Question

1) Given the following conditional value table, determine the appropriate decision under uncertainty using :

a) Maximax

b) Maximin

c) Equally likely

                                                                                               States of Nature

Alternatives	Very Favorable Market	Average Market	Unfavorable Market
Large Plant	$275,000	$100,000	-$150,000
Small Plant	$200,000	$60,000	-$10,000
Overtime	$100,000	$40,000	-$1000
Do Nothing	$0	$0	$0

Answer 1

Answer:

Maximax:

• Under maximax we choose alternative having the highest maximum payoff
• MAx payoffs:
  • Large plant = 275,000
  • Small plant = 200000
  • Overtime= 100000
  • Do nothing = 0
• Hence we will choose large plant in Mximax strategy with the max payoff of $275,000

Maximin:

• Under maximin we choose alternative having the highest minimum payoff
• Min payoffs:
  • Large plant = -150,000
  • Small plant = -10000
  • Overtime= -1000
  • Do nothing = 0
• Hence we will choose do nothing in Minimax strategy with min payoff of 0.

Equally, like:

• Under equally likely we choose alternative having the highest average payoff.
• average payoffs:
  • Large plant = (275,000+100000-150000)/3 = $75,000
  • Small plant = (200000+60000-10000)/3 = $50,000
  • Overtime= (100000+40000-1000)/3 =$46333.3
  • Do nothing = 0
• Hence we will choose large plant in Equally likely with average payoff of $75,000