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Brief Table of Contents

1

CHAPTER 1

D E C I S I O N A N A LY S I S

CHAPTER 2

FUNDAMENTALS OF DISCRETE PROBABILITY

CHAPTER 3

CONTINUOUS PROBABILITY DISTRIBUTIONS

A N D T H E I R A P P L I C AT I O N S

111

CHAPTER 4

S TAT I S T I C A L S A M P L I N G

147

CHAPTER 5

S I M U L AT I O N M O D E L I N G :
CONCEPTS AND PRACTICE

195

REGRESSION MODELS:
CONCEPTS AND PRACTICE

245

CHAPTER 7

L I N E A R O P T I M I Z AT I O N

323

CHAPTER 8

N O N L I N E A R O P T I M I Z AT I O N

411

CHAPTER 9

D I S C R E T E O P T I M I Z AT I O N

451

CHAPTER 10

I N T E G R AT I O N I N T H E A R T O F D E C I S I O N
MODELING

485

CHAPTER 6

49

APPENDIX

517

REFERENCES

521

INDEX

525

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Table of Contents
CHAPTER 1

D E C I S I O N A N A LY S I S

1
2

1.1

A Decision Tree Model and its Analysis

1.2

Summary of the General Method of Decision Analysis

16

1.3

Another Decision Tree Model and its Analysis

17

1.4

The Need for a Systematic Theory of Probability

30

1.5

Further Issues and Concluding Remarks on Decision Analysis

33

1.6

Case Modules
Kendall Crab and Lobster, Inc.
Buying a House
The Acquisition of DSOFT
National Realty Investment Corporation

35
35
38
38
39

1.7

Exercises

44

CHAPTER 2

FUNDAMENTALS OF DISCRETE PROBABILITY

49

2.1

Outcomes, Probabilities and Events

50

2.2

The Laws of Probability

51

2.3

Working with Probabilities and Probability Tables

54

2.4

Random Variables

65

2.5

Discrete Probability Distributions

66

2.6

The Binomial Distribution

67

2.7

Summary Measures of Probability Distributions

72

2.8

Linear Functions of a Random Variable

79

2.9

Covariance and Correlation

82

2.10 Joint Probability Distributions and Independence

86
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2.11 Sums of Two Random Variables

88

2.12 Some Advanced Methods in Probability*

91

2.13 Summary

96

2.14 Case Modules

Arizona Instrumentation, Inc. and the Economic
Development Board of Singapore
San Carlos Mud Slides
Graphic Corporation

97

100

2.15 Exercises

CHAPTER 3

97
98
99

CONTINUOUS PROBABILITY DISTRIBUTIONS

A N D T H E I R A P P L I C AT I O N S

111

3.1

Continuous Random Variables

111

3.2

The Probability Density Function

112

3.3

The Cumulative Distribution Function

115

3.4

The Normal Distribution

120

3.5

Computing Probabilities for the Normal Distribution

127

3.6

Sums of Normally Distributed Random Variables

132

3.7

The Central Limit Theorem

135

3.8

Summary

139

3.9

Exercises

139

CHAPTER 4

S TAT I S T I C A L S A M P L I N G

147

4.1

Random Samples

148

4.2

Statistics of a Random Sample

150

4.3

Confidence Intervals for the Mean, for Large Sample Size

161

4.4

The t-Distribution

165

4.5

Confidence Intervals for the Mean, for Small Sample Size

166

4.6

Estimation and Confidence Intervals for the Population Proportion

169

4.7

Experimental Design

174

4.8

Comparing Estimates of the Mean of Two Distributions

178

4.9

Comparing Estimates of the Population Proportion of Two Populations 180

4.10 Summary and Extensions

182

4.11 Case Modules

Consumer Convenience, Inc.

183
183

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POSIDON, Inc.
Housing Prices in Lexington, Massachusetts
Scallop Sampling

184
185
185
189

4.12 Exercises

CHAPTER 5

xvii

S I M U L AT I O N M O D E L I N G :
CONCEPTS AND PRACTICE

195

5.1

A Simple Problem: Operations at Conley Fisheries

196

5.2

Preliminary Analysis of Conley Fisheries

197

5.3

A Simulation Model of the Conley Fisheries Problem

199

5.4

Random Number Generators

201

5.5

Creating Numbers that Obey a Discrete Probability Distribution

203

5.6

Creating Numbers that Obey a Continuous Probability Distribution

205

5.7

Completing the Simulation Model of Conley Fisheries

211

5.8

Using the Sample Data for Analysis

213

5.9

Summary of Simulation Modeling, and Guidelines on the

Use of Simulation

217

5.10 Computer Software for Simulation Modeling

217

5.11 Typical Uses of Simulation Models

218

5.12 Case Modules

The Gentle Lentil Restaurant
To Hedge or not to Hedge?
Ontario Gateway
Casterbridge Bank

219
219
223
228
235

REGRESSION MODELS:
CONCEPTS AND PRACTICE

245

6.1

Prediction Based on Simple Linear Regression

246

6.2

Prediction Based on Multiple Linear Regression

253

6.3

Using Spreadsheet Software for Linear Regression

258

6.4

Interpretation of Computer Output of a Linear Regression Model

259

6.5

Sample Correlation and R2 in Simple Linear Regression

271

6.6

Validating the Regression Model

274

6.7

Warnings and Issues in Linear Regression Modeling

279

6.8

Regression Modeling Techniques

283

6.9

Illustration of the Regression Modeling Process

288

CHAPTER 6

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6.10 Summary and Conclusions

294

6.11 Case Modules

Predicting Heating Oil Consumption at OILPLUS
Executive Compensation
The Construction Department at CroqPain
Sloan Investors, Part I

295
295
297
299
306

6.12 Exercises

313

CHAPTER 7

L I N E A R O P T I M I Z AT I O N

323

7.1

Formulating a Management Problem as a Linear Optimization Model

324

7.2

Key Concepts and Definitions

332

7.3

Solution of a Linear Optimization Model

335

7.4

Creating and Solving a Linear Optimization Model in a Spreadsheet

347

7.5

Sensitivity Analysis and Shadow Prices on Constraints

354

7.6

Guidelines for Constructing and Using Linear Optimization Models

365

7.7

Linear Optimization Under Uncertainty*

367

7.8

A Brief Historical Sketch of the Development of Linear Optimization

374

7.9

Case Modules
Short-Run Manufacturing Problems at DEC
Sytech International
Filatoi Riuniti

375
375
380
389
397

7.10 Exercises

CHAPTER 8

8.1

N O N L I N E A R O P T I M I Z AT I O N

411

Formulating a Management Problem as a

Nonlinear Optimization Model

412

Graphical Analysis of Nonlinear Optimization

Models in Two Variables

420

8.3

Computer Solution of Nonlinear Optimization Problems

425

8.4

Shadow Prices Information in Nonlinear Optimization Models

428

8.5

A Closer Look at Portfolio Optimization

431

8.6

Taxonomy of the Solvability of Nonlinear Optimization Problems*

432

8.7

Case Modules
Endurance Investors
Capacity Investment, Marketing, and Production at ILG, Inc.

436
436
442

8.8

Exercises

444

8.2

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CHAPTER 9

9.1

D I S C R E T E O P T I M I Z AT I O N

Formulating a Management Problem as a

Discrete Optimization Model

xix

451
452

9.2

Graphical Analysis of Discrete Optimization Models in Two Variables 461

9.3

Computer Solution of Discrete Optimization Problems

464

9.4

The Branch-and-Bound Method for Solving

a Discrete Optimization Model*

468

9.5

Summary

471

9.6

Case Modules
International Industries, Inc.
Supply Chain Management at Dellmar, Inc.
The National Basketball Dream Team

471
471
474
476

9.7

Exercises

478

CHAPTER 10

I N T E G R AT I O N I N T H E A R T O F
DECISION MODELING

10.1 Management Science Models in the Airline Industry

485
486

10.2 Management Science Models in the Investment Management Industry 496

10.3 A Year in the Life of a Manufacturing Company

498

10.4 Summary

501

10.5 Case Modules

Sloan Investors, Part II
Revenue Management at Atlantic Air
A Strategic Alliance for the Lexington Laser Corporation
Yield of a Multi-step Manufacturing Process
Prediction of Yields in Manufacturing
Allocation of Production Personnel

502
502
503
508
510
512
513

APPENDIX

517

A.1 Cumulative Distribution Function of the Standard Normal

Distribution

518

A.2 The Value of c for a t-Distribution with k Degrees of Freedom

519

REFERENCES

521

INDEX

525

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