Purchase Solution

Selecting the best alternative

Not what you're looking for?

Ask Custom Question

Consider a firm that is deciding whether to operate plants only in United States or also in either Mexico or Canada or both. Congress is currently discussing an overseas investment in new capital (OINC) tax credit for U.S. firms that operate plants outside the country. If congress passes OINC in 2011, management expects to do well if is operating plants in Mexico and Canada. If OINC does not pass in 2011 and the firm does operates plants in Mexico and Canada, it will incur rather large losses. It is also possible that Congress will table OINC in 2012 and wait until 2009 to vote on it. The profits pay off matrix (profits in 2011) is shown as under:
State of nature
OINC passes OINC falis OINC stalls
Operate plants in US only $10 million -$1 million $2 million
Operate plants in US and Mexico 15 million -4 million 1.5 million
Operate plants in US, Mexico and Canada 20 million -6 million 4 million

Assuming the managers of this firm have no idea about likley hood of congressional action on OINC in 2011, what decision should the firm make using each of the following rules?

a. Maximax rule
b. Maximin rule
c. Minimax regret rule
d. Equal probability rule

Attachments
Purchase this Solution

Solution Summary

Solution describes the steps to choose the best alternative based upon each of the given rules.

Solution Preview

Please refer attached file for better clarity of tables.

a)
Maximax Rule

State of Nature
Decision Alternative OINC Passes OINC fails OINC stalls Max. Payoff
Operate plants in US only 10 -1 2 10
Operate plants in US and Mexico 15 -4 1.5 15
Operate plants in US, Mexico and Canada 20 -6 4 20

Maximum of maximum payoffs is $20 millions. It should operate plants in US, Mexico and Canada.

b)
Maximin Rule
Choose the alternative which maximises the minimum payoff can get.
State of Nature
Decision Alternative OINC Passes OINC fails OINC stalls Min ...

Solution provided by:
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
Recent Feedback
  • "Thank you"
  • "Really great step by step solution"
  • "I had tried another service before Brain Mass and they pale in comparison. This was perfect."
  • "Thanks Again! This is totally a great service!"
  • "Thank you so much for your help!"
Purchase this Solution


Free BrainMass Quizzes
Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.