Decision Support System CSE5DSS

Running Head: DECISION SUPPORT SYSTEM
CSE5DSS – Decision Support System
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1DECISION SUPPORT SYSTEM
Table of Contents
Problem 1.........................................................................................................................................3
Part a: Llya Decision: Risk Taker............................................................................................3
Part B: Gregor Decision: Risk Averse.....................................................................................4
Part c: Expected Values...............................................................................................................4
Part d: Return for Strategy 1 and Strategy 2................................................................................4
Part e: Range of values................................................................................................................5
Problem 2.........................................................................................................................................6
Problem 3.........................................................................................................................................7
Part a............................................................................................................................................7
Part b (i): Re-order point 3; re-order quantity 3..........................................................................7
Part b (ii): Re-order point 7; re-order quantity 7.........................................................................7
Part c............................................................................................................................................7
Problem 4.........................................................................................................................................8
Part 1............................................................................................................................................8
Part 2..........................................................................................................................................12
Problem 5.......................................................................................................................................19
Problem 6.......................................................................................................................................21
Preliminary questions................................................................................................................21
Task 1.........................................................................................................................................21

2DECISION SUPPORT SYSTEM
I. Logistic Regression............................................................................................................21
Part a: Confusion Matrix...........................................................................................................21
Part b: ROC Curve.....................................................................................................................21
Part c: Area under ROC Curve..................................................................................................22
II. Naïve Bayes Model.........................................................................................................22
Part a: Confusion Matrix...........................................................................................................22
Part b: ROC Curve.....................................................................................................................22
Part c: Area under ROC Curve..................................................................................................23
Task 2.........................................................................................................................................23
Lift Chart for Logistic Regression Model.................................................................................23
Lift Chart for Naïve Bayes Model.............................................................................................24
Conclusion.................................................................................................................................25

3DECISION SUPPORT SYSTEM
Problem 1
The completion from studies in IT and business, two friends prefer on starting a consultancy
firm. However, just like any business, they need an office space but as it is very expensive and
this may affect their business. They plan defining three strategies that can give them an idea to
start up a business.
First Strategy – Rent an office at a prime location, where many customers are prevalent.
Favourable Market Unfavourable Market
Good profit for the business; despite the costly
office space
Net profit of $20,000 (2 years)
Less business, expecting less profit
Lose $16,000.
Second Strategy – Rent an office at a suburb, which is less expensive
Favourable Market Unfavourable Market
Comparatively good profit for the business
Net profit of $15,000
Less business, expecting less profit
Lose $6,000.
Third Strategy – Not set up the business
Favourable Market Unfavourable Market
No business at all
Profit/ Loss $0
No business at all
Profit/ Loss $0.
Lastly, both friends have different outlook as Ilya is risk taker and Gregor is risk averser.

4DECISION SUPPORT SYSTEM
Part a: Llya Decision: Risk Taker
Being a risk taker, she would prefer strategy 1 and is optimistic towards taking this business to a
new level. She would want the profit to maximize out of the three strategies.
LIlya Decision
Favourable Unfavourable Optimum Profit / Loss
S1 $20,000 $16,000 $20,000
S2 $15,000 $6,000 $15,000
S3 $0 $0 $0
Part B: Gregor Decision: Risk Averse
Being a risk averse, she would prefer strategy 3 as she is not interested in setting up the business.
She would want the profit to minimize out of the three strategies.
Gregor Decision
Favourable Unfavourable Optimum Profit / Loss
S1 $20,000 $16,000 $16,000
S2 $15,000 $6,000 $6,000
S3 $0 $0 $0
Part c: Expected Values
As per the question, the chance of favourable market is 55% and that of unfavourable market is
45%. However, the greater expected values can be achieved from strategy 2
Expected Values
Favourable Unfavourable Expected Value
S1
20000*0.55 =
$11,000 16000*0.45 = $7,200 $3,800
S2 15000*0.55 = $8,250 6000*0.45 = $2,700 $5,550
S3 $0 $0 $0
(For expected values: please refer Problem 1 of excel sheet)

5DECISION SUPPORT SYSTEM
Part d: Return for Strategy 1 and Strategy 2
With the value of P (for 0 ≤ P ≤ 1), the returns for strategy 1 and strategy 2 is depicted through
the plot below.
Part e: Range of values
i. The expected return of Strategy 1 is greater than any strategy. Hence, this is when the
probability is higher than 0.67 in the favourable market.
Strategy 1 (0.67 ≤ P ≤ 1)
ii. The expected return of Strategy 2 is greater than others. Hence, this is when the
probability is between 0.29 and 0.66 in the favourable market.
Strategy 2 (0.29 ≤ P ≤ 0.66)
iii. The expected return of Strategy 3 is low such that other strategy loses. Hence, this is
when the probability is below 0.28 in the favourable market.