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
Please refer attached file for better clarity of tables.
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.
Choose the alternative which maximises the minimum payoff can get.
State of Nature
Decision Alternative OINC Passes OINC fails OINC stalls Min ...
Solution describes the steps to choose the best alternative based upon each of the given rules.