University of Tunis Fall 2022
Tunis Business School
Decision & Game Theory
Tutorial 2
Question 1
After graduating, a student is considering job alternatives. He is given a first offer of a team leader
from a reputed company with a total monthly salary of 1,200 TND. A second offer of a developer
is given from a newly established foreign company; in which he receives an initial basic monthly
salary of 400 TND. Moreover, he receives an annual compensation of 3000 TND for each product
that turns out to be “a breakthrough”, 1,000 TND out of each new product that turns out to be “a
success” and nothing out of products that turn out to be “flops”. The outcomes of each new product
have probabilities of 40%, 40%, and 20%, respectively. On the average, 7 new products are
developed each year. He can also launch his own company, as a third job alternative. In that case,
his expected annual profit is 25,000 TND, 6,000 TND or -3,000 TND with equal chances.
1. How appropriate is the expected value criterion for this problem?
2. What is the best job offer that maximizes his expected annual returns?
Question 2
TBS research team focusses on one of three research projects funded by H2020, Erasmus, and
World Bank, respectively. The time to submit a proposal is enough to no more than one project.
H2020 provides 250,000 TND at the end of the project period if it turns out to be a success. It is
believed that the team would make a good job in this project with 70% chance. Erasmus provides
80,000 TND to launch the project and perhaps another 50,000 TND if the project yields
satisfactory results. This may occur with 60% chance. The World Bank provides a sure 110,000
TND independently of the project outcomes.
1. What could be the objective of the TBS team in this problem?
2. Assume that the team is desperate to make some money to increase the self-financing of
the lab. Represent the problem through a decision tree and determine all relevant inputs.
3. How appropriate is the use of the EMV criterion to approach this problem?
4. Based on EMV, what is the research funding option that the TBS team should select?
Question 3
An investor has three investment plans. The first one yields a return of 10,000 TDN for sure. The
second may yield 22,000 TND with 40% chance, 14,000 TND with 25% chance and -10,000 TND
with 35% chance. The third plan consists on receiving 16,000 TND or 6,000 TND with equal
chances. If it is 16,000 TND, then he has the option to reinvest half the amount with a profit rate
of 40%, 10% or -25% of the invested money with equal chances. The investor wants to determine
which investment plan is the most rewarding.
1. Is it appropriate using the expected monetary value in this context?
2. Represent the problem through a decision tree and solve it.
3. Display the best investment plan
1
Question 4
A student, having an exam at 8:30 am, attempts to reach TBS from Ariana on time. He departs
from home at 7:55 am. At least, he should not come too late. If he takes the main (express) road he
may arrive in 30 minutes if the traffic is light. Often, during that period the traffic is heavy or even
terrible requiring 45 to 55 minutes of driving time. His driving experience led him to believe that
all three scenarios are equally likely. He may shift to use small roads in residential areas where the
traffic is really light. He must be lucky however to avoid long red lights. If so, he may arrive in 35
minutes. Otherwise, he may spend around one hour to arrive at TBS. It is believed that he is lucky
60% of the time. A third option would be to take Road X (in the opposite direction of the heavy
traffic) until reaching the new high-way of Sidi Hassine and use it to reach TBS. This option is risk
free. Nevertheless, it is a long way and requires 50 minutes.
1. What is an appropriate objective of the student in this situation?
2. Solve the problem using a decision tree and adopting the expected value criterion.
3. How appropriate the expected value for this specific problem? Justify.