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Minimax Regret Criterion, Expected Net Revenues and EVPI

The local operations manager for the IRS must decide whether to hire 1, 2, or 3 temporary workers. He estimates that net revenues will vary with how well taxpayers comply with the new tax code.

# of workers Low Compliance Medium Compliance High Compliance

1 $50 $50 $50

2 $100 $60 $20

3 $150 $70 $-10

a. If he uses minimax regret criterion, how many new workers will he hire?

b. If the manager thinks the chances of low, medium and high compliances are 20%, 30%, and 50% respectively. Find the best expected net revenues for the number of worker he will decide to hire. (Hint: Part "b" is not connected to Part "a".)

c. Find the expected value of the perfect information. (Hint: Part "c" is not connected to Part "a". But it is connected to Part "b")

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The answers are in the attached file. The following may not show up correctly.

The local operations manager for the IRS must decide whether to hire 1, 2, or 3 temporary workers. He estimates that net revenues will vary with how well taxpayers comply with the new tax code.

# of workers Low Compliance Medium Compliance High Compliance
1 $50 $50 $50
2 $100 $60 $20
3 $150 $70 ($10)

a. If he uses minimax regret criterion, how many new workers will he hire?  

The regret for any decision = best outcome possible for the state of nature - outcome for the decision taken

Regret ...

Solution Summary

Determines the best decision based on Minimax regret criterion, expected net revenue. Also, find the expected value of the perfect information (EVPI).

$2.19