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Minimax Regret Criterion, Expected Net Revenues and EVPI

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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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Solution Summary

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

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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 ...

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