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Selection of Alternatives: Decision Analysis

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A small building contractor has recently experienced two successive years in which work opportunities exceeded the firm's capacity. The contractor must now make a decision on capacity for next year. Estimated profits under each of the two possible states of nature are as shown in the table below. Which alternative should be selected if the decision criterion is:
PART ONE
a) Maximax?
b) Maximin?
c) Equally Likely (LaPlace)?
d) Minimax Regret?
NEXT YEAR'S DEMAND
Alternative Low High
Do nothing $50,000 $60,000
Expand $20,000 $80,000
Subcontract $40,000 $70,000.

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Solution Summary

The solution provides step-by-step method for taking decisions using Maximax, Maximin, Laplace and Minimax regret decision rules.

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