Decision analysis problem:Columbia Construction Company
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The owner of the Columbia Construction Company must decide between building a housing development, constructing a shopping center, or leasing all of the company's equipment to another company. The profit that will result from each alternative will be determined by whether material costs remain stable or increase. The profit from each alternative given the two possibilities for material costs is shown in the following payoff table.
Material Costs
Decision Stable Increase
Houses $70,000 $30,000
Shopping Center $105,000 20,000
Leasing $ 40,000 40,000
Determine the best decision using the following decision criteria.
A. Maximax
B. Maximin
C. Minimax Regret
D. Hurwicz (x=.2)
E. Equal likelihood
Please show the work for each problem.
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A. Maximax
? Maximax criterion selects the alternative that maximizes maximum payoffs among all alternatives.
? For this criterion, first find the maximum pay off for each alternative. Then choose the alternative that has maximum payoff.
Decision Stable Increase Maximum
Houses $70,000 30,000 $70,000
Shopping centre 105,000 20,000 $105,000
Leasing 40,000 40,000 $40,000
It can be seen from above table that the maximum among maximum payoffs is that of shopping centre. Thus, according to Maximax criterion, the best decision is to build Shopping centre.
B. Maximin
? Maximin criterion finds alternative that maximizes minimum payoff over all alternatives.
? First locate minimum payoff for each alternative, and select alternative with maximum number.
Decision Stable Increase Minimum
Houses $70,000 30,000 $30,000
Shopping ...
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