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Choosing an alternative

A small building contractor has recently experienced two successive years in which work opportunities exceed the firm capacity. The contractor must now make a decision on capacity for next year. Estimated profits under each of the two possible states of nature are as shown in the table below.

Which alternative should be selected if decision criteria are...????

a) Maximax?
b) Maximin?
c) Laplace?
d) Minimax regret?

next year demand
Alternative low high

Do nothing 50 60
Expand 20 80
Subcontract 40 70

(profit in thousands)

Solution Preview

Please refer attached file/s for better clarity of tables.

a) Maximax?

Let us find maximum profit in case of each alternative.
Alternatives Next Year Demand
Low High Maximum Profit
Do nothing 50 60 60
Expand 20 80 80
subcontract 40 70 70

We find that maximum of maximum payoffs from is 80 thousand.
So, decision should be Expand.

b) Maximin?
Let us find minimum profit in case of each alternative.

Alternatives ...

Solution Summary

Solution describes the steps to choose an alternative based upon given decision criteria.