OR-Decision Analysis

Assignment Problem 319
Determine the allocations which minimize the total cost of 9. A shipbuilding company has been awarded a big contract for the
transportation. construction of five cargo vessels. The contract stipulates that
5. A departmental head has four subordinates and four tasks to be the company must subcontract a portion of the total work to at
performed. The subordinates differ in efficiency and the tasks least five small ancillary companies. The company has invited
differ in their intrinsic difficulty. His estimates of the times that bids from the small ancillary companies (A1, A2, A3, A4, and A5)
each man would take to perform each task is given in the matrix to take care of the subcontract work in five fields – materials
below: testing, fabrication, assembly, scrap removal and painting. The
Tasks bids received from the ancillary companies are given in the
I II III IV table.
Subcontract Bids (Rs)
A 8 26 17 11
Ancillary Materials Fabrication Assembly Scrap Painting
B 13 28 4 26 Companies Testing Removal
Subordinates C 38 19 18 15
A1 2,50,000 3,00,000 3,80,000 5,00,000 1,50,000
D 19 26 24 10 A2 2,80,000 2,60,000 3,50,000 5,00,000 2,00,000
A3 3,00,000 3,50,000 4,00,000 5,50,000 1,80,000
How should the tasks be allocated to subordinates so as to
A4 1,50,000 2,50,000 3,00,000 4,80,000 1,20,000
minimize the total man-hours? A5 3,00,000 2,70,000 3,20,000 4,80,000 1,60,000
6. An automobile dealer wishes to put four repairmen to four
different jobs. The repairmen have somewhat different kinds of Which bids should the company accept in order to complete the
skills and they exhibit different levels of efficiency from one job contract at minimum cost? What is the total cost of the
to another. The dealer has estimated the number of man-hours subcontracts?
that would be required for each job-man combination. This is 10. In a textile sales emporium, four salesmen A, B, C and D are
given in matrix form in the following table: available to four counters W, X, Y and Z. Each salesman can
Jobs handle any counter. The service (in hours) of each counter
when manned by each salesman is given below:
A B C D
Salesmen
1 5 3 2 8
A B C D
2 7 9 2 6
Men W 41 72 39 52
3 6 4 5 7
Counters X 22 29 49 65
4 5 7 7 8
Y 27 39 60 51
Find the optimal assignment that will result in minimum man- Z 45 50 48 52
hours needed.
How should the salesmen be allocated to appropriate counters
7. A lead draftsman has five drafting tasks to accomplish and five so that the service time is minimized? Each salesman must
idle draftsmen. Each draftsman is estimated to require the handle only one counter.
following number of hours for each task.
11. A hospital wants to purchase three different types of medical
Tasks equipments and five manufacturers have come forward to
A B C D E supply one or all the three machines. However, the hospital’s
policy is not to accept more than one machine from any one of
1 60 50 100 85 95 the manufacturers. The data relating to the price (in thousand
2 65 45 100 75 90 of rupees) quoted by the different manufacturers is given below:
Draftsmen 3 70 60 110 97 85
Machines
4 70 55 105 90 93
1 2 3
5 60 40 120 85 97
A 30 31 27
If each draftsman costs the company Rs 15.80 per hour, B 28 29 26
including overhead, find the assignment of draftsmen to tasks Manufacturers C 29 30 28
that will result in the minimum total cost. What would be the total D 28 31 27
cost? E 31 29 26
8. A construction company has requested bids for subcontracts on
Determine how best the hospital can purchase the three
five different projects. Five companies have responded. Their
machines. [Delhi Univ., MBA (HCA), 2008]
bids are represented below.
12. The secretary of a school is taking bids on the city’s four school
Bid Amounts (’000s Rs) bus routes. Four companies have made the bids (in Rs), as
I II III IV V detailed in the following table:
1 41 72 39 52 25 Route 1 Route 2 Route 3 Route 4

2 22 29 49 65 81 1 4,000 5,000 – –
Bidders 3 27 39 60 51 40 Bus 2 – 4,000 – 4,000
4 45 50 48 52 37 3 3,000 – 2,000 –
5 29 40 45 26 30 4 – – 4,000 5,000
Determine the minimum cost assignment of subcontracts to Suppose each bidder can be assigned only one route. Use the
bidders, assuming that each bidder can receive only one assignment model to minimize the school’s cost of running the
contract. four bus routes.
320 Operations Research: Theory and Applications
13. A large oil company operating a number of drilling platforms in Based on the marks awarded, what role should each of the
the North Sea is forming a high speed rescue unit in order to trainees be given in the rescue unit?
cope with emergency situations that may occur. The rescue unit 14. The personnel manager of ABC Company wants to assign Mr X,
comprises 6 personnel who, for reasons of flexibility, undergo Mr Y and Mr Z to regional offices. But the firm also has an opening
the same comprehensive training programme. The six personnel in its Chennai office and would send one of the three to that branch
are assessed as to their suitability for various specialist tasks if it were more economical than a move to Delhi, Mumbai or
and the marks they received in the training programme are Kolkata. It will cost Rs 2,000 to relocate Mr X to Chennai, Rs 1,600
given in the following table: to reallocate Mr Y there, and Rs 3,000 to move Mr Z. What is the
optimal assignment of personnel to offices?
Trainee Number
Office
Specialist Task I II III IV V VI
Delhi Mumbai Kolkata
Unit Leader 21 5 21 15 15 28
Helicopter Pilot 30 11 16 8 16 4 Mr X 1,600 2,200 2,400
First Aid 28 2 11 16 25 25 Personnel Mr Y 1,000 3,200 2,600
Drilling Technology 19 16 17 15 19 8 Mr Z 1,000 2,000 4,600
Firefighting 26 21 22 28 29 24
Communications 3 21 21 11 26 26
HINTS AND ANSWERS
1. A – III, B – V, C – I, D – IV, E – II; 6. 1 – B, 2 – C, 3 – D, 4 – A ; 1 – C, 2 – D, 3 – B, 4 – A;

Optimal value = 13 hours. Total man-hours = 17 hours.
2. A – e, B – c, C – b, D – a, E – d; 7. 1 – A, 2 – D, 3 – E, 4 – C, 5 – B;
Minimum distance = 570 km. Minimum cost = Rs 365 × 15.8
4. 1 – 11, 2 – 8, 3 – 7, 4 – 9, 5 – 10, 6 – 12; 8. 1 – V, 2 – II, 3 – I, 4 – III, 5 – IV;
Minimum distance = 125 km. Minimum cost = Rs 155.
5. A – I, B – III, C – II, D – IV; 9. A1 – scrap, A2 – Fabrication, A3 – Painting, A4 – Testing,
Total man-hours = 41 hours. A5 – Assembly; Minimum cost = Rs 14,10,000
10. W – C, X – B, Y – A, Z – D; Optimal value = 147 hours.
10.4 VARIATIONS OF THE ASSIGNMENT PROBLEM

10.4.1 Multiple Optimal Solutions
While making an assignment in the reduced assignment matrix, it is possible to have two or more ways
to strike off a certain number of zeros. Such a situation indicates that there are multiple optimal solutions
with the same optimal value of objective function.
10.4.2 Maximization Case in Assignment Problem

If instead of cost matrix, a profit (or revenue) matrix is given, then assignments are mode in such a way
that total profit is maximized. The profit maximization assignment problems are solved by converting them
into a cost minimization problem in either of the following two ways:
(i) Put a negative sign before each of the elements in the profit matrix in order to convert the profit
values into cost values.
(ii) Locate the largest element in the profit matrix and then subtract all the elements of the matrix from
the largest element including itself.
The transformed assignment problem can be solved by using usual Hungarian method.
Example 10.4 A company operates in four territories, and four salesmen available for an assignment.
The territories are not equally rich in their sales potential. It is estimated that a typical salesman operating
in each territory would bring in the following annual sales:
Territory : I II III IV
Annual sales (Rs) : 1,26,000 1,05,000 84,000 63,000
The four salesmen also differ in their ability. It is estimated that, working under the same conditions, their
yearly sales would be proportionately as follows:
Salesmen : A B C D
Proportion : 7 5 5 4
If the criterion is maximum expected total sales, the intuitive answer is to assign the best salesman to the
richest territory, the next best salesman to the second richest, and so on; verify this answer by the
assignment technique. [Delhi Univ., MBA, 2004]
Solution Construct the Effectiveness Matrix: To avoid the fractional values of annual sales of each
salesman in each territory, for convenience, consider their yearly sales as 21 (i.e. the sum of sales
proportions), taking Rs 1,000 as one unit. Now divide the individual sales in each territory by 21 in order
to obtain the required annual sales by each salesman. The maximum sales matrix so obtained is given in
Table 10.10.
Territory
I II III IV Sales Proportion
A 42 35 28 21 7
B 30 25 20 15 5
Salesman
C 30 25 20 15 5 Table 10.10
D 24 20 16 12 4 Effectiveness
Matrix
Sales (in ’000 Rs) 6 5 4 3
Converting Maximization Problem into Minimization Problem: The given maximization assignment
problem (Table 10.10) can be converted into a minimization assignment problem by subtracting from the highest
element (i.e. 42) all the elements of the given table. The new data so obtained is given in Table 10.11(a).
(a) I II III IV (b) I II III IV

A 0 7 14 21 A 0 3 6 9
B 12 17 22 27 B 0 1 2 3 Table 10.11
C 12 17 22 27 C 0 1 2 3 Equivalent Cost
D 18 22 26 30 D 0 0 0 0 Matrix
Apply Hungarian Method to get Optimal Solution: Apply Step 2 of the Hungarian method in order to
get the reduced matrix that has at least one zero, either in a row or column, as shown in Table 10.11(b).
The assignment is made in row A. All zeros in the assigned column I are crossed as shown in Table
10.12. Column II has only one zero, in cell (D, II). Assignment is made in this column, and other zeros are
crossed in row D. Now all zeros are either assigned or crossed off as shown in Table 10.12.
I II III IV
A 0 3 6 9 9
B 0 1 2 3 9
C 0 1 2 3 9
D 0 0 0 0
9 Table 10.12
The solution shown in Table 10.12 is not optimal since only two assignments are made. Draw lines
through marked columns and unmarked rows to cover zeros as shown in Table 10.12.
Develop the revised cost matrix by selecting the minimum element (= 1) among all uncovered elements
by the lines. Subtract 1 from each uncovered element, including itself, and add it to the elements at the
intersection of two lines. A revised cost table so obtained is shown in Table 10.13.
I II III IV
A 0 2 5 8 9
B 0 0 1 2 9
C 0 0 1 2 9
D 1 0 0 0
Table 10.13
9 9
Repeat Steps 1 to 3 to mark the assignments in Table 10.13. Two alternative optimal assignments are
shown in Tables 10.14(a) and (b).
(a) I II III IV (b) I II III IV
A 0 2 4 7 A 0 2 4 7
B 0 0 0 1 B 0 0 0 1
Table 10.14
Alternative C 0 0 0 1 C 0 0 0 1
Optimal Solutions D 2 1 0 0 D 2 1 0 0
The pattern of two alternative optimal assignments among territories and salesmen with their respective
sales volume (in Rs 1,000) is given in the table.
Assignment Set I Assignment Set II
Salesman Territory Sales (Rs) Salesman Territory Sales (Rs)

A I 42 A I 42
B III 20 B II 25
C II 25 C III 20
D IV 12 D IV 12
Total 99 Total 99
Example 10.5 A marketing manager has five salesmen and five sales districts. Considering the
capabilities of the salesmen and the nature of districts, the marketing manager estimates that the sales per
month (in hundred rupees) for each salesman in each district would be as follows:
Districts
A B C D E
1 32 38 40 28 40
2 40 24 28 21 36
Salesmen 3 41 27 33 30 37
4 22 38 41 36 36
5 29 33 40 35 39
Find the assignment of salesmen to districts that will result in maximum sales.
Solution The given maximization problem can be converted into a minimization problem by subtracting
from the largest element (i.e. 41) all the elements of the given table. The new cost data so obtained is given
in Table 10.15.
(a) A B C D E (b) A B C D E
1 9 3 1 13 1 1 8 0 0 7 0
2 1 17 13 20 5 2 0 14 12 14 4
Table 10.15 3 0 14 8 11 4 3 0 12 8 6 4
Equivalent Cost 4 19 3 0 5 5 4 19 1 0 0 5
Data 5 12 8 1 6 2 5 11 5 0 0 1
Apply Step 2 of the Hungarian method to get the opportunity cost table as shown in Table 10.15(b).
Make assignments in Table 10.15(b) by applying Hungarian method as shown in Table 10.16(a).
1 8 0 0 7 0 1 12 0 0 7 0
2 0 14 12 14 4 9 2 0 10 8 10 0
3 0 12 8 6 4 9 3 0 8 4 2 0
4 19 1 0 0 5 4 23 1 0 0 5
5 11 5 0 0 1 5 15 5 0 0 1
Table 10.16
9
The solution shown in Table 10.16(a) is not optimal since only four assignments are made. Cover the zeros
with the minimum number of lines (= 4) as shown in Table 10.16(a).
Develop the revised cost matrix by selecting the minimum element (= 4) among all uncovered elements
by the lines. Subtract 4 from all uncovered elements, including itself, and add it to the element at the
intersection of the lines. A revised cost table, so obtained, is shown in Table 10.16(b).
Repeat the above procedure again to make the assignments in the reduced Table 10.16(b). The two
alternative assignments are shown in Tables 10.17(a) and (b). Two more alternative solutions exist due to
presence of zero element in cells (4, C ), (4, D) and cells (5, C ), (5, D).
1 12 0 0 7 0 1 12 0 0 7 0
2 0 12 10 12 0 2 0 12 10 12 0
3 0 10 4 2 0 3 0 10 4 2 0
4 23 1 0 0 5 4 23 1 0 0 5
Table 10.17
5 15 5 0 0 1 5 15 5 0 0 1 Alternative
Optimal Solutions
Two alternative optimal assignments are as follows:
Assignment Set I Assignment Set II
Salesman District Sales Salesman District Sales
(in ’000 Rs) (in ’000 Rs)
1 B 38 1 B 38
2 A 40 2 E 36
3 E 37 3 A 41
4 C 41 4 C 41
5 D 35 5 D 35
Total 191 Total 191
10.4.3 Unbalanced Assignment Problem

The Hungarian method for solving an assignment problem requires that the number of columns and rows
in the assignment matrix should be equal. However, when the given cost matrix is not a square matrix, the
assignment problem is called an unbalanced problem. In such cases before applying Hungarian method,
dummy row(s) or column(s) are added in the matrix (with zeros as the cost elements) in order to make it
a square matrix.
10.4.4 Restrictions on Assignments

Sometimes it may so happen that a particular resource (say a man or machine) cannot be assigned to a
particular activity (say territory or job). In such cases, the cost of performing that particular activity by a
particular resource is considered to be very large (written as M or ∞) so as to prohibit the entry of this
pair of resource-activity into the final solution.
Example 10.6 In the modification of a plant layout of a factory four new machines M1, M2, M3, and
M4 are to be installed in a machine shop. There are five vacant places A, B, C, D and E available. Because
of limited space, machine M2 cannot be placed at C and M3 cannot be placed at A. The cost of locating
a machine at a place (in hundred rupees) is as follows.
Location
A B C D E
M1 9 11 15 10 11
M2 12 9 – 10 9
Machine
M3 – 11 14 11 7
M4 14 8 12 7 8
Find the optimal assignment schedule. [Delhi Univ., MBA, 2004, 2006]
Solution Since cost matrix is not balanced, add one dummy row (machine) with a zero cost elements in
that row. Also assign a high cost, denoted by M, to the pair (M2, C) and (M3, A). The cost matrix so obtained
is given in Table 10.18(a).
Apply Hungarian method for solving this problem. An optimal assignment is shown in Table 10.18(b).
M1 9 11 15 10 11 M1 0 2 6 1 2
M2 12 9 M 10 9 M2 3 0 M 1 0
M3 M 11 14 11 7 M3 M 4 7 4 0
M4 14 8 12 7 8 M4 7 1 5 0 1
Table 10.18 M5 0 0 0 0 0 M5 0 0 0 0 0
The total minimum cost (Rs) and optimal assignments made are as follows:
Machine Location Cost (in ’000 Rs)

M1 A 9
M2 B 9
M3 E 7
M4 D 7
M5 (dummy) C 0
Total 32
Example 10.7 An airline company has drawn up a new flight schedule that involves five flights. To
assist in allocating five pilots to the flights, it has asked them to state their preference scores by giving
each flight a number out of 10. The higher the number, the greater is the preference. A few of these flights
are unsuitable to some pilots, owing to domestic reasons. These have been marked with ‘×’.
Flight Number
1 2 3 4 5
A 8 2 × 5 4
B 10 9 2 8 4
Pilot C 5 4 9 6 ×
D 3 6 2 8 7
E 5 6 10 4 3
What should be the allocation of the pilots to flights in order to meet as many preferences as possible?
[AIMA (Dip. in Mgt.), 2005]
Solution Since the problem is to maximize the total preference score, in order to apply the Hungarian
method to solve this assignment problem, the equivalent cost matrix is required. This is obtained by
subtracting all the elements of the given matrix from the largest element (= 10) including itself as shown
in Table 10.19.
1 2 3 4 5
A 2 8 M 5 6
B 0 1 8 2 6
C 5 6 1 4 M Table 10.19
D 7 4 8 2 3 Equivalent Cost
E 5 4 0 6 7 Matrix
Perform the Hungarian method on Table 10.19 to make assignments as shown in Table 10.20.
1 2 3 4 5
A 0 5 M 3 3
B 0 0 8 2 5
C 4 4 0 3 M 9
D 5 1 6 0 0
E 5 3 0 6 6 9 Table 10.20
Opportunity Cost
9 Table
The solution shown in Table 10.20 is not the optimal solution because there is no assignment in row
E. Draw minimum number of lines to cover all zeros in the table and then subtract the smallest element
(= 3) from all uncovered elements including itself and add it to the element at the intersection of two lines.
The new table so obtained is shown in Table 10.21.
1 2 3 4 5
A 0 5 M 3 3
B 0 0 11 2 5
C 1 1 0 0 M
D 5 1 9 0 0
E 2 0 0 3 3 Table 10.21
Repeat the Hungarian method to make assignments in Table 10.21. Since the number of assignments
in Table 10.21 is equal to the number of rows or columns, this solution is the optimal solution. The optimal
assignment is as follows:
Pilot Flight Number Preference Score
A 1 8
B 2 9
C 4 6
D 5 7
E 3 10
Total 40
Example 10.8 A city corporation has decided to carry out road repairs on four main arteries of the city.
The government has agreed to make a special grant of Rs 50 lakh towards the cost with a condition that
the repairs be done at the lowest cost and quickest time. If the conditions warrant, a supplementary token
grant will also be considered favourably. The corporation has floated tenders and five contractors have sent
in their bids. In order to expedite work, one road will be awarded to only one contractor.
Cost of Repairs (Rs in lakh)

R1 R2 R3 R4
C1 9 14 19 15
C2 7 17 20 19
Contractors/Road C3 9 18 21 18
C4 10 12 18 19
C5 10 15 21 16
(a) Find the best way of assigning the repair work to the contractors and the costs.
(b) If it is necessary to seek supplementary grants, what should be the amount sought?
(c) Which of the five contractors will be unsuccessful in his bid? [AMIE 2005]
Solution (a) Since cost matrix is not balanced, therefore add one dummy column (road, R5) with a zero
cost elements. The revised cost matrix is given in Table 10.22.
R1 R2 R3 R4 R5
C1 9 14 19 15 0
C2 7 17 20 19 0
C3 9 18 21 18 0
Table 10.22 C4 10 12 18 19 0
Cost Matrix C5 10 15 21 16 0
Apply the Hungarian method to solve this problem. This is left as an exercise for the reader. An optimal
assignment is shown in Table 10.23.
R1 R2 R3 R4 R5
C1 1 1 0 0 1
C2 0 5 2 5 2
C3 0 4 1 2 0
C4 3 0 0 5 2
Table 10.23
Optimal Solution C5 1 1 1 0 0
The total minimum cost (in rupees) and optimal assignment made are as follows:
Road Contractor Cost (Rs in lakh)

R1 C2 7
R2 C4 12
R3 C1 19
R4 C5 16
R5 C3 0
Total 54
(b) Since the total cost exceeds 50 lakh, the excess amount of Rs 4 lakh (= 54 – 50) is to be sought
as supplementary grant.
(c) Contractor C3 who has been assigned to dummy row, R5 (roads) loses out in the bid.
CONCEPTUAL QUESTIONS B
1. Can there be multiple optimal solutions to an assignment 3. Explain how can one modify an effectiveness matrix in an
problem? How would you identify the existence of multiple assignment problem, if a particular assignment is prohibited.
solutions, if any? 4. What is an unbalanced assignment problem? How is the
2. How would you deal with the assignment problems, where (a) Hungarian method applied for obtaining a solution if the matrix
the objective function is to be maximized? (b) some assignments is rectangular?
are prohibited?
SELF PRACTICE PROBLEMS B
1. A project work consists of four major jobs for which an equal available to replace one of the existing ones and the associated
number of contractors have submitted tenders. The tender of that machine costs are also given below.
amount quoted (in lakh of rupees) is given in the matrix. Machines
Job M1 M2 M3 M4 M5 M6
a b c d
W1 12 3 6 – 5 9
1 10 24 30 15
W2 4 11 – 5 – 8
Contractor 2 16 22 28 12
Workers W3 8 2 10 9 7 5
3 12 20 32 10
4 9 26 34 16 W4 – 7 8 6 12 10
W5 5 8 9 4 6 1
Find the assignment which minimizes the total cost of the project
when each contractor has to be assigned at least one job. (a) Determine whether the new machine can be accepted.
2. Alpha Corporation has four plants, each of which can manufacture (b) Also determine the optimal assignment and the associated
any one of four products A, B, C or D. Production costs differ saving in cost.
from one plant to another and so do the sales revenue. The 5. A fast-food chain wants to build four stores. In the past, the
revenue and the cost data are given below. Determine which chain has used six different construction companies, and having
product should each plant produce in order to maximize profit. been satisfied with each, has invited each to bid on each job.
Sales Revenue (in ’000 Rs) The final bids (in lakh of rupees) are shown in the following table:
Plant
Construction Companies
1 2 3 4
1 2 3 4 5 6
A 50 68 49 62
Product B 60 70 51 74 Store 1 85.3 88.0 87.5 82.4 89.1 86.7
C 52 62 49 68 Store 2 78.9 77.4 77.4 76.5 79.3 78.3
D 55 64 48 66 Store 3 82.0 81.3 82.4 80.6 83.5 81.7
Store 4 84.3 84.6 86.2 83.3 84.4 85.5
Production Cost (in ’000 Rs)
Plant
Since the fast-food chain wants to have each of the new stores
1 2 3 4
ready as quickly as possible, it will award at the most one job to
A 49 60 45 61 a construction company. What assignment would result in
Product B 55 63 45 49 minimum total cost to the fast-food chain?
C 55 67 53 70 [Delhi Univ., MBA, 2001, 2003]
D 58 65 54 68 6. A methods engineer wants to assign four new methods to three
work centres. The assignment of the new methods will increase
3. A company has four machines that are to be used for three jobs. production. The methods are given below.
Each job can be assigned to one and only one machine. The
cost of each job on each machine is given in the following table. Increase in Production (unit)
Machines Work Centres
W X Y Z
A B C
A 18 24 28 32
Jobs B 8 13 17 18 1 10 17 8
C 10 15 19 22 2 18 19 7
Method 3 17 12 6
What are the job-assignment pairs that shall minimize the cost? 4 10 10 8
[Gauhati, MCA, 2001] If only one method can be assigned to a work centre, determine
4. Five workers are available to work with the machines and the the optimum assignment.
respective costs (in rupees) associated with each worker- 7. Consider a problem of assigning four clerks to four tasks. The
machine assignment are given below. A sixth machine is time (hours) required to complete the task is given below:
Tasks Territory
A B C D 1 2 3 4 5
1 4 7 5 6 A 75 80 85 70 90
2 – 8 7 4 Salesmen B 91 71 82 75 85
Clerks C 78 90 85 80 80
3 3 – 5 3
4 6 6 4 2 D 65 75 88 85 90
Clerk 2 cannot be assigned task A and clerk 3 cannot be Suggest optimal assignment of the salesmen. If for certain
assigned task B. Find all the optimum assignment schedules. reasons, salesman D cannot be assigned to territory 3, will the
optimal assignment be different? If so, what would be the new
8. The marketing director of a multi-unit company is faced with a assignment schedule? [Delhi Univ., MCom, 2000]
problem of assigning 5 senior managers to six zones. From past 12. The personnel manager of a medium-sized company has
experience he knows that the efficiency percentage judged by decided to recruit two employees D and E in a particular section
sales, operating costs, etc., depends on the manager-zone of the organization. The section has five fairly defined tasks 1,
combination. The efficiency of different managers is given below: 2, 3, 4 and 5; and three employees A, B and C are already
Zones employed in the section. Considering the specialized nature of
task 3 and the special qualifications of the recruit D for task 3,
I II III IV V VI
the manager has decided to assign task 3 to employee D and
A 73 91 87 82 78 80 then assign the remaining tasks to remaining employees so as
B 81 85 69 76 74 85 to maximize the total effectiveness. The index of effectiveness
Manager C 75 72 83 84 78 91 of each employee of different tasks is as under.
D 93 96 86 91 83 82
Tasks
E 90 91 79 89 69 76
1 2 3 4 5
Find out which zone should be managed by a junior manager A 25 55 60 45 30
due to the non-availability of a senior manager. B 45 65 55 35 40
9. A head of department in a college has the problem of assigning Employees C 10 35 45 55 65
courses to teachers with a view to maximize educational D 40 30 70 40 60
quality in his department. He has available to him one professor, E 55 45 40 55 10
two associate professors, and one teaching assistant (TA).
Four courses must be offered. After appropriate evaluation, he Assign the tasks for maximizing total effectiveness. Critically
has arrived at the following relative ratings (100 = best rating) examine whether the decision of the manager to assign task 3
regarding the ability of each instructor to teach each of the four to employee D was correct. [Delhi Univ., MBA, 2003]
courses.
13. The casualty medical officer of a hospital has received four
Course 1 Course 2 Course 3 Course 4
requests for Ambulance van facility. Currently, six vans are
Prof. 1 60 40 60 70 available for assignment and their estimated response time (in
Prof. 2 20 60 50 70 minutes) are shown in the table below:
Prof. 3 20 30 40 60 Van
TA 30 10 20 40
1 2 3 4 5 6
How should he assign his staff to the courses in order to realize 1 16 15 13 14 15 18
his objective? [Delhi Univ., MBA (HCA), 1999] 2 18 16 12 13 17 16
10. At the end of a cycle of schedules, a transport company has Incident 3 14 14 17 16 15 15
a surplus of one truck in each of the cities 1, 2, 3, 4, 5 and a 4 13 17 19 18 14 17
deficit of one truck in each of the cities A, B, C, D, E and F.
The distance (in kilometres) between the cities with a surplus, Determine which van should respond, and what will be the
and cities with a deficit, is given below: average response time. [Delhi Univ., MBA (HCA), 1990, 96, 98]
To City 14. To stimulate interest and provide an atmosphere for intellectual
discussion a finance faculty in a management school decides to
A B C D E F
hold special seminars on four contemporary topics: Leasing,
1 80 140 180 100 156 198 portfolio management, private mutual funds, swaps and options.
2 48 164 194 126 170 100 Such seminars are to be held be held once par week in the
From City 3 56 180 120 100 170 164 afternoons. However, scheduling these seminars (one for each
4 99 100 1,100 104 180 190 topic, and not more than one seminar per afternoon) has to be
5 64 180 190 160 160 170 done carefully so that the number of students unable to attend
is kept to a minimum. A careful study indicates that the number
How should the trucks be despatched so as to minimize the total of students who cannot attend a particular seminar on a specific
distance travelled? Which city will not receive a truck? day is as follows:
[Madras, MBA, 2000]
11. A company is considering expanding into five new sales territories.
The company has recruited four new salesmen. Based on the
salesmen’s experience and personality traits, the sales manager
has assigned ratings to each of the salesmen for each of the
sales territories. The ratings are as follows:
• Chandru swims all styles: back 1 : 10, butterfly 1 : 12, free

Leasing Portfolio Private Swaps
style 1 : 05 and breast stroke 1 : 20.
Management Mutual and
• Dorai swims only the butterfly 1 : 11, while Easwar swims
Funds Options
the back stroke 1 : 20, breast stroke 1 : 16, free style 1
Monday 50 40 60 20 : 06 and the butterfly 1 : 10.
Tuesday 40 30 40 30 Which swimmer should be assigned which swimming style?
Wednesday 60 20 30 20 Who will not be in the relay?
Thursday 30 30 20 30 16. (a) At the end of a cycle of schedules, a trucking company has
Friday 10 20 10 30 a surplus of one vehicle in each of the cities
– 1, 2, 3, 4 and 5 and a deficit of one vehicle in each of the cities
Find an optimal schedule of the seminars. Also find out the total A, B, C, D, E and F. The cost (in rupees) of transportation and
number of students who will be missing at least one seminar. handling between the cities with a surplus and the cities with
15. Five swimmers are eligible to compete in a relay team that is deficits are shown in the following table:
to consist of four swimmers swimming four different swimming To City
styles. The styles are – back stroke, breast stroke, free style
A B C D E F
and butterfly. The time taken by the five swimmers – Anand,
Bhasker, Chandru, Dorai and Easwar, to cover a distance of 1 134 116 167 233 164 097
100 metres in various swimming styles is given below, in 2 114 195 260 166 178 130
minutes, seconds. From City 3 129 117 048 094 066 101
• Anand swims the back stroke in 1 : 09, the breast stroke 4 071 156 092 143 114 136
in 1 : 15 and has never competed in the free style or 5 097 134 125 083 142 118
butterfly.
Find the assignment of surplus vehicles to deficit cities that will
• Bhasker is a free style specialist averaging 1 : 01 for the result in a minimum total cost? Which city will not receive a
100 metres but can also swim the breast stroke in 1 : 16 vehicle? [Delhi Univ., MBA, 2002]
and butterfly in 1 : 20.
HINTS AND ANSWERS
1. (i) 1 – b, 2 – c, 3 – d, 4 – a, 7. (i) 1 – B, 2 – D, 3 – A, 4 – C
(ii) 1 – c, 2 – b, 3 – d, 4 – a; Minimum cost = Rs 71,00,000. (ii) 1 – C, 2 – D, 3 – A, 4 – B. Minimum hours = 18.
(iii) 1 – c, 2 – d, 3 – b, 4 – a, 8. A – III, B – II, C – III, D – I, E – IV, dummy – V.
(iv) 1 – b, 2 – c, 3 – d, 4 – a 9. (i) Prof. 1 – Course 3, Prof. 2 – Course 2, Prof. 3 – Course 4,
2. Construct the profit matrix using the relationship: Profit = T.A. – Course 1
Revenue – Cost (ii) Prof. 1 – Course 1, Prof. 2 – Course 2, Prof. 3 – Course 4,
A – 2, B – 4, C – 1, D – 3 and Maximum profit = Rs 42,000 T.A. – Course 3. Maximum educational quality = 210.
3. (i) A – W, B – X, C – Y, 10. 1 – E, 2 – B, 3 – A, 4 – F, 5 – D; Cost = Rs 326.
(ii) A – W, B – Y, C – X. Minimum cost = Rs 50. 11. A – 5, B – 1, C – 2, D – 3; 359.
4. (a) W1 – M5, W2 – M6, W3 – M2, W4 – M4, W5 – M1 and W6 12. A – 4, B – 2, C – 5, D – 3, E – 1; 300.
(dummy) – M3; Minimum cost = Rs 21 15. The assignment matrix with time expressed in seconds and
(b) W1 – M5, W2 – M1, W3 – M2, W4 – M3 and W5 – M4, adding a dummy style to balance it is given by
Minimum cost = Rs 23.
Back Stroke Breast Stroke Free Style Butterfly
The sixth machine should be accepted because saving in
cost is Rs (23 – 21) = Rs 2 Anand 69 75 – –
5. S1 – 4, S2 – 3, S3 – 2, S4 – 1; Cost = Rs 325.4 Bhasker – 76 61 80
Chandru 70 80 65 72
6. (i) 1 – A, 2 – dummy, 3 – B, 4 – C
Dorai – – – 71
(ii) 1 – C, 2 – dummy, 3 – B, 4 – A. Total production = 30 Easwar 80 76 66 70
units
10.5 A TYPICAL ASSIGNMENT PROBLEM

Example 10.9 A small airline company that owns five planes operates on all the seven days of a week.
Flights between three cities A, B and C, according to the schedule, is given below. The layover cost per
stop is roughly proportional to the square of the layover time:
Flight No. From Departure Time To Arrival Time
(in hrs) (in hrs)
1 A 09.00 B 12.00
2 A 10.00 B 13.00
3 A 15.00 B 18.00
4 A 20.00 C Midnight
5 A 22.00 C 02.00
6 B 04.00 A 07.00
7 B 11.00 A 14.00
8 B 15.00 A 18.00
9 C 07.00 A 11.00
101 C 15.00 A 19.00
Find out how the planes should be assigned to the flights so as to minimize the total layover cost. If you
have made any particular assumptions, state them clearly.
Solution We have made the following assumptions:
(i) A plane cannot make more than two trips (to and fro).
(ii) A plane flying from a particular city must be back within 24 hours for the next scheduled trip from
the city.
From the given data, it is clear that there is no route between city B and C. Therefore, the present
problem can be divided into two subproblems: (i) routes between A and C, and (ii) routes between
A and B.
Let us now construct the cost matrix for the routes connecting cities A and C. This is given in Table 10.24.
Flight Number 9 10
4 130 226
Table 10.24 5 146 178
The elements in the Table 10.24 are interpreted as follows: For route 4 – 9 a plane taking flight number 4
from A to C and number 9 from C to A, would have a layover time of 9 hours (11.00 to 20.00) at city A
and 7 hours (midnight – 7.00) at city C. Thus, the layover cost for the route 4 – 9 would be (9)2 + (7)2
= 130 units. Similarly, the other route costs elements are also obtained.
The optimal assignment can now be obtained by applying the Hungarian method of assignment. The
optimal solution is given in Table 10.25.
Flight Number 9 10
4 0 64
Table 10.25 5 0 0
Optimal assignment : 4 – 9, 5 – 10
Total cost : 308 units.
Similarly, cost matrix for the routes connecting cities A and B can be constructed as shown in Table 10.26.
Flight Number 6 7 8
1 260 M 234
2 234 M 260
Table 10.26 3 164 290 M
The elements in Table 10.26 are interpreted as follows: For route 1–6, a plane taking flight number 1 from
A to B and number 6 from B to A would have a total layover time of 18 hours (16 + 2) with an associated
layover cost of (16)2 + (2)2 = 260 units. Since a plane taking flight number 1 cannot return for flight number
7 because of assumption (ii), the layover cost associated with this flight is considered very high, say M.
Similarly, the other route cost elements are also obtained.
The optimal assignment can now be obtained by applying the Hungarian method of assignment. The
optimal solution is given in Table 10.27.
Flight Number 6 7 8
1 26 M 0
2 0 M 26
3 0 0 M Table 10.27
Optimal assignment : 1 – 8, 2 – 6, 3 – 7
Total cost : 758 units.
Hence, from the two solutions obtained above, the complete flight schedule of planes is arrived at and is
given in Table 10.28.
Plane Flight Departure Arrival
Number Number City Time (hrs) City Time (hrs)
1 A 09.00 B 12.00
1 8 B 15.00 A 18.00
-----------------------------------------------------------------
2 A 10.00 B 13.00
----- 2
6 B 04.00 A 07.00
-----------------------------------------------------------------
3 A 15.00 B 18.00
----- 3
7 B 11.00 A 14.00
-----------------------------------------------------------------
4 A 20.00 C Midnight
----- 4
9 C 07.00 A 11.00 Table 10.28
----------------------------------------------------------------- Optimal Flight
5 A 22.00 C 0.200
----- 5 Schedule
10 C 15.00 A 19.00
The total minimum layover cost is 308 + 758 = 1,066 units.
10.6 TRAVELLING SALESMAN PROBLEM

The travelling salesman problem may be solved as an assignment problem, with two additional conditions
on the choice of assignment. That is, how should a travelling salesman travel starting from his home city
(the city from where he started), visiting each city only once and returning to his home city, so that the
total distance (cost or time) covered is minimum. For example, given n cities and distances dij (cost cij or
time tij) from city i to city j, the salesman starts from city 1, then any permutation of 2, 3, . . ., n represents
the number of possible ways of his tour. Thus, there are (n – 1)! possible ways of his tour. Now the problem
is to select an optimal route that is able to achieve the objective of the salesman.
To formulate and solve this problem, let us define:
xij =
RS1, if salesman travels from city i to city j
T0, otherwise
A travelling
Since each city can be visited only once, we have salesman starts
n −1 from his home city
Σ x ij = 1, j = 1, 2 , . . ., n ; i ≠ j and returns back
i =1
visiting each city, so
Again, since the salesman has to leave each city except city n, we have that the total
n distance (cost or
Σ x ij = 1, i = 1, 2 , . . ., n − 1; i ≠ j time) covered is the
j =1 minimum.
The objective function is then

n −1 n
Minimize Z = Σ Σ dij xij
i =1 j =1
Since dji = dij is not required, therefore dij = ∞ for i = j. However, all dijs must be non-negative, i.e.
dij ≥ 0 and dij + djk ≥ djk for all i, j, k.
Example 10.10 A travelling salesman has to visit five cities. He wishes to start from a particular city,
visit each city once and then return to his starting point. The travelling cost (in ’000 Rs) of each city from
a particular city is given below:
To City
A B C D E
A ∞ 2 5 7 1
B 6 ∞ 3 8 2
From City C 8 7 ∞ 4 7
D 12 4 6 ∞ 5
E 1 3 2 8 ∞
What should be the sequence of visit of the salesman so that the cost is minimum? [Delhi Univ., MBA, 2004]
Solution Solving the given travelling salesman problem as an assignment problem, by Hungarian method
of assignment, an optimal solution is shown in Table 10.29. However, this solution is not the solution to
the travelling salesman problem as it gives the sequence A – E – A. This violates the condition that
salesmen can visit each city only once.
To City
A B C D E
A ∞ 1 3 6 0
B 4 ∞ 0 6 0
D 8 0 1 ∞ l
Table 10.29
Optimal Solution E 0 2 0 7 ∞
The ‘next best’ solution to the problem that also satisfies the extra condition of unbroken sequence
of visit to all cities, can be obtained by bringing the next (non-zero) minimum element, i.e. 1, into the
solution. In Table 10.29, the cost element 1 occurs at three different places. Therefore, consider all three
different cases one by one until the acceptable solution is reached.
Case 1: Make the unit assignment in the cell (A, B) instead of zero assignment in the cell (A, E) and
delete row A and column B so as to eliminate the possibility of any other assignment in row A and column
B. Now make the assignments in the usual manner. The resulting assignments are shown in Table 10.30.
To City
A B C D E
A ∞ 1 3 6 0
B 4 ∞ 0 6 0
D 8 0 1 ∞ 1
Table 10.30 E 0 2 0 7 ∞
The solution given in Table 10.30 gives the sequence: A→B, B→C, C→D, D→E, E→A. The cost
corresponding to this feasible solution is Rs 15,000.
Case 2: If we make the assignment in the cell (D, C) instead of (D, E), then no feasible solution is obtained
in terms of zeros or in terms of element 1 which may give cost less than Rs 15,000.
Hence, the best solution is: A – B – C – D – E – A, and the total cost associated with this solution is
Rs 15,000.
Example 10.12 ABC Ice Cream Company has a distribution depot in Greater Kailash Part I for
distributing ice-cream in South Delhi. There are four vendors located in different parts of South Delhi (call
them A, B, C and D) who have to be supplied ice-cream everyday. The following matrix displays the
distances (in kilometres) between the depot and the four vendors:
To
Depot Vendor A Vendor B Vendor C Vendor D
Depot – 3.5 3 4 2
Vendor A 3.5 – 4 2.5 3
From Vendor B 3 4 – 4.5 3.5
Vendor C 4 2.5 4.5 – 4
Vendor D 2 3 3.5 4 –
What route should the company van follow so that the total distance travelled is minimized?
[Delhi Univ., MBA, 2003, 2004, 2006]
Solution Solving the given travelling salesman problem as an assignment problem, by using the
Hungarian method of assignment, an optimal solution is shown in Table 10.31.
To
Depot – 1.5 0 2 0
Vendor A 1.5 – 0.5 0 0.5
From Vendor B 0 0.5 – 1 0
Vendor C 2 0 1 – 1.5 Table 10.31

Vendor D 0 0.5 0 1.5 – Optimal Solution
The solution shown in Table 10.31 is an optimal solution to an assignment problem, but it is not the optional
solution to the travelling salesman problem. This is because it gives the sequence: Depot → Vendor D →
Vendor B → Depot. This violates the condition of the travelling salesman problem.
The ‘next best’ solution to the problem that also satisfies travelling salesman condition of unbroken
sequence, can be obtained by bringing next (non-zero) minimum element, i.e. 0.5, into the solution. In Table
10.31, the element 0.5 occurs at four different places. Therefore, consider all four different cases, one by one,
until an acceptable solution is reached.
All four cases of possible solution to travelling salesman problem tried with element 0.5 as well as zero
element do not provide a desired solution. Thus, we look for the ‘next best’ solution by bringing the next
(non-zero) element 1 along with 0.5 and zero elements into the solution.
Make assignment in cell (C, B) and delete row 4 and column 3. Then make assignments in the usual
manner using elements 1, 0.5 and 0 in the cells as shown in Table 10.32.
To
Depot – 1.5 0 2 0
Vendor A 1.5 – 0.5 0 0.5
From Vendor B 0 0.5 – 1 0
Vendor C 2 0 1 — 1.5
Table 10.32 Vendor D 0 0.5 0 1.5 –
The set of assignments given in Table 10.38 is a feasible solution to the travelling salesman problem.
The route for the salesman is: Vendor C → Vendor B → Depot → Vendor D → Vendor A → Vendor C.
The total distance (in km) to be covered in this sequence is 15 km.
The reader may try other cases. This is left as an exercise.
SELF PRACTICE PROBLEMS C
1. An airline that operates seven days a week has the timetable If the salesman starts from city A and has to come back to city
which is given below. The crew must have a minimum layover A, which route should he select so that the total distance
time of five hours between flights. travelled is minimum?
4. A salesman must travel from city to city to maintain his
Flight No. Delhi-Jaipur Flight No. Jaipur-Delhi accounts. This week he has to leave his home base and visit
Dep. Arrival Dep. Arrival other cities and the return home. The table shows the distances
(in km) between the various cities. His home city is city A.
101 7.00 am 8.00 am 201 8.00 am 9.15 am
102 8.00 am 9.00 am 202 8.30 am 9.45 am To City
103 1.30 pm 2.30 pm 203 12.00 noon 1.15 pm A B C D E
104 6.30 pm 7.30 pm 204 5.30 pm 6.45 pm
A – 375 600 150 190
Obtain the pairing of flights that minimizes layover time away B 375 – 300 350 175
from home. For any given pairing, the crew will be based at the From City C 600 300 – 350 500
city that results in the smaller layover. For each pair also
D 160 350 350 – 300
mention the town where the crew should be based.
E 190 175 500 300 –
2. A machine operator processes four types of items on his
machine and he must choose a sequence for them. The set- Use the assignment method to determine the tour that will
up cost per change depends on the items currently on machine minimize the total distance of visiting all cities and then returning
and the set-up to be made according to the following table: home. [Delhi Univ., MBA, 2002]
To 5. A salesman travels from one place to another; he cannot,
A B C D however, travel from one place and back. The distances (in km)
between pairs of cities are given below:
A – 4 7 3
B 4 – 6 3 To City
From Item C 7 6 – 7 P Q R S
D 3 3 7 –
P – 15 25 20
If he processes each of the item once and only once each From City Q 22 – 45 55
week, then how should he sequence the item on his machine? R 40 30 – 25
Use the method for the problem of travelling salesman.
S 20 26 38 –
[Delhi Univ., MBA, 2001]
3. A salesman has to visit five cities A, B, C, D and E. The The problem is to chalk out a route which enables him to visit
distances (in hundred kilometres) between the five cities are as each of the cities only once, so that the total distance covered
follows: by him is minimum. [Delhi Univ., MBA, 2003]
To City 6. Products 1, 2, 3, 4 and 5 are to be processed on a machine.
The set-up costs in rupees per change depend upon the
A B C D E
product presently on the machine and the set-up to be made.
A – 1 6 8 4 These are given by the following data:
B 7 – 8 5 6 C12 = 16, C13 = 4, C14 = 12, C23 = 6, C24 = 5, C25 = 8,
From City C 6 8 – 9 7 C35 = 6, C45 = 20; Cij = Cji, Cij = ∞ for i = j
D 8 5 9 – 8 for all values of i and j not given in the data. Find the optimum
E 4 6 7 8 – sequence of products in order to minimize the total set-up cost.
7. A salesman has to visit five cities A, B, C, D and E. The To City

distances (in hundred km) between the five cities are as follows:
C1 C2 C3 C4 C5
To City
C1 – 10 13 11 –
A B C D E C2 10 – 12 10 12
A – 17 16 18 14 From City C3 14 13 – 13 11
B 17 – 18 15 16 C4 11 10 14 – 10
From City C 16 18 – 19 17 C5 12 11 12 10 –
D 18 15 19 – 18 How should the salesman plan his trip so that he covers each
E 14 16 17 18 – of these cities no more than once, and completes his trip in
minimum possible time required for travelling?
If the salesman starts from city A and has to come back to city
9. Solve the travelling salesman problem given by the following
A, which route should he select so that total distance travelled
data
by him is minimized? [Delhi Univ., MBA, 2004]
C12 = 20, C13 = 4, C14 = 10, C23 = 5, C24 = 6.
8. The expected times required to be taken by a salesman in C25 = 10, C35 = 6, C45 = 20, where Cij = Cji
travelling from one city to another are as follows: and there is no route between cities i and j if the value for Cij
is not shown.
HINTS AND ANSWERS
1. Calculate layover times when (i) the crew is based in Delhi and 2. (i) A – D, D – B, B – C, C – A; (ii) A – C, C – B, B – D,
(ii) when the crew is based in Jaipur, by considering 15 minutes D – A. Total minimum cost = Rs 19.
= 1 unit. 3. A → C → D → B → E → A; 30 km
(i) 103 – 201; 104 – 202, 101 – 203; 102 – 204 (ii) 103 – 4. A → D → C → B → E → A; 1,165 km
201; 101 – 202; 104 – 203; 102 – 204. 5. P → R → S → Q → P; 98 km
Total minimum layover time is 52 hours and 30 minutes. 6. 1 → 2 → 5 → 3 → 4 → 1. Total cost = Rs 47.
CHAPTER SUMMARY
Given a set of tasks to be performed and a set of assignees who are available to perform these tasks (one assignee per task), an
assignment problem deals with the allocation of an assignee to a particular task so as to minimize the total cost of performing all
the tasks. The assignees can be people, machines, vehicles, plants and so on. The formulation of an assignment problem requires
constructing a cost matrix for each possible pair of an assignee to a task.
The aim of this chapter is to enable readers to recognize whether a problem can be formulated and analyzed as an assignment
problem or as a variant of one of these problem types.
CHAPTER CONCEPTS QUIZ
True or False
1. In assignment problem, an optimal assignment requires that the 8. The minimum number of lines required to cover all zeroes can not
maximum number of lines which can be drawn through squares be more than the number of columns/rows in the problem.
with zero opportunity cost be equal to the number of rows. 9. In an assignment problem involving assignment of salesmen to
2. In an assignment problem, if a constant is added or subtracted different zones to exploit their sales potential fully, if a salesman
from every element of any row/column in the given cost matrix, cannot be assigned to a particular zone, then the relevant cell
then an assignment that minimizes the total cost in one matrix also value would be replaced by M for solving the problem.
maximizes the total cost in other matrix. 10. The relevant cost element is replaced by a zero in case a certain
3. The travelling salesman problem can not be solved as an work is not to be assigned to a particular job.
assignment problem.
4. Multiple zeros in columns and rows are all indicative of multiple Fill in the Blanks
optimal solutions.
5. Assignment problem deals with assignment of persons to jobs that 11. An assignment problem that has an objective of maximizing profit
they can perform with varying efficiency. is solved as a minimization problem after converting all cost value
6. If all entries in a row of the cost matrix are increased by a constant, into _____ values.
then it will affect the optimal solution to the problem. 12. When applying Hungarian method, we subtract the smallest element
7. All dummy rows or columns in the assignment problem are from all elements in each column. Then we _____ the smallest
assumed to be non-zero. element in each row from all elements in the row and the remaining
elements represent _____.
13. An optimal solution can be found from an opportunity cost table by 26. Maximization assignment problem is transformed into a
drawing lines covering all zero squares when the minimum number minimization problem by
of the lines possible equals the number of _____. (a) adding each entry in a column from the maximum value in
14. In the assignment problem, the number of allocations in each row that column
and column are _____. (b) subtracting each entry in a column from the maximum
15. The _____ method provides an efficient method of finding the value in that column (b)
optimal solution without making a direct comparison of every (c) subtracting each entry in the table from the maximum value
solution. in that table
(d) any one of the above
16. If in the assignment problem, there is no assignment in a _____,
then it implies that the total number of assignments are _____ the 27. If there were n workers and n jobs there would be
number of rows/columns in the square matrix. (a) n! solutions
(b) (n – 1)! solutions
17. In the _____ method, a list of possible assignments among the (c) (n !)n solutions
given assignees and activities is prepared. (d) n solutions
18. The problem of degeneracy makes the transportation method _____ 28. An assignment problem can be solved by
for solving an assignment problem. (a) simplex method
19. The _____ problem is a special case of the balanced transportation (b) transportation method
problem where all rim requirements equals _____. (c) both (a) and (b)
20. In the assignment problem, the _____ cost is the difference between (d) none of the above
the best possible assignment of an assignee to an activity and the 29. For a salesman who has to visit n cities which of the following
best possible assignment is an assignment with opportunity cost are the ways of his tour plan
equal to _____. (a) n!
(b) (n + 1)!
Multiple Choice (c) (n – 1)!
(d) n
21. An assignment problem is considered as a particular case of a 30. The assignment problem
transportation problem because (a) requires that only one activity be assigned to each resource
(a) the number of rows equals columns (b) is a special case of transportation problem(a)
(b) all xij = 0 or 1 (c) can be used to maximize resources
(d) all of the above
(c) all rim conditions are 1
(d) all of the above 31. An assignment problem is a special case of transportation prob-
lem, where
22. An optimal assignment requires that the maximum number of
(a) number of rows equals number of columns
lines that can be drawn through squares with zero opportunity
(b) all rim conditions are 1
cost be equal to the number of
(c) values of each decision variable is either 0 or 1
(a) rows or columns
(d) all of the above
(b) rows and columns
(c) rows + columns – 1 32. Every basic feasible solution of a general assignment problem,
(d) none of the above having a square pay-off matrix of order, n should have assign-
ments equal to
23. While solving an assignment problem, an activity is assigned to
(a) 2n + 1 (b) 2n – 1
a resource through a square with zero opportunity cost because
(c) m + n – 1 (d) m + n
the objective is to
33. To proceed with the MODI algorithm for solving an assignment
(a) minimize total cost of assignment
problem, the number of dummy allocations need to be added are
(b) reduce the cost of assignment to zero
(a) n (b) 2n
(c) reduce the cost of that particular assignment to zero
(c) n – 1 (d) 2n – 1
(d) all of the abovec)
34. The Hungarian method for solving an assignment problem can
24. The method used for solving an assignment problem is called also be used to solve
(a) reduced matrix method (a) a transportation problem
(b) MODI method (b) a travelling salesman problem
(c) Hungarian method (c) both (a) and (b)
(d) none of the above (d) only (b)
25. The purpose of a dummy row or column in an assignment 35. An optimal solution of an assignment problem can be obtained only
problem is to if
(a) obtain balance between total activities and total resources (a) each row and column has only one zero element
(b) prevent a solution from becoming degenerate (b) each row and column has at least one zero element
(c) provide a means of representing a dummy problem (c) the data are arrangement in a square matrix
(d) none of the above (d) none of the above
Answers to Quiz
1. F 2. F 3. F 4. T 5. T 6. F 7. F 8. F 9. T 10. T
11. regret 12. subtract; opportunity cost 13. rows or columns 14. equal 15. Hungarian
16. row or columns; less than 17. enumeration 18. inefficient 19. assignment; one
20. job opportunity; zero. 21. (d) 22. (a) 23. (a) 24. (c) 25. (a) 26. (c) 27. (a) 28. (c)
29. (c) 30. (d) 31. (d) 32. (b) 33. (c) 34. (b) 35. (d)
CASE STUDY
Case 10.1: Shreya & Sons

Shreya & Sons are planning to develop three products 1, 2 and 3 in its three plants A, B and C. Only a single product
is decided to be introduced in each of the plants. The unit cost of producing one product in a plant, is given in the
following matrix.
Plant
A B C
1 8 12 –
Product 2 10 6 4
3 7 6 6
The management is interested to understand how should the product be assigned so that the total unit cost is
minimized? Also
(a) If the quantity of different products to be produced is as follows, then what assignment shall minimize the
aggregate production cost?
Product Quantity (in units)
1 12,000
2 12,000
3 10,000
(b) If the three products were to be produced in equal quantities, then what is consequence?
It is expected that the selling prices of the products produced by different plants would be different. The prices are
shown in the following table:
Plant
A B C
1 15 18 –
Product 2 18 16 10
3 12 10 8
Assuming the quantities mentioned in (a) above would be produced and sold, how should the products be assigned
to the plants in order to obtain maximum profits?
Case 10.2: City Corporation

A city corporation has decided to carry out repairs on four main dispensaries of the city. The government has agreed
to make a special grant of Rs 50 lakh towards the costs, with a condition that the repairs must be done at the lowest
cost and the quickest time. If conditions warrant, then a supplementary token grant will also be considered favourably.
The corporation has floated tenders and five contractors have sent in their bids. In order to expedite work, one
dispensary will be awarded to only one contractor.
Cost of Repairs (Rs in lakh)
Contractor Dispensary
D1 D2 D3 D4
C1 9 14 19 15
C2 7 17 20 19
C3 9 18 21 18
C4 10 12 18 19
C5 10 15 21 16
You as a consultant suggest to the corporate the best way of assigning the repair work to the contractors. Also
(a) If it is necessary to seek supplementary grants, then what would be the amount sought?
(b) Which of the five contractors will be unsuccessful in his bid?
Case 10.3: Kamal Transport

A trip from Chennai to Bangalore takes six hours by bus. A typical time-table of the bus service prepared by the
transport authorities in both directions is given below:
Departure from Route Number Arrival at Arrival at Route Number Departure from
Chennai Bangalore Chennai Bangalore
06.00 a 12.00 11.30 1 05.30

07.30 b 13.30 15.00 2 09.00
11.30 c 17.30 21.00 3 15.00
19.00 d 01.00 00.30 4 18.30
00.30 e 06.30 06.00 5 00.00
The cost of providing this service by the transport company depends upon the time spent by the bus crew (driver
and conductor) away from their places in addition to service time. There are five crew. There is, however, a constraint
that every crew should be provided with more than 4 hours of rest before the return trip again and should not wait
for more than 24 hours for the return trip. The company has residential facilities for the crew at Chennai as well as
at Bangalore. Suggest how crew should be assigned with which line of service or which service line should be connected
with which other line, so as to reduce the waiting time to the minimum.
APPENDIX: IMPORTANT RESULTS AND THEOREMS

Theorem 10.1 In an assignment problem, if a constant is added to or subtracted from every element
of any row or column in the given cost matrix, then an assignment that minimizes the total cost in one matrix
also minimizes the total cost in the other matrix.
n n n n
Alternately Let xij = x ij∗ , Minimize Z = ∑ ∑ cij x ij such that ∑ x ij = ∑ xij = 1, for all xij = 0 or 1,
i =1 j =1 i =1 j =1
n n
then x ij∗ ∗
also Minimize Z = ∑ ∑ cij∗ x ij , where cij∗ = cij – ui – vj, for i, j = 1, 2, . . ., n and where ui
i =1 j =1
and vj are some real numbers.
Proof Given that the assignment xij = x ij∗ minimizes the total cost,
n n n n
Z∗ = ∑ ∑ cij∗ x ij = ∑ ∑ ( cij − ui − vj ) xij
i =1 j =1 i =1 j =1
n n n n n n
= ∑ ∑ cij x ij − ∑ ui ∑ x ij − ∑ vj ∑ x ij
i =1 j =1 i =1 j =1 j =1 i =1
n n n n n n
= ∑ ∑ cij x ij − ∑ ui − ∑ vj = Z – ∑ ui − ∑ vj
i =1 j =1 i =1 j =1 i =1 j =1
n n
As the terms ∑ ui and ∑ vj , which are subtracted from Z to give Z ∗ are independent of xij, therefore
i =1 j =1
∗
Z is also minimum for xij = x ij∗ .
n n
Theorem 10.2 If all cij > 0 and it is possible to find a set xij = x ij∗ so that ∑ ∑ cij x ij = 0, then this
i =1 j =1
assignment is optimal.
Proof Left to the reader as an exercise. A state of nature can be a state of economy (e.g. inflation), a
weather condition, a political development, etc. The states of nature are usually not determined by the
action of an individual or an organization. These are the result of an ‘act of God’ or result of many situations
pushing in various directions.
The most relevant states of nature may be identified through some technique such as scenario analysis,
i.e. there may be certain possible states of nature that may not have a serious impact on the decision, while
others could be quite serious. In scenario analysis, various knowledgeable section of people are interviewed –
stakeholders, long-time managers, etc., in order to determine the most relevant states of nature that affect the
decision.
C h a p t e r 11
Decision Theory and Decision Trees
“The one word that makes a good manager – decisiveness.”
– Iacocca, Lee
PREVIEW
In decision theory a set of techniques are used for making decisions in the decision-environment of
uncertainty and risk.
Decision tree graphically displays the progression of decision and random events, in those cases
where a problem involves a sequence of decisions (including a decision on whether to obtain additional
information).
Utilities theory helps to incorporate decision-makers’ attitude towards risk into the analysis of those
problems where there is possibility of large losses.
LEARNING OBJECTIVES
After studying this chapter, you should be able to

z understand the steps of decision-making process.
z make decision under various decision-making environments.
z determine the expected value of perfect information, expect opportunity loss and expected monetary
value associated with any decision.
z revise probability estimates using Bayesian analysis.
z construct decision trees for making decision.
z understand the importance of utility theory in decision-making.
CHAPTER OUTLINE
11.1 Introduction • Self Practice Problems B
11.2 Steps of Decision-Making Process • Hints and Answers
11.3 Types of Decision-Making Environments 11.7 Decision Tree Analysis
11.4 Decision-making Under Uncertainty 11.8 Decision-Making with Utilities
• Conceptual Questions A • Self Practice Problems C
• Self Practice Problems A • Hints and Answers
• Hints and Answers Chapter Summary
11.5 Decision-Making Under Risk Chapter Concepts Quiz
11.6 Posterior Probabilities and Bayesian Analysis Case Study
• Conceptual Questions B
11.1 INTRODUCTION
The success or failure that an individual or organization experiences, depends to a large extent, on the ability
of making acceptable decisions on time. To arrive at such a decision, a decision-maker needs to enumerate
feasible and viable courses of action (alternatives or strategies), the projection of consequences associated
with each course of action, and a measure of effectiveness (or an objective) to identify the best course
of action.
Decision theory is both descriptive and prescriptive business modeling approach to classify the degree
of knowledge and compare expected outcomes due to several courses of action. The degree of knowledge
is divided into four categories: complete knowledge (i.e. certainty), ignorance, risk and uncertainty as
shown in Fig. 11.1.
Fig. 11.1
Zones of
Decision-making
Irrespective of the type of decision model, following essential components are common to all:
Decision aralysis is
an analytical Decision alternatives There is a finite number of decision alternatives available to the decision-maker
approach of at each point in time when a decision is made. The number and type of such alternatives may depend on
comparing decision
alternatives in terms the previous decisions made and their outcomes. Decision alternatives may be described numerically, such
of expected as stocking 100 units of a particular item, or non-numerically, such as conducting a market survey to know
outcomes. the likely demand of an item.
States of nature A state of nature is an event or scenario that is not under the control of decision makers.
For instance, it may be the state of economy (e.g. inflation), a weather condition, a political development,
etc.
The states of nature may be identified through Scenario Analysis where a section of people are
interviewed – stakeholders, long-time managers, etc., to understand states of nature that may have serious
impact on a decision.
The states of nature are mutually exclusive and collectively exhaustive with respect to any decision
problem. The states of nature may be described numerically such as, demand of 100 units of an item or
non-numerically such as, employees strike, etc.
Payoff It is a numerical value (outcome) obtained due to the application of each possible combination
States of nature of decision alternatives and states of nature. The payoff values are always conditional values because of
are outcomes due
to random factors
unknown states of nature.
that effect the The payoff values are measured within a specified period (e.g. within one year, month, etc.) called the
payoff of from decision horizon. The payoffs in most decisions are monetary. Payoffs resulting from each possible
decision alternatives. combination of decision alternatives and states of natures are displayed in a matrix (also called payoff
matrix) form as shown in Table 11.1.
Courses of Action
(Alternatives)
States of Nature Probability S1 S2 ... Sn
N1 p1 p 11 p 12 ... p 1n
N2 p2 p 21 p 22 ... p 2n
Table 11.1
General Form of # # # # #
Payoff Matrix Nm pm p m1 p m2 ... p mn
11.2 STEPS OF DECISION-MAKING PROCESS

The decision-making process involves the following steps:
1. Identify and define the problem.
2. List all possible future events (not under the control of decision-maker) that are likely to occur.
Decision Theory and Decision Trees 341
3. Identify all the courses of action available to the decision-maker.

4. Express the payoffs ( pij ) resulting from each combination of course of action and state of nature.
5. Apply an appropriate decision theory model to select the best course of action from the given list on the basis
of a criterion (measure of effectiveness) to get optimal (desired) payoff.
Example 11.1 A firm manufactures three types of products. The fixed and variable costs are given below:
Fixed Cost (Rs) Variable Cost
per Unit (Rs)
Product A : 25,000 12
Product B : 35,000 9
Product C : 53,000 7
The likely demand (units) of the products is given below:

Poor demand : 3,000
Moderate demand : 7,000
High demand : 11,000 Payoff is the
quantitative measure
If the sale price of each type of product is Rs 25, then prepare the payoff matrix. of the outcome from
Solution Let D1, D2 and D3 be the poor, moderate and high demand, respectively. The payoff is determined as: each pair of
decision alternative
Payoff = Sales revenue – Cost and a state of
nature.
The calculations for payoff (in ’000 Rs) for each pair of alternative demand (course of action) and the
types of product (state of nature) are shown below:
D1 A = 3 × 25 – 25 – 3 × 12 = 14 D2 A = 7 × 25 – 25 – 7 × 12 = 66
D1 B = 3 × 25 – 35 – 3 × 19 = 13 D2 B = 7 × 25 – 35 – 7 × 19 = 77
D1 C = 3 × 25 – 53 – 3 × 17 = 1 D2 C = 7 × 25 – 53 – 7 × 17 = 73
D3 A = 11 × 25 – 25 – 11 × 12 = 118
D3 B = 11 × 25 – 35 – 11 × 19 = 141
D3 C = 11 × 25 – 53 – 11 × 17 = 145
The payoff values are shown in Table 11.2.
Product Type Alternative Demand (in ’000 Rs)

D1 D2 D3
A 14 66 118
B 13 77 141
Table 11.2
C 1 73 145
11.3 TYPES OF DECISION-MAKING ENVIRONMENTS

To arrive at an optimal decision it is essential to have an exhaustive list of decision-alternatives, knowledge
of decision environment, and use of appropriate quantitative approach for decision-making. In this section Decision making
three types of decision-making environments: certainty, uncertainty, and risk, have been discussed. The under certainty is
knowledge of these environments helps in choosing the quantitative approach for decision-making. an environment in
which future
outcomes or states
Type 1 Decision-Making under Certainty
of nature are
In this decision-making environment, decision-maker has complete knowledge (perfect information) of known.
outcome due to each decision-alternative (course of action). In such a case he would select a decision
alternative that yields the maximum return (payoff) under known state of nature. For example, the decision
to invest in National Saving Certificate, Indira Vikas Patra, Public Provident Fund, etc., is where complete
information about the future return due and the principal at maturity is know.
Type 2 Decision-Making under Risk

In this decision-environment, decision-maker does not have perfect knowledge about possible outcome of
every decision alternative. It may be due to more than one states of nature. In a such a case he makes
an assumption of the probability for occurrence of particular state of nature.
Type 3 Decision-Making under Uncertainty

In this decision environment, decision-maker is unable to specify the probability for occurrence of particular
state of nature. However, this is not the case of decision-making under ignorance, because the possible
states of nature are known. Thus, decisions under uncertainty are taken even with less information than
decisions under risk. For example, the probability that Mr X will be the prime minister of the country 15
years from now is not known.
11.4 DECISION-MAKING UNDER UNCERTAINTY

When probability of any outcome can not be quantified, the decision-maker must arrive at a decision only
on the actual conditional payoff values, keeping in view the criterion of effectiveness (policy). The following
criteria of decision-making under uncertainty have been discussed in this section.
(i) Optimism (Maximax or Minimin) criterion
(ii) Pessimism (Maximin or Minimax) criterion
(iii) Equal probabilities (Laplace) criterion
(iv) Coefficient of optimism (Hurwiez) criterion
(v) Regret (salvage) criterion
11.4.1 Optimism (Maximax or Minimin) Criterion

In this criterion the decision-maker ensures that he should not miss the opportunity to achieve the largest
possible profit (maximax) or the lowest possible cost (minimin). Thus, he selects the decision alternative
that represents the maximum of the maxima (or minimum of the minima) payoffs (consequences or outcomes).
The working method is summarized as follows:
Decision making (a) Locate the maximum (or minimum) payoff values corresponding to each decision alternative.
under risk is an (b) Select a decision alternative with best payoff value (maximum for profit and minimum for cost).
environment in
which the probability Since in this criterion the decision-maker selects an decision-alternative with largest (or lowest) possible
of outcomes or payoff value, it is also called an optimistic decision criterion.
states of nature can
be quantified.
11.4.2 Pessimism (Maximin or Minimax) Criterion
In this criterion the decision-maker ensures that he would earn no less (or pay no more) than some specified
amount. Thus, he selects the decision alternative that represents the maximum of the minima (or minimum
of the minima in case of loss) payoff in case of profits. The working method is summarized as follows:
(a) Locate the minimum (or maximum in case of profit) payoff value in case of loss (or cost) data
corresponding to each decision alternative.
(b) Select a decision alternative with the best payoff value (maximum for profit and mimimum for loss
or cost).
Since in this criterion the decision-maker is conservative about the future and always anticipates the worst
possible outcome (minimum for profit and maximum for cost or loss), it is called a pessimistic decision
criterion. This criterion is also known as Wald’s criterion.
Decision making
under uncertainty 11.4.3 Equal Probabilities (Laplace) Criterion
is an environment in
which the probability Since the probabilities of states of nature are not known, it is assumed that all states of nature will occur
of outcomes or with equal probability, i.e. each state of nature is assigned an equal probability. As states of nature are
states of nature can mutually exclusive and collectively exhaustive, so the probability of each of these must be: 1/(number of
not be quantified.
states of nature). The working method is summarized as follows:
(a) Assign equal probability value to each state of nature by using the formula:
1 ÷ (number of states of nature).
(b) Compute the expected (or average) payoff for each alternative (course of action) by adding all the
payoffs and dividing by the number of possible states of nature, or by applying the formula:
(Probability of state of nature j ) × (Payoff value for the combination of alternative i
and state of nature j.)
(c) Select the best expected payoff value (maximum for profit and minimum for cost).
This criterion is also known as the criterion of insufficient reason. This is because except in a few cases,
some information of the likelihood of occurrence of states of nature is available.
11.4.4 Coefficient of Optimism (Hurwicz) Criterion

This criterion suggests that a decision-maker should be neither completely optimistic nor pessimistic and,
therefore, must display a mixture of both. Hurwicz, who suggested this criterion, introduced the idea of a
coefficient of optimism (denoted by α) to measure the decision-maker’s degree of optimism. This coefficient
lies between 0 and 1, where 0 represents a complete pessimistic attitude about the future and 1 a complete
optimistic attitude about the future. Thus, if α is the coefficient of optimism, then (1 – α) will represent
the coefficient of pessimism.
The Hurwicz approach suggests that the decision-maker must select an alternative that maximizes
H (Criterion of realism) = α (Maximum in column) + (1 – α ) (Minimum in column)
The working method is summarized as follows:
(a) Decide the coefficient of optimism α (alpha) and then coefficient of pessimism (1 – α).
(b) For each decision alternative select the largest and lowest payoff value and multiply these with α
and (1 – α) values, respectively. Then calculate the weighted average, H by using above formula.
(c) Select an alternative with best weighted average payoff value.
11.4.5 Regret (Savage) Criterion

This criterion is also known as opportunity loss decision criterion or minimax regret decision criterion Regret criterion
because decision-maker regrets for choosing wrong decision alternative resulting in an opportunity loss attempts to minimize
of payoff. Thus, he always intends to minimize this regret. The working method is summarized as follows: the maximum
opportunity loss.
(a) From the given payoff matrix, develop an opportunity-loss (or regret) matrix as follows:
(i) Find the best payoff corresponding to each state of nature
(ii) Subtract all other payoff values in that row from this value.
(b) For each decision alternative identify the worst (or maximum regret) payoff value. Record this value
in the new row.
(c) Select a decision alternative resulting in a smallest anticipated opportunity-loss value.
Example 11.2 A food products’ company is contemplating the introduction of a revolutionary new
product with new packaging or replacing the existing product at much higher price (S1). It may even make
a moderate change in the composition of the existing product, with a new packaging at a small increase
in price (S2), or may mall a small change in the composition of the existing product, backing it with the word
‘New’ and a negligible increase in price (S3). The three possible states of nature or 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 of the strategies of three
events (expected sales). This is represented in the following table:
States of Nature
Strategies N1 N2 N3
S1 7,00,000 3,00,000 1,50,000

S2 5,00,000 4,50,000 0
S3 3,00,000 3,00,000 3,00,000
Which strategy should the concerned executive choose on the basis of

(a) Maximin criterion (b) Maximax criterion
(c) Minimax regret criterion (d) Laplace criterion?
Solution The payoff matrix is rewritten as follows:

(a) Maximin Criterion
Strategies
States of
Nature S1 S2 S3
N1 7,00,000 5,00,000 3,00,000

N2 3,00,000 4,50,000 3,00,000
N3 1,50,000 0,,00000 3,00,000
Column (minimum) 1,50,000 0,,00000 3,00,000← Maximin Payoff
The maximum of column minima is 3,00,000. Hence, the company should adopt strategy S3.
(b) Maximax Criterion
Strategies
States of
Nature S1 S2 S3
N1 7,00,000 5,00,000 3,00,000

N2 3,00,000 4,50,000 3,00,000
N3 1,50,000 0,,00000 3,00,000
Column (maximum) 7,00,000 5,00,000 3,00,000

↑__ Maximax Payoff
The maximum of column maxima is 7,00,000. Hence, the company should adopt strategy S1.
(c) Minimax Regret Criterion Opportunity loss table is shown below:
Strategies
States of
Nature S1 S2 S3
N1 7,00,000 – 7,00,000 7,00,000 – 5,00,000 7,00,000 – 3,00,000

= 0 = 2,00,000 = 4,00,000
N2 4,50,000 – 3,00,000 4,50,000 – 4,50,000 4,50,000 – 3,00,000
= 1,50,000 = 0 = 1,50,000
N3 3,00,000 – 1,50,000 3,00,000 – 0 3,00,000 – 3,00,000
= 1,50,000 = 3,00,000 = 0
Column (maximum) 1,50,000 3,00,000 4,00,000

↑__ Minimax Regret
Hence the company should adopt minimum opportunity loss strategy, S1.
(d) Laplace Criterion Assuming that each state of nature has a probability 1/3 of occurrence. Thus,
Strategy Expected Return (Rs)
S1 (7,00,000 + 3,00,000 + 1,50,000)/3 = 3,83,333.33 ← Largest Payoff

S2 (5,00,000 + 4,50,000 + 0)/3 = 3,16,666.66
S3 (3,00,000 + 3,00,000 + 3,00,000)/3 = 3,00,000
Since the largest expected return is from strategy S1, the executive must select strategy S1.
Example 11.3 A manufacturer manufactures a product, of which the principal ingredient is a chemical
X. At the moment, the manufacturer spends Rs 1,000 per year on supply of X, but there is a possibility
that the price may soon increase to four times its present figure because of a worldwide shortage of the
chemical. There is another chemical Y, which the manufacturer could use in conjunction with a third chemical
Z, in order to give the same effect as chemical X. Chemicals Y and Z would together cost the manufacturer
Rs 3,000 per year, but their prices are unlikely to rise. What action should the manufacturer take? Apply
the maximin and minimax criteria for decision-making and give two sets of solutions. If the coefficient of
optimism is 0.4, then find the course of action that minimizes the cost.
Solution The data of the problem is summarized in the following table (negative figures in the table
represents profit).
States of Nature Courses of Action

S1 (use Y and Z ) S2(use X )
N1 (Price of X increases) – 3,000 – 4,000

N2 (Price of X does not increase) – 3,000 – 1,000
(i) Maximin Criterion

S1 S2
N1 – 3,000 – 4,000
N2 – 3,000 – 1,000
Column (minimum) – 3,000 – 4,000
↑ Maximin Payoff
Maximum of column minima = – 3,000. Hence, the manufacturer should adopt action S1.
(ii) Minimax (or opportunity loss) Criterion
S1 S2
N1 – 3,000 – (– 3,000) = 0 – 3,000 – (– 4,000) = 1,000

N2 – 1,000 – (– 3,000) = 2,000 – 1,000 – (– 1,000) = 0
Maximum opportunity – 2,000 – 1,000 ← Minimax Payoff
Hence, manufacturer should adopt minimum opportunity loss course of action S2.
(iii) Hurwicz Criterion Given the coefficient of optimism equal to 0.4, the coefficient of pessimism will be
1 – 0.4 = 0.6. Then according to Hurwicz, select course of action that optimizes (maximum for profit
and minimum for cost) the payoff value
H = α (Best payoff) + (1 – α) (Worst payoff)
= α (Maximum in column) + (1 – α) (Minimum in column)
Course of Action Best Payoff Worst Payoff H

S1 – 3,000 – 3,000 – 3,000
S2 – 1,000 – 4,000 – 2,800
Since course of action S2 has the least cost (maximum profit) = 0.4(1,000) + 0.6(4,000) = Rs 2,800, the
manufacturer should adopt this.
Example 11.4 An investor is given the following investment alternatives and percentage rates of return.
States of Nature (Market Conditions)

Low Medium High
Regular shares 7% 10% 15%
Risky shares –10% 12% 25%
Property –12% 18% 30%
Over the past 300 days, 150 days have been medium market conditions and 60 days have had high market
increases. On the basis of these data, state the optimum investment strategy for the investment.
[Nagpur Univ., MBA, 1999]
Solution According to the given information, the probabilities of low, medium and high market conditions
would be 90/300 or 0.30, 150/300 or 0.50 and 60/300 or 0.20, respectively. The expected pay-offs for each of the
alternatives are shown below:
Strategy
Market Conditions Probability Regular Shares Risky Shares Property
Low 0.30 – 0.07 × 0.30 0.10 × 0.30 0.15 × 0.30

Medium 0.50 – 0.10 × 0.50 0.12 × 0.50 0.25 × 0.50
High 0.20 – 0.12 × 0.20 0.18 × 0.20 0.30 × 0.20
Expected Return 0.136 0.126 0.230
Since the expected return of 23 per cent is the highest for property, the investor should invest in this alternative.
CONCEPTUAL QUESTIONS A
1. Discuss the difference between decision-making under 4. What is a scientific decision-making process? Discuss the
certainty, under uncertainty and under risk. role of the statistical method in such a process.
2. What techniques are used to solve decision-making problems 5. Give an example of a good decision that you made, which
under uncertainty? Which technique results in an optimistic resulted in a bad outcome. Also give an example of a good
decision? Which technique results in a pessimistic decision? decision that you made and that had a good outcome. Why
was each decision good or bad?
3. Explain the various quantitative methods that are useful for
decision-making under uncertainty.
SELF PRACTICE PROBLEMS A
1. The following matrix gives the payoff (in Rs) of different strategies Strategy State of Nature
(alternatives) S1, S2 and S3 against conditions (events) N1, N2,
N3 and N4. N1 N2
State of Nature S1 40 60
Strategy N1 N2 N3 N4 S2 10 – 20
S3 – 40 150
S1 4,000 – 100 6,000 18,000
S2 20,000 5,000 400 0 Select a strategy using each of the following decision criteria: (a)
S3 20,000 15,000 – 2,000 1,000 Maximax, (b) Minimax regret, (c) Maximin, (d) Minimum risk,
assuming equiprobable states.
Indicate the decision taken under the following approaches: (i) 4. Mr Sethi has Rs 10,000 to invest in one of three options: A, B
Pessimistic, (ii) Optimistic, (iii) Equal probability, (iv) Regret, (v) or C. The return on his investment depends on whether the
Hurwicz criterion, the degree of optimism being 0.7. economy experiences inflation, recession, or no change at all.
2. In a toy manufacturing company, suppose the product acceptance The possible returns under each economic condition are given
probabilities are not known but the following data is known: below:
Anticipated First Year Profit (’000 Rs) State of Nature
Product Line Strategy Inflation Recession No Change
Product
Acceptance Full Partial Minimal A 2,000 1,200 1,500
B 3,000 800 1,000
Good 8 70 50 C 2,500 1,000 1,800
Fair 50 45 40
Poor – 25 – 10 0 What should he decide, using the pessimistic criterion, optimistic
criterion, equally likely criterion and regret criterion?
Determine the optimal decision under each of the following 5. A manufacturer’s representative has been offered a new product
decision criteria and show how you arrived at it: line. If he accepts the new line he can handle it in one of the
(a) Maximax, (b) Maximin, (c) Equal likelihood and (d) Minimax two ways. The best way according to the manufacturer would
regret? be to set a separate sales force to exclusively handle the new
3. The following is a payoff (in rupees) table for three strategies line. This would involve an initial investment of Rs 1,00,000 in
and two states of nature: the office, office equipment and the hiring and training of the
salesmen. On the other hand, if the new line is handled by the territory and their experience with other products, the
existing sales force, using the existing facilities, the initial representative estimates the following probabilities for annual
investment would only be Rs 30,000, principally for training his sales of the new product:
present salesmen.
The new product sells for Rs 250. The representative Sales (in units) : 1,000 2,000 3,000 4,000 5,000
normally receives 20 per cent of the sales price on each unit Probability : 0.10 0.15 0.40 0.30 0.05
sold, of which 10 per cent is paid as commission to handle the
new product. The manufacturer offers to pay 60 per cent of the (a) Set up a regret table.
sale price of each unit sold to the representative, if the (b) Find the expected regret of each course of action.
representative sets up a separate sales organization. Otherwise (c) Which course of action would have been best under the
the normal 20 per cent will be paid. In either case the salesman maximin criterion?
gets a 10 per cent commission. Based on the size of the
HINTS AND ANSWERS
1. (i) S2, (ii) S2 or S3, (iii) S3, (iv) S1, (v) S2 Therefore, payoff function corresponding to S1 and S2 would
2. (a) Full, (b) Minimal, (c) Full or partial, (d) Partial be
3. (a) S3; Rs 150 (b) S3; Rs 80 (c) S1; Rs 40 (d) S3; Rs 55 S1 = –1,00,000 + 250 × {(30 – 10)/100} × α = –1,00,000 + 50α
4. Choose A: Rs 120, Choose B: Rs 300, Choose C: Rs 176.6, S2 = –30,000 + 250 × {(20 – 10)/100} × α = – 30,000 + 25α
Choose C: Rs 50 Equating the two, we get – 1,00,000 + 50α = – 30,000 + 25α
5. Let S1 = install new sales facilities or α = 2,800.
Let S2 = continue with existing sales facilities.
11.5 DECISION-MAKING UNDER RISK

In this decision-making environment, decision-maker has sufficient information to assign probability to the
likely occurrence of each outcome (state of nature). Knowing the probability distribution of outcomes
(states of nature), the decision-maker needs to select a course of action resulting a largest expected
(average) payoff value. The expected payoff is the sum of all possible weighted payoffs resulting from
choosing a decision alternative.
The widely used criterion for evaluating decision alternatives (courses of action) under risk is the
Expected Monetary Value (EMV) or Expected Utility.
11.5.1 Expected Monetary Value (EMV)

The expected monetary value (EMV) for a given course of action is obtained by adding payoff values multiplied Expected monetary
by the probabilities associated with each state of nature. Mathematically, EMV is stated as follows: value is obtained by
m adding payoffs for
EMV (Course of action, Sj) = Σ pij pi each course of
i =1 action, multiplied by
where m = number of possible states of nature the probabilities
associated with
p i = probability of occurrence of state of nature, Ni
each state of
pij = payoff associated with state of nature Ni and course of action, Sj nature.
The Procedure
1. Construct a payoff matrix listing all possible courses of action and states of nature. Enter the
conditional payoff values associated with each possible combination of course of action and state of
nature along with the probabilities of the occurrence of each state of nature.
2. Calculate the EMV for each course of action by multiplying the conditional payoffs by the associated
probabilities and adding these weighted values for each course of action.
3. Select the course of action that yields the optimal EMV.
Example 11.5 Mr X flies quite often from town A to town B. He can use the airport bus which costs
Rs 25 but if he takes it, there is a 0.08 chance that he will miss the flight. The stay in a hotel costs
Rs 270 with a 0.96 chance of being on time for the flight. For Rs 350 he can use a taxi which will
make 99 per cent chance of being on time for the flight. If Mr X catches the plane on time, he will
conclude a business transaction that will produce a profit of Rs 10,000, otherwise he will lose it.
Which mode of transport should Mr X use? Answer on the basis of the EMV criterion.
Solution Computation of EMV associated with various courses of action is shown in Table 11.3.
Courses of Action
States of Bus Stay in Hotel Taxi
Nature Cost Prob. Expected Cost Prob. Expected Cost Prob. Expected
Value Value Value
Catches 10,000 – 25 0.92 9,177 10,000 – 270 0.96 9,340.80 10,000 – 350 0.99 9,553.50
the flight = 9,975 = 9,730 = 9,650
Miss the flight – 25 0.08 – 2.0 – 270 0.04 – 10.80 – 350 0.01 – 3.50
Expected monetary 9,175 9,330 9,550

Table 11.3 value (EMV)
Since EMV associated with course of action ‘Taxi’ is largest (= Rs 9,550), it is the logical alternative.
Example 11.6 The manager of a flower shop promises its customers delivery within four hours on all
flower orders. All flowers are purchased on the previous day and delivered to Parker by 8.00 am the next
morning. The daily demand for roses is as follows.
Dozens of roses : 70 80 90 100
Probability : 0.1 0.2 0.4 0.3
The manager purchases roses for Rs 10 per dozen and sells them for Rs 30. All unsold roses are donated
to a local hospital. How many dozens of roses should Parker order each evening to maximize its profits?
What is the optimum expected profit? [Delhi Univ., MBA, Dec. 2004]
Solution The quantity of roses to be purchased per day is considered as ‘course of action’ and the
daily demand of the roses is considered as a ‘state of nature’ because demand is uncertain with
known probability. From the data, it is clear that the flower shop must not purchase less than 7 or
more than 10 dozen roses, per day. Also each dozen roses sold within a day yields a profit of Rs (30
– 10) = Rs 20 and otherwise it is a loss of Rs 10. Thus
Marginal profit (MP) = Selling price – Cost = 30 – 10 = Rs 20
Marginal loss (ML) = Loss on unsold roses = Rs 10
Using the information given in the problem, the various conditional profit (payoff) values for each
combination of decision alternatives and state of nature are given by
Conditional profit = MP × Roses sold – ML × Roses not sold
=
RS 20D, if D ≥ S
T 20D − 10(S − D) = 30D − 10S , if D < S
where D = number of roses sold within a day and S = number of roses stocked.
The resulting conditional profit values and corresponding expected payoffs are computed in
Table 11.4.
States of Probability Conditional Profit (Rs) due to Expected Payoff (Rs) due to
Nature Courses of Action Courses of Action
(Demand (Purchase per Day) (Purchase per Day)
per Day)
70 80 90 100 70 80 90 100
(1) (2) (3) (4) (5) (1)×(2) (1)×(3) (1)×(4) (1)×(5)
70 0.1 140 130 120 110 14 13 12 11

80 0.2 140 160 150 140 28 32 30 28
90 0.4 140 160 180 170 56 64 72 68
Table 11.4
100 0.3 140 160 180 200 42 48 54 60
Conditional Profit
Value (Payoffs) Expected monetary value (EMV) 140 157 168 167
Since the highest EMV of Rs 168 corresponds to the course of action 90, the flower shop should
purchase nine dozen roses everyday.
Example 11.7 A retailer purchases cherries every morning at Rs 50 a case and sells them for Rs 80 a
case. Any case that remains unsold at the end of the day can be disposed of the next day at a salvage
value of Rs 20 per case (thereafter they have no value). Past sales have ranged from 15 to 18 cases per
day. The following is the record of sales for the past 120 days.
Cases sold : 15 16 17 18
Number of days : 12 24 48 36
Find out how many cases should the retailer purchase per day in order to maximize his profit.
[Delhi Univ., MCom, 2000; Ajmer Univ., MBA, 2003]
Solution Let Ni (i = 1, 2, 3, 4) be the possible states of nature (daily likely demand) and Sj ( j = 1, 2,
3, 4) be all possible courses of action (number of cases of cherries to be purchased).
Marginal profit (MP) = Selling price – Cost = Rs (80 – 50) = Rs 30
Marginal loss (ML) = Loss on unsold cases = Rs (50 – 20) = Rs 30
The conditional profit (payoff) values for each combination of decision alternatives and state of nature
are given by
Conditional profit = MP × Cases sold – ML × Cases unsold
= (80 – 50) (Cases sold) – (50 –20) (Cases unsold)
 30S if S ≥ N
=  (80 – 50) S – 30(N – S) = 60S – 30N if S < N

The resulting conditional profit values and corresponding expected payoffs are computed in Table 11.5.
States of Probability Conditional Profit (Rs) due to Expected Payoff (Rs) due to
(Demand (Purchase per Day) (Purchase per Day)
per Week)
15 16 17 18 15 16 17 18
(1) (2) (3) (4) (5) (1)×(2) (1)×(3) (1)×(4) (1)×(5)
15 0.1 450 420 390 360 45 42 39 36
16 0.2 450 480 450 420 90 96 90 84
17 0.4 450 480 510 480 180 192 204 192
Table 11.5
18 0.3 450 480 510 540 135 144 153 162
Conditional Profit
Expected monetary value (EMV) 450 474 486 474 Value (Payoffs)
Since the highest EMV of Rs 486 corresponds to the course of action 17, the retailer must purchase
17 cases of cherries every morning.
Example 11.8 The probability of demand for hiring cars on any day in a given city is as follows:
No. of cars demanded : 0 1 2 3 4
Probability : 0.1 0.2 0.3 0.2 0.2
Cars have a fixed cost of Rs 90 each day to keep the daily hire charges (variable costs of running)
Rs 200. If the car-hire company owns 4 cars, what is its daily expectation? If the company is about to go
into business and currently has no car, how many cars should it buy?
Solution Given that Rs 90 is the fixed cost and Rs 200 is variable cost. The payoff values with 4 cars
at the disposal of decision-maker are calculated as under:
No. of cars
demanded : 0 1 2 3 4
Payoff : 0 – 90 × 4 200 – 90 × 4 400 – 90 × 4 600 – 90 × 4 800 – 90 × 4
(with 4 cars) = – 360 = – 160 = 40 = 240 = 440
Thus, the daily expectation is obtained by multiplying the payoff values with the given corresponding
probabilities of demand:
Daily Expectation = (– 360)(0.1) + (– 160)(0.2) + (40)(0.3) + (240)(0.2) + (440)(0.2) = Rs 80
The conditional payoffs and expected payoffs for each course of action are shown in Tables 11.6 and 11.7.
Demand of Probability Conditional Payoff (Rs) due to Decision to Purchase Cars

Cars (Course of Action)
0 1 2 3 4
0 0.1 0 – 90 – 180 – 270 – 360

1 0.2 0 110 20 – 70 – 160
Table 11.6 2 0.3 0 110 220 130 40
Conditional Payoff 3 0.2 0 110 220 330 240
Values 4 0.2 0 110 220 330 440
Demand of Probability Conditional Payoff (Rs) due to Decision to Purchase Cars

Cars (Course of Action)
0 1 2 3 4
0 0.1 0 –9 – 18 – 27 – 36
1 0.2 0 22 4 – 14 – 32
2 0.3 0 33 66 39 12
Table 11.7 3 0.2 0 22 44 66 48
Expected Payoffs 4 0.2 0 22 44 66 88
and EMV EMV 0 90 140 130 80
Since the EMV of Rs 140 for the course of action 2 is the highest, the company should buy 2 cars.
11.5.2 Expected Opportunity Loss (EOL)

Expected opportunity loss (EOL), also called expected value of regret, is an alternative decision criterion
for decision making under risk. The EOL is defined as the difference between the highest profit (or payoff )
and the actual profit due to choosing a particular course of action in a particular state of nature. Hence,
EOL is the amount of payoff that is lost by not choosing a course of action resulting to the minimum payoff
in a particular state of nature. A course of action resulting to the minimum EOL is preferred. Mathematically,
EOL is stated as follows.
m
EOL (State of nature, Ni ) = Σ lij pi
i =1
where lij = opportunity loss due to state of nature, Ni and course of action, Sj
p i = probability of occurrence of state of nature, Ni
The Procedure
1. Prepare a conditional payoff values matrix for each combination of course of action and state of nature
along with the associated probabilities.
2. For each state of nature calculate the conditional opportunity loss (COL) values by subtracting each
payoff from the maximum payoff.
3. Calculate the EOL for each course of action by multiplying the probability of each state of nature
with the COL value and then adding the values.
4. Select a course of action for which the EOL is minimum.
Example 11.9 A company manufactures goods for a market in which the technology of the product is
changing rapidly. The research and development department has produced a new product that appears to
have potential for commercial exploitation. A further Rs 60,000 is required for development testing.
The company has 100 customers and each customer might purchase, at the most, one unit of the
product. Market research suggests that a selling price of Rs 6,000 for each unit, with total variable costs
of manufacturing and selling estimate as Rs 2,000 for each unit.
From previous experience, it has been possible to derive a probability distribution relating to the
proportion of customers who will buy the product as follows:
Proportion of customers : 0.04 0.08 0.12 0.16 0.20
Probability : 0.10 0.10 0.20 0.40 0.20
Determine the expected opportunity losses, given no other information than that stated above, and
state whether or not the company should develop the product.
Solution If p is the proportion of customers who purchase the new product, the company’s conditional
profit is: (6,000 – 2,000) × 100 p – 60,000 = Rs (4,00,000 p – 60,000).
Let Ni (i = 1, 2, . . ., 5) be the possible states of nature, i.e. proportion of the customers who will buy
the new product and S1 (develop the product) and S2 (do not develop the product) be the two courses
of action.
The conditional profit values (payoffs) for each pair of Nis and Sjs are shown in Table 11.8.
Proportion of Conditional Profit = Rs (4,00,000 p – 60,000)

Customers Course of Action
(State of Nature) S1 S2
(Develop) (Do not Develop)
0.04 – 44,000 0
0.08 – 28,000 0
0.12 – 12,000 0 Table 11.8
0.16 4,000 0 Conditional Profit
0.20 20,000 0 Values (Payoffs)
Opportunity loss values are shown in Table 11.9.
Proportion of Probability Conditional Profit (Rs) Opportunity Loss (Rs)

Customers
S1 S2 S1 S2
(State of Nature)
0.04 0.1 – 44,000 0 44,000 0
0.08 0.1 – 28,000 0 28,000 0
0.12 0.2 – 12,000 0 12,000 0 Table 11.9
0.16 0.4 4,000 0 0 4,000 Opportunity Loss
0.20 0.2 20,000 0 0 20,000 Values
Using the given estimates of probabilities associated with each state of nature, the expected
opportunity loss (EOL) for each course of action is given below:
EOL (S1) = 0.1 (44,000) + 0.1 (28,000) + 0.2 (12,000) + 0.4 (0) + 0.2 (0) = Rs 9,600
EOL (S2) = 0.1 (0) + 0.1 (0) + 0.2 (0) + 0.4 (4,000) + 0.2 (20,000) = Rs 5,600
Since the company seeks to minimize the expected opportunity loss, the company should select course Expected value of
of action S2 (do not develop the product) with minimum EOL. perfect information
is an average (or
expected) value of
11.5.3 Expected Value of Perfect Information (EVPI) an additional
information if it were
If decision-makers can get perfect (complete and accurate) information about the occurrence of various of any worth.
states of nature, then choosing a course of action that yields the desired payoff in the presence of any
state of nature is easy.
The EMV or EOL criterion helps the decision-maker to select a particular course of action that optimizes
the expected payoff, without any additional information. Expected value of perfect information (EVPI)
represents the maximum amount of money required to pay for getting additional information about the
occurrence of various states of nature before arriving to a decision. Mathematically, it is stated as:
EVPI = (Expected profit with perfect information)
– (Expected profit without perfect information)
m
= ∑ pi max(
j
pij ) – EMV*
i =1
where pij = best payoff when action, Sj is taken in the presence of state of nature, Ni
p i = probability of state of nature, Ni
EMV* = maximum expected monetary value
Example 11.10 A company needs to increase its production beyond its existing capacity. It has
narrowed down on two alternatives in order to increase the production capacity: (a) expansion, at a cost
of Rs 8 million, or (b) modernization at a cost of Rs 5 million. Both approaches would require the same
amount of time for implementation. Management believes that over the required payback period, demand
will either be high or moderate. Since high demand is considered to be somewhat less likely than moderate
demand, the probability of high demand has been set at 0.35. If the demand is high, expansion would gross
an estimated additional Rs 12 million but modernization would only gross an additional Rs 6 million, due
to lower maximum production capability. On the other hand, if the demand is moderate, the comparable
figures would be Rs 7 million for expansion and Rs 5 million for modernization.
EVPI provides an (a) Calculate the conditional profit in relation to various action-and-outcome combinations and states of
instant way to nature.
check whether (b) If the company wishes to maximize its expected monetary value (EMV), should it modernize or expand?
getting any (c) Calculate the EVPI.
additional information
might be worthwhile. (d) Construct the conditional opportunity loss table and also calculate EOL. [Delhi Univ, MBA, 2004]
Solution (a) States of nature: High demand and Moderate demand, and Courses of action: Expand and
Modernize.
Since probability of high demand is estimated at 0.35, the probability of moderate demand must be
(1 – 0.35) = 0.65. The calculations for conditional profit values are shown in Table 11.10.
State of Nature Conditional Profit (million Rs) due to

(Demand) Course of Action
Expand (S1) Modernize (S2)

Table 11.10
Conditional Profit High demand (N1) 12 – 8 = 4 6 – 5 = 1
Table Moderate demand (N2) 7 – 8 = –1 5 – 5 = 0
(b) The payoff table (Table 11.10) can be rewritten as follows along with the given probabilities of states
of nature.
State of Nature Probability Conditional Profit (million Rs)
(Demand) Due to Course of Action
Expand Modernize
Table 11.11 High demand 0.35 4 1

Payoff Table Moderate demand 0.65 –1 0
The calculation of EMV for each course of action S1 and S2 is given below:
EMV(S1) = 0.35(4) + 0.65( – 1) = Rs 0.75 million
EMV(S2) = 0.35(1) + 0.65(0) = Rs 0.35 million
Since EMV (S1) = 0.75 million is maximum, the company must choose course of action S1(expand).
(c) To calculate EVPI, first calculate EPPI by choosing optimal course of action for each state of nature.
Multiply conditional profit associated with each course of action by the given probability to get weighted
profit, and then add these weights as shown in Table 11.12.
State of Nature Probability Optimal Course Profit from Optimal Course of Action
(Demand) of Action (Rs million)
Conditional Profit Weighted Profit
High demand 0.35 S1 4 4 × 0.35 = 1.40

Moderate demand 0.65 S2 0 0 × 0.65 = 0
Table 11.12 EPPI = 1.40
If optimal EMV* = Rs 0.75 million corresponding to the course of action S1, then
EVPI = EPPI – EMV(S1) = 1.40 – 0.75 = Rs 0.65 million.
In other words, to get perfect information on demand pattern (high or moderate), company should consider
paying up to Rs 0.65 million.
(d) The opportunity loss values are shown in Table 11.13.
State of Nature Probability Conditional Profit Conditional Opportunity

(Demand) (Rs million) Due to Loss (Rs million) Due to
Course of Action Course of Action
S1 S2 S1 S2
High demand (N1) 0.35 4 1 0 3

Moderate demand (N2) 0.65 –1 0 1 0 Table 11.13
Since probabilities associated with each state of nature, P (N1) = 0.35, and P(N2) = 0.65, the expected
opportunity losses for the two courses of action are:
EOL(S1) = 0.35(0) + 0.65(1) = Re 0.65 million
EOL(S2) = 0.35(3) + 0.65(0) = Rs 1.05 million
Since the expected opportunity loss, EOL (S1) = Re 0.65 million minimum, decision-maker must select
course of action S1, so as to have smallest expected opportunity loss.
Example 11.11 A certain piece of equipment has to be purchased for a construction project at a remote
location. This equipment contains an expensive part that is subject to random failure. Spares of this part
can be purchased at the same time the equipment is purchased. Their unit cost is Rs 1,500 and they have
no scrap value. If the part fails on the job and no spare is available, the part will have to be manufactured
on a special order basis. If this is required, the total cost including down time of the equipment, is estimated
at Rs 9,000 for each such occurrence. Based on previous experience with similar parts, the following
probability estimates of the number of failures expected over the duration of the project are provided below:
Failure : 0 1 2
Probability : 0.80 0.15 0.05
(a) Determine optimal EMV* and optimal number of spares to purchase initially.
(b) Based on opportunity losses, determine the optimal course of action and optimal value of EOL.
(c) Determine the expected profit with perfect information and expected value of perfect information.
Solution (a) Let N1 (no failure), N2 (one failure) and N3 (two failures) be the possible states of nature
(i.e. number of parts failures or number of spares required). Similarly, let S1 (no spare purchased), S2 (one
spare purchased) and S3 (two spares purchased) be the possible courses of action.
The conditional costs for each pair of course of action and state of nature is shown in Table 11.14.
State of Nature Course of Action Purchase Emergency Total Conditional

(Spare Required) (Number of Spare Purchased) Cost (Rs) Cost (Rs) Cost (Rs)
 0 0 0 0 0

N1  0 1 1,500 0 1,500

 0 2 3,000 0 3,000
 1 0 0 9,000 9,000

N2  1 1 1,500 0 1,500

 1 2 3,000 0 3,000
 2 0 0 18,000 18,000

N3  2 1 1,500 9,000 10,500
 Table 11.14
 2 2 3,000 0 3,000
Using the conditional costs and the probabilities of states of nature, the expected monetary value can
be calculated for each of three states of nature as shown in Table 11.15.
State of Nature Probability Conditional Cost Due to Weighted Cost Due to

(Space Required) Course of Action Course of Action
S1 S2 S3 S1 S2 S3
N1 0.80 0 1,500 3,000 0.80 (0) 1,200 2,400

= 0
N2 0.15 9,000 1,500 3,000 0.15 (9,000) 225 450
= 1,350
N3 0.05 18,000 10,500 3,000 0.05 (18,000)
Table 11.15
= 900 525 150
Expected
Monetary Value EMV = 2,250 1,950 3,000
Since weighted cost = Rs 1,950 is lowest due to course of action, S2, it should be chosen. If the EMV
is expressed in terms of profit, then EMV* = EMV(S2) = – Rs 1,950. Hence, the optimal number of spares
to be purchased initially should be one.
(b) The calculations for conditional opportunity loss (COL) to determine EOL are shown in Table 11.16.
State of Nature Conditional Cost Due to Conditional Opportunity Loss Due to
(Space Required) Course of Action Course of Action
S1 S2 S3 S1 S2 S3
Table 11.16
Conditional N1 0 1,500 3,000 0 1,500 3,000
Opportunity Loss N2 9,000 1,500 3,000 7,500 0 1,500
(COL) N3 18,000 10,500 3,000 15,000 7,500 0
Since we are dealing with conditional costs rather than conditional profits, the lower value for each
state of nature shall be considered for calculating opportunity losses. The calculations for expected
opportunity loss are shown in Table 11.17.
State of Nature Probability Conditional Opportunity Weighted Opportunity
(Space Required) Loss (Cost) Due to Loss (Cost) Due to
Course of Action Course of Action
S1 S2 S3 S1 S2 S3
N1 0.80 0 1,500 3,000 0.80(0) 1,200 2,400

= 0
N2 0.15 7,500 0 1,500 0.15 (7,500) 0 225
Table 11.17 = 1,125
Expected N3 0.05 15,000 7,500 0 0.05 (15,000) 375 0
Opportunity Loss = 750
(EOL) EMV = 1,875 1,575 2,625
Since minimum, EOL* = EOL(S2) = Rs 1,575, therefore adopt course of action S2 and purchase one spare.
(c) The expected profit with perfect information (EPPI) can be determined by selecting the optimal course
of action for each state of nature, multiplying its conditional values by the corresponding probability and
then adding these products. The EPPI calculations are shown in Table 11.18.
States of Probability Optimal Course Cost of Optimal Course of Action (Rs)

Nature of Action
Conditional Weighted
(Space Cost Opportunity Loss
Required) (Minimum Value)
N1 0.80 S1 0 0.80(0) = 0
N2 0.15 S2 1,500 0.15 (1,500) = 225
N2 0.05 S3 3,000 0.05 (3,000) = 150
Table 11.18 Total = 375
Thus expected profit with perfect information is, EPPI = Rs 375. Expected value of perfect information then
is: EVPI = EPPI – EMV* = – 375 – (– 1,950) = Rs 1,575. It may be observed that, EVPI = EOL* = Rs 1,575
Example 11.12 XYZ Company manufactures parts for passenger cars and sells them in lots of 10,000
parts each. The company has a policy of inspecting each lot before it is actually shipped to the retailer.
Five inspection categories, established for quality control, represent the percentage of defective items
contained in each lot. These are given in the following table. The daily inspection chart for past 100
inspections shows the following rating or breakdown inspection: Due to this the management is considering
two possible courses of action:
(i) S1: Shut down the entire plant operations and thoroughly inspect each machine.
Rating Proportion of Frequency

Defective Items
Excellent (A) 0.02 25
Good (B) 0.05 30
Acceptable (C) 0.10 20
Fair (D) 0.15 20
Poor (E) 0.20 5
Total = 100
(ii) S2 : Continue production as it now exists but offer the customer a refund for defective items that
S2 : are discovered and subsequently returned.
The first alternative will cost Rs 600 while the second alternative will cost the company Re 1 for each
defective item that is returned. What is the optimum decision for the company? Find the EVPI.
Solution Calculations of inspection and refund cost are shown in Table 11.19.
Rating Defective Probability Cost Opportunity Loss

Rate Inspect Refund Inspect Refund
A 0.02 0.25 600 200 400 0

B 0.05 0.30 600 500 100 0
C 0.10 0.20 600 1,000 0 400
D 0.15 0.20 600 1,500 0 900
Table 11.19
E 0.20 0.05 600 2,000 0 1,400
Inspection and
1.00 600* 670 EOL = 170* 240 Refund Cost
The cost of refund is calculated as follows:

For lot A : 10,000 × 0.02 × 1.00 = Rs 200
Similarly, the cost of refund for other lots is calculated.
Expected cost of refund is:
200 × 0.25 + 500 × 0.30 + . . . + 2,000 × 0.05 = Rs 670
Expected cost of inspection is:
600 × 0.25 + 600 × 0.30 + . . . + 600 × 0.05 = Rs 600
Since the cost of refund is more than the cost of inspection, the plant should be shut down for
inspection. Also, EVPI = EOL of inspection = Rs 170.
Example 11.13 A toy manufacturer is considering a project of manufacturing a dancing doll with three
different movement designs. The doll will be sold at an average of Rs 10. The first movement design using
‘gears and levels’ will provide the lowest tooling and set up cost of Rs 1,00,000 and Rs 5 per unit of
variable cost. A second design with spring action will have a fixed cost of Rs 1,60,000 and variable cost
of Rs 4 per unit. Yet another design with weights and pulleys will have a fixed cost of Rs 3,00,000
and variable cost Rs 3 per unit. The demand events that can occur for the doll and the probability of their
occurrence is given below:
Demand (units) Probability

Light demand 25,000 0.10
Moderate demand 1,00,000 0.70
Heavy demand 1,50,000 0.20
(a) Construct a payoff table for the above project.
(b) Which is the optimum design?
(c) How much can the decision-maker afford to pay in order to obtain perfect information about the demand?
Solution The calculations for EMV are shown in Table 11.20.
Payoff = (Demand × Selling price) – (Fixed cost + Demand × Variable cost)
= Revenue – Total variable cost – Fixed cost
States of Probability Conditional Payoff (Rs) Due to Expected Payoff (Rs) Due to
(Demand) (Choice of Movements)
Gears and Spring Weights Gears and Spring Weights
Levels Action and Pulleys Levels Action and Pulleys
Light 0.10 25,000 – 10,000 – 1,25,000 2,500 – 1,000 – 12,500

Moderate 0.70 4,00,000 4,40,000 4,00,000 2,80,000 3,08,000 2,80,000
Table 11.20 Heavy 0.20 6,50,000 7,40,000 7,50,000 1,30,000 1,48,000 1,50,000
EMV and Payoff
Values EMV 4,12,500 4,55,000 4,17,500
Since EMV is largest for spring action, it is the one that must be selected.
States of Probability Courses of Action

Nature Gears and Spring Weights Maximum Maximum Payoff
(Demand) Levels Action and Pulleys Payoff × Probability
Light 0.10 25,000 – 10,000 – 1,25,000 25,000 2,500

Table 11.21 Moderate 0.70 4,00,000 4,40,000 4,00,000 4,40,000 3,08,000
Expected Payoff
Heavy 0.20 6,50,000 7,40,000 7,50,000 7,50,000 1,50,000
with Perfect
Information Total = 4,60,500
The maximum amount of money that the decision-maker would be willing to pay in order to obtain
perfect information regarding demand for the doll will be
EVPI = Expected payoff with perfect information – Expected payoff under uncertainty (EMV)
= 4,60,500 – 4,55,000 = Rs 5,500
Example 11.14 A TV dealer finds that the cost of holding a TV in stock for a week is Rs. 50. Customers who
cannot obtain new TV sets immediately tend to go to other dealers and he estimates that for every customer
who cannot get immediate delivery he loses an average of Rs. 200. For one particular model of TV the probabilities
of demand of 0, 1, 2, 3, 4 and 5 TV sets in a week are 0.05, 0.10, 0.20, 0.30, 0.20 and 0.15, respectively.
(a) How many televisions per week should the dealer order? Assume that there is no time lag between ordering
and delivery.
(b) Compute EVPI.
(c) The dealer is thinking of spending on a small market survey to obtain additional information regarding the
demand levels. How much should he be willing to spend on such a survey. [Delhi Univ., MBA, 2000]
Solution If D denotes the demand and S the number of televisions stored (ordered), then the conditional
cost values are computed and are shown in Table 15.22.
50S + 200 ( D − S ) , when D ≥ S
Cost function = 
50 D + 50 ( S − D ) , when D < S
State of Nature Probability Conditional Cost (Rs.)

(Demand) Course of Action (Stock)
0 1 2 3 4 5
0 0.05 0 50 100 150 200 250
1 0.10 200 50 100 150 200 250
2 0.20 400 250 100 150 200 250
3 0.30 600 450 300 150 200 250
4 0.20 800 650 500 350 200 250
5 0.15 1000 850 700 550 400 250 Table 11.22
Expected Cost
Expected Cost = 590 450 330 250 230 250
State of Nature Probability Minimum Cost Expected Cost for

(Demand) for Perfect Information Perfect Information
(1) (2) (3) = (1) × (2)
0 0.05 0 0
1 0.10 50 5
2 0.20 100 20
3 0.30 150 45
4 0.20 200 40 Table 11.23
Expected Payoff
5 0.15 250 37.5
with perfect
ECPI = 147.5 Information
EVPI = Conditional Cost – ECPI = 230 – 147.5 = Rs. 82.5.

The pay-off for EMV is shown in Table 15.24
State of Nature Probability Conditioinal Payoff

(Demand) Course of Action (Stock)
0 1 2 3 4 5
0 0.05 0 – 50 – 100 – 150 – 200 – 250
1 0.10 0 150 100 50 0 – 50
2 0.20 0 150 300 250 200 150
3 0.30 0 150 300 450 400 350
4 0.20 0 150 300 450 600 550
Table 11.24
5 0.15 0 150 300 450 600 750
Computation of
EMV = 0 140 260 340 360 340 EMV
State of Nature Probability Payoff for Expected Payoff

(Demand) Perfect Information for Perfect Information
(1) (2) (3) = (1) × (2)
0 0.05 0 0
1 0.10 150 15
2 0.20 300 60
3 0.30 450 135
4 0.20 600 120
Table 11.25
5 0.15 750 112.5
Computation of
442.5 EPPI
The expected value of perfect information is given by

EVPI = EPPI – EMV* = 442.5 – 360 = Rs. 82.5.
(c) On the basis of the given data, the dealer should not be willing to spend more than Rs. 82.5 for the market
survey.
Example 11.15 XYZ company is considering issuing 1,00,000 shares to raise capital needed for expansion. It
is estimated that if the issues were made now, it would be fully taken up at a price of Rs. 30 per share. However, the
company is facing two crucial situations, both of which may influence the share price in the near future, namely:
(i) A wage dispute with tool room operators which could lead to a strike and have an adverse effect on the
share price.
(ii) The possibility of a substantial contract with a large company overseas which would increase the share
price.
The four possible outcomes and their expected effect on the company’s share prices are:
E1 : No strike and contract obtained–share price rises to Rs. 34.
E2 : Strike and contract obtained–share price stays at Rs. 30.
E3 : No strike and contract lost–share price raises to Rs. 32.
E4 : Strike and contract lost–share price falls to Rs. 16.
Management has identified three possible strategies that the company could adopt, namely
A1 : Issue 1,00,000 shares now
A2 : Issue 1,00,000 shares only after the outcomes of (i) and (ii) are known
A3 : Issue 5,00,000 shares now and 50,000 shares after the outcomes of (i) and (ii) are known.
(a) Determine the maximax solution. What alternative criterion might be used?
(b) It has been estimated that the probability of a strike is 55 per cent and that there is a 65 per cent chance
of getting the contract, these probabilities being independent. Determine the optimum policy for the
company using the criterion of maximizing expected pay-off.
(c) Determine the expected value of perfect information for the company.
Solution The payoff values are shown in Table 11.26
States of Probability Conditional Payoff (Rs. lakh) Conditional Loss (Rs. lakh)
Nature Alternative Strategy Alternative Strategy
A1 A2 A3 A1 A2 A3
E1 (1 – 0.55) × 0.65 = 0.2925 30 34 0.5 × 30 + 0.5 × 34 = 31 4 0 3
E2 0.55 × 0.65 = 0.3575 30 30 0.5 × 30 + 0.5 × 30 = 30 0 0 0
E3 (1 – 0.55)(1 – 0.65) = 0.1575 30 32 0.5 × 30 + 0.5 × 32 = 30.5 2 0 1.5
E4 0.55 × (1 – 0.65) = 0.1925 30 16 0.5 × 30 + 0.5 × 16 = 23 0 14 7
Table 11.26 Expected Values 30 34 31
A strategy with highest minimum (maximin) payoff (i.e. 30) is A1 and a strategy with highest (maximax) pay-
off (i.e. 34) is A2. Since highest pay-off of Rs. 30 lakh is obtained corresponding to strategy A1, the company
should adopt strategy A1.
(c) Calculations for expected value of the perfect information are shown in Table 15.27.
State of Nature Maximum Pay-off Probability Expected Pay-off with

Perfect Information
E1 34 0.2925 9.94
E2 30 0.3575 10.72
E3 32 0.1575 5.04
Table 11.27 E4 16 0.1925 5.78
EVPI
31.48
Hence, expected value of perfect information is : 31.48 – 30 = Rs. 1,48,000.

Example 11.16 A vegetable seller buys tomatoes for Rs. 45 a box and sells them for Rs. 80 per box. If the
box is not sold on the first selling day, it is worth Rs. 15 as salvage. The past records indicate that demand is
normally distriubuted, with a mean of 30 boxes daily and a standard deviation of 9 boxes. How many boxes
should he stock?
Solution The probability of selling at least one additional unit (box) to justify the stocking of additional unit
is given by
IL (45 − 15)
p= = = 30 = 0.462
IP + IL (80 − 45) + (45 − 15) 65
where Incremental loss (IL) = Cost price – Salvage price
Incremental profit (IP) = Selling price – Cost price
This implies that the vegetable seller must be 46.2 per cent sure
of selling at least one additional unit before he should pay to
stock an additional unit. The vegetable seller should stock
additional boxes until point A is reached. If more units are stocked,
then the probability will fall below 0.462.
Fig. 11.1
The point A is at 0.1 standard deviation to the right of the mean
x = 30. Since the standard deviation of the distribution of past
demand is 9 boxes, point A can be located as follows:
Point A = Mean + Standard deviation = 30 + 0.1 × 9 = 30.1 31 boxes
Hence, the fruit seller should stock 31 boxes.
Example 11.17 A stall at a certain railway station sells for Rs. 1.50 paise a copy of daily newspaper for
which it pays Rs. 1.20. Unsold papers are returned for a refund of Re. 0.95 a copy. Daily sales and corresponding
probabilities are as follows :
Daily sales : 500 600 700
Probability : 0.5 0.3 0.2
(a) How many copies should it order each day to get maximum expected profit?
(b) If unsold copies cannot be returned and are useless, what should be the optimal order each day? Use
increment analysis.
Solution Given that, Incremental profit (IP) = Rs. (1.50 – 1.20) = Re. 0.30
Incremental loss (IL) = Rs. (1.20 – 0.95) = Re. 0.25
The probability (p) of selling at least one additional copy of the newspaper to justify keeping that additional
copy of newspaper is:
IL 0.25
p= = = 0.45.
IP + IL 0.30 + 0.25
Thus to justify the ordering of an additional copy, there must be at least 0.45 cumulative probability of selling
that copy. Cumulative probabilities are computed below:
Daily sales : 500 600 700
Probability : 0.50 0.30 0.20
Comulative
probability : 1.00 0.50 0.20
Hence, the optimal order size is 600 copies.
(b) If unsold copies are non-refundable, then
IL 1.20 1.20
p= = = = 0.80
IP + IL 0.30 + 1.20 1.50
Hence, optimal order size is, 500 copies.
Example 11.18 The demand pattern of the cakes made in a bakery is as follows:
No. of cakes demanded : 0 1 2 3 4 5
Probability : 0.05 0.10 0.25 0.30 0.20 0.10
If the preparation cost is Rs 30 per unit and selling price is Rs 40 per unit, how many cakes should
the baker bake for maximizing his profit?
Solution Given that incremental cost (IC) to prepare a cake is Rs 30 per unit and incremental price (IP)
to sell a cake is Rs 40 per unit. The cumulative probability ( p) of selling at least an additional unit of cake
to justify the stocking of that additional unit of cake is given by
IC 30
p= = = 0.428
IC + IP 30 + 40
The cumulative probabilities of greater than type are computed as shown in Table 11.28.
Demand Probability Cumulative Probability

( No. of Cakes) P (Demand = k) P (Demand ≥ k)
0 0.05 1.00
1 0.10 0.95
2 0.25 0.85
3 0.30 0.60 ←
4 0.20 0.30
Table 11.28 5 0.10 0.10
Since P(demand ≥ k) that exceeds the critical ratio, p = 0.428 is k = 3 units of cake, the optimal decision
is to prepare only 3 cakes.
11.6 POSTERIOR PROBABILITIES AND BAYESIAN ANALYSIS

An initial probability statement to evaluate expected payoff is called a prior probability distribution, but
if the probability statement has been revised due to additional information, then such a probability
Posterior statement is called a posterior probability distribution.
probabilities are In this section we will discuss the method of computing posterior probabilities, given prior probabilities
the revised
probabilities of the
using Bayes’ theorem. The analysis of problems using posterior probabilities with new expected payoffs
states of nature and additional information, is called prior-posterior analysis.
obtained after
conducting a test to Baye’s Theorem Statement
improve the prior
probabilities of Let A1, A2, . . ., An be mutually exclusive and collectively exhaustive outcomes. Their probabilities P(A1),
respective nature. P(A2), . . ., P(An) are known. There is an experimental outcome B for which the conditional probabilities
P(B | A1), P(B | A2), . . ., P(B | An) are also known. Given the information that outcome B has occurred, the
revised conditional probabilities of outcomes Ai, i.e. P(Ai | B), i = 1, 2, . . ., n are determined by using the
following relationship:
P ( Ai and B ) P ( Ai ∩ B ) P ( Ai ) P ( B | Ai )
P ( Ai | B ) = = =
P( B) P( B) P( B)
n
where P( B) = ∑ P( Ai ) P( B | Ai )
i =1
Since each joint probability can be expressed as the product of a known marginal (prior) and conditional
probability, i.e., P ( Ai ∩ B ) = P ( Ai ) × P ( B | Ai )
Example 11.19 A company is considering to introduce a new product to its existing product range. It
has defined two levels of sales as ‘high’ and ‘low’ on which it wants to base its decision and has estimated
Baye’s decision the changes that each market level will occur, together with their costs and consequent profits or losses.
rule uses the prior This information is summarized below:
probabilities to
determine the States of Nature Probability Courses of Action
expected payoff for
each decision Market the Product Do not Market the
alternatives and (Rs ’000) Product (Rs ’000)
then chooses the
one with the largest High sales 0.3 150 0
expected payoff. Low sales 0.7 – 40 0
The company’s marketing manager suggests that a market research survey may be undertaken to
provide further information on which the company should base its decision. Based on the company’s past

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Assignment Problem 319

1 41 72 39 52 25 Route 1 Route 2 Route 3 Route 4

HINTS AND ANSWERS

1. A – III, B – V, C – I, D – IV, E – II; 6. 1 – B, 2 – C, 3 – D, 4 – A ; 1 – C, 2 – D, 3 – B, 4 – A;

10.4 VARIATIONS OF THE ASSIGNMENT PROBLEM

10.4.2 Maximization Case in Assignment Problem

(a) I II III IV (b) I II III IV

(a) I II III IV (b) I II III IV

Salesman Territory Sales (Rs) Salesman Territory Sales (Rs)

10.4.3 Unbalanced Assignment Problem

10.4.4 Restrictions on Assignments

Machine Location Cost (in ’000 Rs)

Cost of Repairs (Rs in lakh)

Road Contractor Cost (Rs in lakh)

SELF PRACTICE PROBLEMS B

• Chandru swims all styles: back 1 : 10, butterfly 1 : 12, free

HINTS AND ANSWERS

10.5 A TYPICAL ASSIGNMENT PROBLEM

The total minimum layover cost is 308 + 758 = 1,066 units.

10.6 TRAVELLING SALESMAN PROBLEM

The objective function is then

Vendor A 1.5 – 0.5 0 0.5

From Vendor B 0 0.5 – 1 0

Vendor C 2 0 1 – 1.5 Table 10.31

Vendor A 1.5 – 0.5 0 0.5

From Vendor B 0 0.5 – 1 0

SELF PRACTICE PROBLEMS C

7. A salesman has to visit five cities A, B, C, D and E. The To City

HINTS AND ANSWERS

CHAPTER CONCEPTS QUIZ

Case 10.1: Shreya & Sons

Product Quantity (in units)

Case 10.2: City Corporation

Case 10.3: Kamal Transport

06.00 a 12.00 11.30 1 05.30

APPENDIX: IMPORTANT RESULTS AND THEOREMS

After studying this chapter, you should be able to

11.2 STEPS OF DECISION-MAKING PROCESS

3. Identify all the courses of action available to the decision-maker.

The likely demand (units) of the products is given below:

Product Type Alternative Demand (in ’000 Rs)

11.3 TYPES OF DECISION-MAKING ENVIRONMENTS

Type 2 Decision-Making under Risk

Type 3 Decision-Making under Uncertainty

11.4 DECISION-MAKING UNDER UNCERTAINTY

11.4.1 Optimism (Maximax or Minimin) Criterion

11.4.4 Coefficient of Optimism (Hurwicz) Criterion

11.4.5 Regret (Savage) Criterion

S1 7,00,000 3,00,000 1,50,000

Which strategy should the concerned executive choose on the basis of

Solution The payoff matrix is rewritten as follows:

N1 7,00,000 5,00,000 3,00,000

N1 7,00,000 5,00,000 3,00,000

Column (maximum) 7,00,000 5,00,000 3,00,000

N1 7,00,000 – 7,00,000 7,00,000 – 5,00,000 7,00,000 – 3,00,000

Column (maximum) 1,50,000 3,00,000 4,00,000

Strategy Expected Return (Rs)

S1 (7,00,000 + 3,00,000 + 1,50,000)/3 = 3,83,333.33 ← Largest Payoff

States of Nature Courses of Action

N1 (Price of X increases) – 3,000 – 4,000