferred.

Criteria of Realism (Hurwicz principle)

There is concept of Index of optimism and there markets are expected to be
slightly better than normal. Hence, we assume Index of optimism at 70% (o.70)

THERE ARE 3 APPROCHES TO PROBALITY

1. Priori or Classical theory of probability

2. Relative frequency approach to probability
3. Subjective probability (Here we consider this approach as Index of
optimism)

Priori: When the total number of outcomes are well known in advance.
Probability is calculated by a formula:

51
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
 No. of favourable cases (outcomes)
P = -----------------------------------------------------------
Total number of possible cases (outcomes)

Examples: Tossing of a coin, Rolling of a dice, Cards

Relative frequency approach to probability

--------------------------------------------------------------
Class Intervals Frequency (f) Cumulative Relative
(CI) frequency (cf) Frequency (rf)
10-20 5 5 5/40 = 0.125
20-30 8 13 8/40= .20
30-40 13 26 13/40 = 0.325
40-50 9 35 9/40 =0.225
50-60 5 40 5/40 =0.125
40

Illustration:
There is a painter, who paints signboards on daily wages. He uses paints based
upon the requirement of painting the boards. The painter has collected
information related to number of liters of paint that was consumed in past 200
day. The details are given below:

No. of liters of No. of days R.f.

paint consumed
0 25 25/200 = 0.125= 12.5%
1 50 = 25%
2 80 = 40 %
3 35 = 17.5%
4 10 5%
200 100%

Q: What is the probability that the painter will consume 2 liters of paint
Answer: 40%

52
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
Subjective Probability: When the occruance of any event is decided by the
experience of the decision maker or the past history of the event. At times, the
past history is extrapolated for future occurance and probability is calculated.
Subjective probability varies from person to person and from situation to
situation.
Examples: It is based upon the experience and the future outlook of economy.

Assume alpha = 0.7

HA1 = 0.7 (45) + ( 1 – 0.7) (15)

= 0.7 * 45 + 1 * 15 - 076 * 175

= 36

HA2 = 0.7 (65) + ( 1 – 0.7) (25)

= 0.7 * 65 + 1 * 25 - 0.7 * 25
= +
= 53

HA3 = 0.7 (70) + ( 1 – 0.7) (25)

= 0.7 *70 + 1 * 25 - 0.7 * 25

= 56.5
Highest value of Hurwicz principle is at HA3 hence, the company should
manufacture GLUCOSE

Criterial of Regret

53
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
 Regret Matrix

Strategies available to the Decision Maker

A1: Cream (C) A2: Coconut (Co) A3 Glucose (G)

E1: 5000 25-15= 10 25- 20 = 5 25-25= 0

E2: 10000 55 – 25 = 30 55-55= 0 55- 40 = 15

E3: 20000 70 – 45 = 25 70 – 65 = 5 70 – 70 = 0

Highest Regret 30 5 15

Hence, Minimum of the maximum regrets should be selected.

Accordingly, Mini-max regret is at A2. The company need to manufacture
Coconut.

Qt 2: A food products company is contemplating the introduction of a

revolutionary new product with new packaging to replace the existing product at
same price (S1) or a moderate change in the composition of the existing product
with a new packaging at a small increase in price (S2) or a minor change in the
composition and addition of a word “NEW IMPROVED” with negligible
increase in price (S3).
The three possible states of nature of events are (i) High increase in Sales (N1),
(ii) No change in Sales (N2) and (iii) decrease in Sales (N3). The marketing
department of the company worked out the payoffs in terms of yearly net profits
for each course of action for these events as given in the following table :

Q 3: The sales of proposed types of soaps are as under:

54
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
 Estimated sales Type of Soaps
A B C

20000 25 40 60

10000 15 20 25

2000 10 5 3

19 24+2 = 26 36+1.2 = 37.2

Make decisions under maxi-max, Laplace method and mini max regret
criteria.
Answer:
Criteria of Optimism: SOAP C
Criteria of Rationality: SOAP C
Criteria of Regret: SOAP C

Thus, the best possible results for the company will be when Soap C is
manufactured.
Criteria of Pessimism: SOAP C
Hurwicz (Assume alpha = 0.6): SOAP C

55
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
 States of Nature Course of Action
S1 S2 S3

N1 700000 500000 300000

N2 300000 450000 300000

N3 150000 0 300000

Choose the course of action based upon all the FIVE principles of DECISION
MAKING under UNCERTAINTY.

a) Criterial of Rationality :

[S1]
1/3 (7 + 3 + 1.5) lakhs
= 3,83, 333
[S2]
1/3 (5 + 4.5 + 0) lakhs
= 316,667
[S3]
1/3 (3 + 3 + 3) lakhs
= 3,00,000

56
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
PRATICAL QUESTION 2

There is a company which is in the business of manufacturing fishing boats. The

company has a limited capacity of manufacturing fishing boats and hence
maximum of 6 boats can only be produced by them.
The boats need to be sold immediately after they are produced otherwise they
catch rust and they cannot be sold at its normal price.
The cost of producing one boat is Rs 7000 for the company and selling price per
boat is Rs 10000. If the boat is not sold immediately, they will attract only a scrap
value of Rs 6000 per boat.
Construct a payoff table and give the decision based upon the principles of
uncertainly how many boats can be manufactured by the company.
The expected demand of fishing boats will be in the range of 0 to 6. The
probability of demand expected for each number of boat has been given below:

No. of Boats 0 1 2 3 4 5 6
Probability 0.14 0.27 0.28 0.18 0.09 0.03 0.01

57
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
 DECISION MAKING UNDER THE CONDITIONS OF RISK

When the outcome of the strategies are known in numerical values, it is known
as situation of risk. Since, the outcome is in numbers and we are trying to find
out the values for future event. Hence, we use probability.
Probability can be defined as something which relied heavily on the element of
chance. It other words, the occurance of the event is purely dependent upon
chance.
However, in the business world, we define probability as ‘Numerical conversion
of future’.
To get fair idea about the possible value of any phenomenon (example sales
revenue), we multiply the possibility of occurance of event with the projected
sales revenue and we get, expected sales revenue. For example:
Year Target (in Cr) Probability of Expected Sales
achievement of revenue in Cr)
target
2021 100 70% 70
2022 110 85% 93.5
2023 121 100% 121
2024 132 110% 145

58
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
There are two criteria under the Risk
a. Principle of Maximum Likelihood
b. Expectation principle

Payoff matrix for the book seller

Strategies (Courses of Actions)
Events Prob A1: 18 A2: 19 A3: 20 A4: 21 A5: 22 A6: 23
E1: 18 0.10 36 31 26 21 16 11
E2: 19 0.15 54 57 46 39 31 24
E3: 20 0.20 72 76 80 62 52 42
E4: 21 0.25 90 95 100 105 77.5 65
E5: 22 0.18 65 68 72 76 79.2 55.8
E6: 23 0.12 43 46 48 50 52.8 55.2
1.00 360 373 372 353 308.5 253

As per expectation principle, we need to select the strategy in which there is

highest expected payoffs
We get 373 as the highest expected payoff, hence the book seller should buy 19
copies of the book.

59
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
 DECISION THEORY

Session:
********************************************************

NUMERICAL ON COST (LOSS) SITUATION

In this approach (cost reduction), the selection of the strategies is reverse of the
profit situation. For example, the criterial giving lowest average is selected in the
criteria of rationality.
Similarly,

Optimism:
Pessimism:
Realism:
Regret:

Illustration 1:
The manufacturing unit of a large concern has concluded by way of experience
that in a year the number of breakdowns varies between 0 to 6. The probability
of these breakdowns is given below:
No. of 0 1 2 3 4 5 = >6
breakdowns
Probability 0.10 0.22 0.30 0.16 0.10 0.12 0.00

The organization will try to reduce the number of breakdowns and will try to
understand the method of avoiding breakdown and stoppage production. Each
time there is breakdown, the valve needs to be changed. The cost of one valve is
Rs 4000 however, if the valve is not available immediately then the entire
production operation needs to be stopped. The total estimated loss for stoppage
and re-start of the operation is Rs 20000.

60
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
Construct a payoff matrix and find out how many VALVES the company should
buy in advance. The valves have a life of only one year.

Solution.

Payoff matrix for the Cost (Loss) Incurred by the company

(Amount in Rs ‘000)
Strategies (Courses of Actions)
Events Prob A0: 0 A1: 1 A2: 2 A3: 3 A4: 4 A5: 5
E0: 0 0.10 0 4 8 12 16 20
E1: 1 0.22 20 4 8 12 16 20
E2: 2 0.30 40 24 8 12 16 20
E3: 3 0.16 60 44 28 12 16 20
E4: 4 0.10 80 64 48 32 16 20
E5: 5 0.12 100 84 68 52 36 20
Avg

DECISION MAKING UNDER RISK

(vii) Expectation principle:
(b) Calculation of expected payoffs:
A0= 0.10 * 0 + 0.22 * 20 + 0.30 * 40 + 0.16 * 60 + 0.10 * 80 + 0.12 * 100
= 0.00 + 4.4 + 12 + 9.6 + 8.0 + 12
= 46
A1= 0.10 * 4 + 0.22 * 4 + 0.30 * 24 + 0.16 *44 + 0.10 * 64 + 0.12 * 84
= 0.40 + 0.88 + 7.2 + 7.04 + 6.4 +10.08
= 32.76

A2= 0.10 * 4 + 0.22 * 4 + 0.30 * 20 + 0.16 *44 + 0.10 * 64 + 0.12 * 84

= 0.40 + 0.88 + 6 + 5.0 + 6.4 +10.08
= 28.80

61
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
A2= 0.10 * 8 + 0.22 * 8 + 0.30 * 8 + 0.16 *28 + 0.10 * 48 + 0.12 * 68
= 0.80 + 1.76 + 2.40 + 4.48 + 4.80 +8.16
= 22.4
A3= 0.10 * 12 + 0.22 * 12 + 0.30 * 12 + 0.16 *12 + 0.10 * 32 + 0.12 * 52
= 1.2 + 2.64 + 3.6 + 1.92 + 3.2 + 6.24
= 18.8

A4= 0.10 * 16 + 0.22 * 16 + 0.30 * 16 + 0.16 *16 + 0.10 * 16 + 0.12 * 36

= 1.6 + 3.52 + 4.8 + 2.56 + 1.6 + 4.32
= 18.4

A4= 0.10 * 20 + 0.22 * 20 + 0.30 * 20 + 0.16 *20 + 0.10 * 20 + 0.12 * 20

= 20

IN this principle, the lowest expected cost is the best strategy. Hence the decision
maker should buy 4 values and remain Happy

(a) Find out the probability of failure:

Use the formula = ∑ pi * n
= 0 * 0.10 + 1 * 0.22 + 2 * 0.30 + 3 * 0.16 + 4 * 0.10 + 5 * 0.12
= 0 + 0.22 + 0.60 + 0.48 + 0.40 + 0.60
= 2.3
The expected number of failures is between to 2 to 3. Hence, to be on the safer
side, the company can buy 3 valves

62
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
Here, the highest probability is 30%, hence there is a need of purchasing 2 values
by the decision maker because highest probability of failure is against 2.

(vi) Criteria of Maximum Likelihood: We identify the highest probability,

the corresponding strategy should be adopted by the decision maker.
Here, the highest probability is 30%, hence there is a need of purchasing 2 values
by the decision maker because highest probability of failure is against 2.

(v) Criteria of Regret:

Regret table for the Cost (Loss) Incurred by the company
(Amount in Rs ‘000)
Strategies (Courses of Actions)
Events Prob A0: 0 A1: 1 A2: 2 A3: 3 A4: 4 A5: 5
E0: 0 0.10 0 4 8 12 16 20
E1: 1 0.22 16 0 4 8 12 16
E2: 2 0.30 32 16 0 4 8 12
E3: 3 0.16 48 32 16 0 4 8
E4: 4 0.10 64 48 32 16 0 4
E5: 5 0.12 80 64 48 32 16 0

A0: 80
A1: 64
A2: 48
A3: 32
A4: 16
A5: 20
Select the strategy which minimizes the maximum regret.
Hence, A4 is the best strategy and accordingly, the decision maker should buy 4
valves

63
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
(iv) Criteria of Realism: we need to select the index of optimism (Pessimism).
Higher is the value between 0 to 1, the more adverse will be the environment.
Hence, alpha = 0.6 means there is 60% likelihood of failures.

HAi = Alpha (minimum value) + (1 – alpha) (maximum value)

Assume alpha = 0.7

HA0 = 0.7 (0) + ( 1 – 0.7) (100)

= 30

HA1 = 0.7 (4) + ( 1 – 0.7) (84)

= 28

HA2 = 0.7 (8) + ( 1 – 0.7) (68)

= 26

HA3 = 0.7 (12) + ( 1 – 0.7) (52)

= 24

HA4 = 0.7 (16) + ( 1 – 0.7) (36)

= 22

HA3 = 0.7 (20) + ( 1 – 0.7) (20)

= 20
The lowest value of Hurwicz principle is taken as the best possible strategy.
Hence, the decision maker should buy 5 values.

(iii) Criteria of Pessimism: We need to select the highest cost under each
strategy. In short, the decision maker believes that environment will come up
with just opposite of what the decision maker will do.
A0: 100
A1: 84
64
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
 A2: 68
A3: 52
A4: 36
A5: 20
The decision maker will always believe that they need to map the worst scenario
in such a manner that there will be minimum possible damage to the company.
Hence, the decision maker will go ahead and buy as many as needed for the
smooth running of the company. Hence, the best strategy in the above case will
be to buy 5 values and expect 5 failures.
Select MINI-MAX strategy.

(ii) Criteria of Optimism: We need to select the lowest cost under each strategy
and lowest among these minimums will be Optimistic thought process of the
decision maker. In short, the decision believes that achievement of lowest
possible is cost is possible. They select the minimum of the minimums
A0: 0 (mini-min)
A1: 4
A2: 8
A3: 12
A4:16
A5: 20
The manufacturer (company) needs to buy 0 Valves. They will expect no failure
or breakdown in the entire year.

We will solve this numerical by using all criteria of Uncertainty and Risk
(i) Criteria of Rationality
A0: 50
A1: 37.33
A2: 28
65
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
 A3: 22
A4:19.33
A5: 20
The manufacturer (company) needs to buy 4 Valves.

66
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
 PRACTICAL NUMERICAL
For
PRACTICE

Qt 1: Dr Jhamjham is considering the possibility of opening a small dress shop

at Greenbanks Circle, a few blocks from the university. She has located a good
mall that attracts students. Her options are to open a small shop, a medium size
shop or no shop at all. The market for a dress shop be good, average or bad. The
probabilities for these three possibilities are 0.2 for a good market, 0.5 for an
average market and 0.3 for a bad market. The profit or loss for the medium sized
and small sized shops for the various market conditions are given below. Building
no shop at all yields no loss and no gain. What do you recommend.

(figures in Rupees)

Alternative Good Market Average Market Bad Market

Small Shop 75000 25000 - 40000

Medium Shop 100000 35000 - 60000

No Shop 0 0 0

Qt : 2 Answer the following MCQ / Fill in the blanks questions.

(a). The summated value of the product of the probabilities of mutually exclusive
events & the collectively exhaustive states of nature with the conditional payoffs
of those same states of nature is called as:

(i) EPPI (ii) EVPI (iii) EVP (iv) Hurwicz Criterion (v) None of the above

67
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
(b) ................................ is the first step in Quantitative Analysis.

(c) The solution to the mixed strategy 2 x 2 game can be found by:

(i) equating a player's expected winning for one of the opponent's strategies with
opponent's other strategy

(ii) equating the value of the game for player A with the value of the game for the
player B.

(iii) setting 'q' equal to 'p' and solving

(iv) setting the maximin and minimax as equality and solving the game.

(v) Taking out the saddle point and getting the value of the game.

(d) . Which of the following methods are used to reduce the size of the game of
mixed strategy.

(i) Inversion and Reduction

(ii) Rotation and Reduction

(iii) Co-factorization and Reduction

(iv) Transposition and Reduction

(v) None of the above

(e) Select the odd one out.

(i) Decision can be made under the conditions of Risk.

(ii) Decision can be made under the conditions of Uncertainty.

68
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
(iii) Decision can be made under the conditions of Competition.

(iv) Decision can be made under the conditions of Complacency

(v) Decision can be made under the conditions of Certainty.

Qt 3 : Rampack and Rimzhim have known each other since school days. Two
years back, they entered the same university and today they are taking a Masters
level course in a Business School. Both hope to graduate in Marketing as
specialization. In an attempt to make extra money and to use some of the
knowledge gained from business course Rampack and Rimzhim decided to look
into the possibility of starting a word company which would provide word
processing services to students who needed model test papers and other reports
prepared in a professional manner. Using the systems approach, Rampack and
Rimzhim have identified three strategies. Strategy 1 is to invest in a fairly
expensive microcomputer system with a high quality laser printer. In a
favourable market they should be able to obtain a net profit of Rs 10000 over the
next two years. If the market is unfavourable, they can lose Rs 8000. Strategy 2
is to purchase a less expensive system and with a favourable market they could
get a return of Rs 8000 during the next two years but with an unfavrouable market,
they can get a loss of Rs 4000. Their strategy 3 is to do nothing. Rampack is
baiscally a risk taker while Rimzhim tries to avoid risk.

(a) What type of decision procedure should Rampack use? What would
Rampack's decision be in terms of profit or loss?

(b) What type of decision maker is Rimzhim? What decision will Rimzhim make?

(c) If Rampack and Rimzhim were indifferent to risk, what type of decision
approach should they use?

69
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
(d) Assuming that you are an expert in the area of business plan implementation
and you provide suggestions to the budding entrepreneurs. Give the process
which you will follow and the assumptions made if any. Show relevant
calculations made.

Qt 4: Dr Jhamjham is considering the possibility of opening a small dress shop

at Greenbanks Circle, a few blocks from the university. She has located a good
mall that attracts students. Her options are to open a small shop, a medium size
shop or no shop at all. The market for a dress shop be good, average or bad. The
probabilities for these three possibilities are 0.2 for a good market, 0.5 for an
average market and 0.3 for a bad market. The profit or loss for the medium sized
and small sized shops for the various market conditions are given below.
Building no shop at all yields no loss and no gain. What do you recommend.
(figures in Rupees)

Alternative Good Market Average Market Bad Market

Small Shop 75000 25000 - 40000
Medium Shop 100000 35000 - 60000
No Shop 0 0 0

Qt 5: Beedi, the owner of a Tennis shop must decide how many tennis shirts to
order for the summer season. For a particular type of shirt, he must order in
batches of 100. If he orders 100 shirts, his cost is Rs 100 per shirt; if he orders
200, his cost is Rs 90 per shirt; and if he orders 300 or more shirts, his cost is Rs
85 per shirt. The selling price is Rs 120, but if any shirts are left unsold at the end
of the summer, they will sold for half price. For simplicity, the owner believes
that demand for this shirt will be either 100, 150 or 200. Of course, he cannot sell
more shirts that he stocks. If, however, he under stocks, there is a goodwill loss
of Rs 5 for each shirt a person wants to buy but cannot because it is out of stock.
Furthermore, the owner must place the order now for the forthcoming summer
season; he cannot wait to see how the demand is running for this shirt before he
orders, nor can he place several orders.

For the above situation, define:

70
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai
(a) The decision maker
(b) The alternative courses of action
(c) The events
(d) The consequences

*************************************

71
Class Notes of OR by Dr Sanjay Sinha, Professor, BVIMSR, Navi Mumbai