Adapted From Pearl 1988 Used Car Buyer Can Decide To

(Adapted from Pearl (1988)) A used-car buyer can decide to carry out various tests with various costs (e.g., kick the tires, take the car to a qualified mechanic) and then, depending on the outcome of the tests, decide which car to buy. We will assume that the buyer is deciding whether to buy car c, that there is time to carry out at most one test, and that t1 is the test of c1 and costs $50. A car can be in good shape (quality q+) or bad shape (quality q-), and the tests might help to indicate what shape the car is in. Car c1 costs $1,500, and its market value is $2,000 if it is in good shape; if not, $700 in repairs will be needed to make it in good shape. The buyer’s estimate is that c1 has a 70 chance of being in good shape.

a. Draw the decision network that represents this problem.

b. Calculate the expected net gain from buying cl, given no test.

c. Tests can be described by the probability that the car will pass or fail the test given that the car is in good or had shape. We have the following information:

P (pass (c1, t1) │q+ (c1)) = 0.8, P (pass (c1, t1) │q- (c1)) = 0.35. Use Bayes’ theorem to calculate the probability that the car will pass (or fail) its test and hence the probability that it is in good (or bad) shape given each possible test outcome.

d. Calculate the optimal decisions given either a pass or a fail, and their expected utilities.

e. Calculate the value of information of the test, and derive an optimal conditional plan for the buyer.

Posted in Uncategorized