SEATWORK

1. Accounts receivable have been grouped into the following states:

State 1: Paid
State 2: Bad debt
State 3: 0-30 days old
State 4: 31-60 days old

Sixty percent of all new bills are paid before they are 30 days old. The remainder of these go to state 4.
Seventy percent of all 30 day old bills are paid before they become 60 days old. If not paid, they are
permanently classified as bad debts.
a. Set up the one month Markov transition matrix.
b. What is the probability that an account in state 3 will be paid?

2. The medical prognosis for a patient with a certain disease is to recover, to die, to exhibit symptom 1, or
to exhibit symptom 2. The matrix of transition probabilities is

Recover Die S1 S2
Recover 1 0 0 0
Die 0 1 0 0
S1 1/4 1/4 1/3 1/6
S2 1/4 1/8 1/8 1/2

a. What are the absorbing states?

b. What is the probability that a patient with symptom 2 will recover?

3. A recent study done by an economist for the Small Business Administration investigated failures of
small business. Failures were either classified as due to poor financing, poor management, or a poor product.
The failure rates differed for new businesses (under one year old) versus established businesses (over one year
old.)

As the result of the economist's study, the following probabilities were determined. For new businesses the
probability of failure due to financing was .15, due to management .20, and due to product .05. The
corresponding probabilities for established businesses were .10, .06, and .03 respectively.
a. Determine a five-state Markov Chain transition matrix with states for new, established,
and each of the three failure states. Write it in the form of I, O, R, and Q submatrices.
b. Determine the probability that a new business will survive during the next three years.
c. What proportion of new businesses eventually fail due to:
(1) poor financing? (2) poor management? (3) poor product?

4. On any particular day an individual can take one of two routes to work. Route A has a 25% chance of
being congested, whereas route B has a 40% chance of being congested.

The probability of the individual taking a particular route depends on his previous day's experience. If one day
he takes route A and it is not congested, he will take route A again the next day with probability .8. If it is
congested, he will take route B the next day with probability .7.

On the other hand, if on a day he takes route B and it is not congested, he will take route B again the next day
with probability .9. Similarly if route B is congested, he will take route A the next day with probability .6.
a. Construct the transition matrix for this problem. (HINT: There are 4 states corresponding
to the route taken and the congestion. The transition probabilities are products of the
independent probabilities of congestion and next day choice.)
b. What is the long-run proportion of time that route A is taken?

5. Henry, a persistent salesman, calls North's Hardware Store once a week hoping to speak with the
store's buying agent, Shirley. If Shirley does not accept Henry's call this week, the probability she will do the
same next week is .35. On the other hand, if she accepts Henry's call this week, the probability she will not do
so next week is .20.
a. Construct the transition matrix for this problem.
b. How many times per year can Henry expect to talk to Shirley?
c. What is the probability Shirley will accept Henry's next two calls if she does not accept
his call this week?
d. What is the probability of Shirley accepting exactly one of Henry's next two calls if she
accepts his call this week?

6. Rent-To-Keep rents household furnishings by the month. At the end of a rental month a customer can:
a) rent the item for another month, b) buy the item, or c) return the item. The matrix below describes the
month-to-month transition probabilities for 52-inch LED televisions the shop stocks.

Next Month
Rent Buy Return
Rent .72 .10 .18

This Buy 0 1 0
Month
Return 0 0 1

What is the probability that a customer who rented a TV this month will eventually buy it?

7. Joe Ferris, a stock trader at the brokerage firm of Smith, Jones, Johnson, and Thomas, Inc. has noticed that
price changes in the shares of Dollar Department Stores at each trade are dependent upon the previous trade's
price change. His observations can be summarized by the following transition matrix.

Current Next Price Change

Price Change +1/8 0 -1/8
+1/8 .7 .2 .1
0 .3 .4 .3
-1/8 .2 .1 .7

a. What is the long-run average change in the value of a share of Dollar Department Stores' stock per trade?
b. If the shares of Dollar Department Stores are currently traded at $18 and the last trade was at 17 7/8, what is
the probability the shares will sell at 18 in two trades?

8. Joe Isley, the owner of Big I HiFi, believes that the store's inventory can be modeled as a Markov
process. If items are either classified as in stock, out of stock, discontinued from stock or put on clearance
sale, then the following transition matrix has been estimated:

NEXT MONTH
THIS MONTH In Stock Out of Stock Discontinued Clearance Sale
In Stock .67 .20 .05 .08
Out of Stock .48 .42 .10 0
Discontinued 0 0 1 0
Clearance Sale 0 0 0 1

a. Rewrite the transition matrix for the problem in the form of I, O, R, and Q submatrices.
b. Compute the fundamental matrix for this problem.
c. What is the probability of an item currently in stock being out of stock in two months?
d. What is the probability of an item currently out of stock eventually being discontinued from stock?

9. The vice president of personnel at Jetair Aerospace has noticed that yearly shifts in personnel can be
modeled by a Markov process. The transition matrix is:

NEXT YEAR
CURRENT YEAR Same Position Promotion Retire Quit Fired
Same Position .55 .10 .05 .20 .10
Promotion .70 .20 0 .10 0
Retire 0 0 1 0 0
Quit 0 0 0 1 0
Fired 0 0 0 0 1

a. Write the transition matrix in the form of I, O, R, and Q submatrices.

b. Compute the fundamental matrix, N, for this problem.
c. What is the probability of an employee who was just promoted eventually retiring? Quitting? Being fired?

10. The evening television news broadcast that individuals view on one evening is influenced by which
broadcast they viewed previously. An executive at the C network has determined the following transition
probability matrix describing this phenomenon.

CURRENT NETWORK NEXT NETWORK NEWS WATCHED

NEWS WATCHED A C N
A .80 .12 .08
C .08 .85 .07
N .08 .09 .83

a. Which network has the most loyal viewers?

b. What are the three networks' long-run market shares?
c. Suppose each of the three networks earns $1,250 in daily profit from advertising revenue for each
1,000,000 viewers it has. If on the average 40,000,000 people watch the evening television news, compute the
long run average daily profit each network generates from its evening news broadcast.

11. Southside College has modeled its student loan program as a Markov process. Each year a student
with a prior loan borrows again, defers repayment for a year, makes payments, pays the loan balance in full, or
defaults on repayment. The transition matrix is as follows:

NEXT YEAR
THIS YEAR Borrowing Deferring Paying Paid-Off Default
Borrowing .60 .30 0 .10 0
Deferring .15 0 .65 .10 .10
Paying 0 0 .75 .15 .10
Paid-Off 0 0 0 1 0
Defaulted 0 0 0 0 1

a. If currently a student is making payments on his/her loan, what is the probability the loan will be paid in full
eventually?
b. Is the probability of eventually defaulting greater for a student who is currently borrowing more or a student
who is making payments?
c. What is the probability a student who is borrowing this year will repay the loan balance in full in two years
or less?