# Risk and Uncertainty Example 2 (part a)

Please note, page numbers in this lecture are different from page numbers in the P5 course notes!

### Problems with notes or lectures?

1. Dear Tutor,

This is with regard to the probability values used in question b(i) expected value of example 1 in chapter 7 (Risk and Uncertainity, P5 Opentuition Course notes).

In the calculation of the expected values for the above example, we know that in some cases the demand cannot be met due to limited capacity. With a given maximum capacity of 1200 units, our fixed contract units and demand must be equal or less than 1200 units.
Therefore, with a fixed contract of 800 units, a demand of 400 units can only be met. Other levels of demand cannot be met as it exceeds the capacity.
Similarly, with a fixed contract of 700, a demand of 700 (i.e 700+700=1400 > 1200) and demand 900 units can not be met; and with a fixed contract of 500 units, a demand of 900 units cannot be met.

1) How is the expected value of 4,400 been arrived at (with fixed contract of 800 units and demand of 400 units) given the probability in the question is 0.2 for a demand of 400 units ? Should the expected value not be 880 (i.e 4400 x 0.2) instead of 4,400 (4,400 x 1). If the probability is taken as 1, would it not mean that the outcome is certain?

2) Similarly in the case of a fixed contract of 700 units, the probability of 500 units of demand is taken as 0.8 when the question clearly states 0.3. Can you please explain how the probability can be changed (when the levels of demand are not met due to limited capacity) though the question clearly gives the probability for the level of demand?

Thank you.

• Yes. Can the lecturer please clarify. As we are applying the probability to the demand not the contract. If we take the contract and thereby reducing our available supply to normal demand, what probability do we apply or does it not matter?

• 1) Since the contribution will be 4400 whatever happens, the expected value is 4400!! If you prefer it with probabilities (although you really should not need to), it is as follows:
(0.2 x 4400) + (0.3 x 4400) + (0.4 x 4400) + (0.1 x 4400) = 4400

2) Of course the probability has not changed. Using the same logic as in (1) it is rather quicker to take 4,600 x 0.8 instead of (4600 x 0.3) + (4600 x 0.4) + (4600 x 0.1), which will give exactly the same answer. For the exam of course it does not matter – whichever you are more comfortable with, since it gives the same answer.

(One think that you might not realise (I cannot be sure from your question) is that if normal demand cannot be met in full, we at least assume that we sell to them what we can. The lecture does make this clear)

• Dear Mr. John Moffat,
It has been made clear that:
1) Where the demand + fixed contract size = or than the maximum capacity, the enterprise will go on produce to its maximum capacity to meet as much of the demand as it can. Therefore, when the contract size is 800 and the demand is 900, the factory will go ahead to produce its maximum capacity less the fixed contract size i.e (1200 – 800 = 400).
Once again, thank you very much.

2. Am watching this lecture on my iPad…..but at 24.11 mins the lecture stops…..I have tried to play again at that point but won’t play…..is there anyone else having this problem……was in the middle of the example point b…..thanks

• I cannot see the lecture on my iPad at all

3. I am trying to listen P5 video lectures on Ipad, but cant get to them.
Anyone to assist

• Lectures work fine on the iPad
No idea why they don’t load for you

5. WRT – to the initial Expected value table, should we apply the probablity on the demand and keep the contract profit fixed, would that be a problem.

For e.g, 300*3 = 900 + 400 = 1300, instead of 580?

• I agree with the above comment. The probabilities are given for the normal demand, not contract.

6. Thank you

7. thanks alot

9. No video sight !!!!!!!

10. lovely video, very clear and useful

11. me like!

12. I have really found your tuition very useful. I am not able to listen to the lecture notes under chapter 7 Risk and uncertainty example 2a

try another time, when you internet works better?

14. explained well

15. Really enjoyed thanks

16. No video, what a waste of time.

• @ asifraza Video works fine!

I’m sorry you have a problem, but you can only blame your PC!! Please visit the support page for help: http://opentuition.com/support/

and if one click to view a lecture is a waste of time, then think, what a waste of time it is for admin, to actually, read your comment, check if video works, and reply to your wasting time comment….