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MaxiMin - MiniMax, Expected Value

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The marketing department of a soft-drink company wishes to determine the maximum expected payoff from introducing a new crystal-clear drink.

Assume that the marketing department works in a risk taking company. Which decision would they likely pursue? (MaxiMax)

Calculate the opportunity lost table. Assume that the marketing department works in a risk adverse company. Which decision would they likely pursue? (MiniMax)

Assume the company has no preconceived assessment with regard to states of nature probabilities. What decision would they likely pursue given they assumed all states of nature had equal probabilities? (Equally likely)

Assume that the probability that the market share is less than 1% is 20%, that the probability that market share is at least 1% and less than 4% is 50%, and that the probability that the market share is at least 4% is 30%. What decision with the company likely pursue considering these assessments of states of nature probabilities? (Expected value)

What is the expected value of perfect information (EVPI) for this last calculation?
Market Share
Investment <1% 1% to 4% >=4%
Low $300,000.00 $400,000.00 $500,000.00
Medium $(100,000.00) $900,000.00 $1,000,000.00
High $(400,000.00) $300,000.00 $3,000,000.00

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Solution Summary

This solution explains which decision a business should take if they're risk takers.

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Decision Analysis Questions

All questions have been answered. I just need someone to check the accuracy of my answers.

Thank you.

True/False

Indicate whether the sentence or statement is true or false.

T 1. A state of nature is an actual event that may occur in the future.

F 2. The maximin criterion results in the maximum of the maximum payoffs.

F 3. The Hurwicz criterion is a compromise between the maximax and maximin criteria.

T 4. The minimax regret criterion maximizes the maximum regret.

F 5. The Hurwicz criterion multiplies the worst payoff by the coefficient of optimism.

Multiple Choice

Identify the letter of the choice that best completes the statement or answers the question.

C 6. The maximax criterion results in the

a. minimum of the minimum payoffs

b. maximum of the minimum payoffs

c. maximum of the maximum payoffs

d. minimum of the maximum payoffs

A 7. The Hurwicz criterion multiplies the

a. best payoff by the coefficient of optimism

b. worst payoff by the coefficient of optimism

c. best payoff by the worst payoff

d. none of the above

C 8. The difference between expected payoff under certainty and expected payoff under risk is the

a.expected net value

b. expected rate of return

c. expected value of perfect information

d. expected value

C 9. Which of the following is not an approach for decision making under uncertainty?

a. minimax

b.maximin

c.decision tree

d.minimax regret

C 10. The ______________ of sample information is the ratio of the expected value of sample information to the expected value of perfect information

a. utilization

b. expected value

c. efficiency

d. coefficient

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