Question

Given the following conditional value table:

Alternatives	Very Favorable Market	Average Market	Unfavorable Market
Build new plant	$250,000	$180,000	-$200,000
Subcontract	$270,000	$185,000	-$220,000
Overtime	$100,000	$50,000	-$12,000
Do Nothing	$0	$0	$0

a) Using the decision making under uncertainty with the criterion of Maximax

The appropriate decision will be Subcontract

The value of the return under this decision is $ 270.000.

 

b) Using the decision making under uncertainty with the criterion of Maximin

The appropriate decision will be Do Nothing

The value of the return under this decision is $ 0.

 

c) Using the decision making under uncertainty with the criterion of Equity Likely.

The appropriate decision will be Subcontract

The value of the return under this decision is s (enter your answer as a whole number).

Answer 1

1) Decision making under uncertainity with Maximax criterion

Alternatives	Favorable market	Average market	unfavorable market	Maximum in row
Build new plant	$250,000	$180,000	-$200,000	$250,000
Subcontract	$270,000	$185,000	-$220,000	$270,000*
Overtime	$100,000	$50,000	-$12,000	$100,000
Do nothing	0	0	0	0

The appropriate decision will be to Subcontract with a value of return of $270,000. Since this is the best of the best options

Explanation - The maximax looks at the best that could happen under each action and then chooses the action with the largest value. So, the best option is to subcontract . (since that is highest in the row and column)

2) Decision making under uncertainity with maximin criterion

alternatives	favorable market	average market	unfavorable market	minimum in the row
Build new plant	$250,000	$180,000	-$200,000	-$200,000
sub contract	$270,000	$185,000	-$220,000	-$220,000
overtime	$100,000	$50,000	-$12,000	-$12,000
do nothing	0	0	0	0

The appropriate decision will be to do nothing. Since that is the best out of the worst options.

Explanation: The maximin person looks at the worst that could happen under each action and then choose the action with the largest payoff. They assume that the worst that can happen will, and then they take the action with the best worst case scenario.

3) Decision making under uncertainity with equally likely criterion

alternatives	favorable market	average market	unfavorable market	row average
build new plant	$250,000	$180,000	-$200,000	$76,670
sub contract	$270,000	$185,000	-$220,000	$78,330*
overtime	$100,000	$50,000	-$12,000	$54,000
do nothing	0	0	0	0

Considers all the payoffs for each alternative

• Find the average payoff for each alternative
  • For sub contract (in 000's)- (270 + 185 - 220)/3 = 78.33
• Select the alternative with the highest average

Since the highest average is with sub-contract, the equally likely (Laplace) criterion is to sub-contract and the value is $78,330 (rounded)