Question

Even though independent gasoline stations have been having a difficult time, lan Langella has been thinking about starting his own independent gasoline station. Ian's problem is to decide how large his station should be. The annual returns will depend on both the size of his station and a number of marketing factors related to the oil industry and demand for gasoline. After a careful analysis, lan developed the following table: 

States of Nature

Size of First Station	Good Market	Fair Market	Poor Market
Small	$60,000	$21,000	-$12,000
Medium	$70,000	$32,000	-$18,000
Large	$95,000	$32,500	-$42,000
Very Large	$280,000	$24,000	-$150,000

For example, if lan constructs a small station and the market is good, he will realize a profit of $60,000. 

This exercise contains only parts b, c, and d. 

b) Using the decision making under uncertainty with the criterion of Maximax 

The appropriate decision will be _______ 

Answer 1

The appropriate decision will be Very Large

Maximax criterion considers the maximum of all maximum returns. This considers only the alternative with highest possible return. So, the best alternative with maximum returns are the appropriate decision.

The maximum yields of the stations based on the situation needs to be picked.

Among that, maximum value need to be chosen to choose an alternative.

In this scenario, Large size of first station yields maximum benefit of $280000

Size of first station	Good market	Fair market	Poor market	Maximum
Small	$60,000	$21,000	-$12,000	$60,000
Medium	$70,000	$32,000	-$18,000	$70,000
Large	$95,000	$32,500	-$42,000	$95,000
Very Large	$28,0000	$24,000	-$150,000	$28,0000
			Maximax	$280000