Question

You must decide wither to buy new machinery to produce X or to modify existing machinery. If you have no idea of the economic probabilities of the two different states of nature: (1) Economic outlook is good, and (2) Economic outlook is bad. Use a probability of the economy being bad of 20%.

Payoff Table	Economic Outlook ($1,000)
	Good	Bad
Buy a new machine	$750	−$175
Modify an old machine	$500	$200
*In the payoff table, a negative number (−) indicates loss.

Use the decision rules stated in each question.

Question		Answer
a.	What decision would you made according to the maximax decision rule and what is the corresponding value?
b.	What decision would you made according to the maximin decision rule?
c.	What decision would you made according to the minimax regret decision rule and what is the corresponding value?
d.	What decision would you made according to the EMV decision ruleand what is the corresponding value?
e.	What decision would you made according to the EOL decision ruleand what is the corresponding value?

Answer 1

a.under Maxi Max criteria it is decided to buy a machine @ 750$

b. Under the Maximin critertia, it is decided to modify a new machine @200$

c.under minimax regret criteria, it is decided modify a new machine@ 250$

d.under the EMV decision rule, it is decided to buy a new machine@565$

e.under the EOL deciison rule, it is decided to buy a new machine@ 75$