A small building contractor has recently experienced two successive years in whi
ID: 396125 • Letter: A
Question
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
* Profit in $ thousands.
Which alternative should be selected if the decision criterion is (Enter your answers in thousands. Omit the "$" sign in your response.)
NEXT YEAR'S DEMAND High Alternative Do nothing Expand Subcontract Low $50* $60 28 40 80 7eExplanation / Answer
a) Maximax = Determine the best possible payoff, and choose the alternative with that payoff.
Do nothing - 60
Expand - 80
Subcontract - 70
Ans: Expand
b) Maximin = Determine the worst possible payoff for each alternative, and choose the
alternative that has the “best worst.”
Do nothing - 50
Expand - 20
Subcontract - 40
Ans: Do Nothing
c) Laplace = Determine the average payoff for each alternative, and choose the alternative
with the best average.
Do nothing = (50+60)/2 = 55
Expand = (20+80)/2 = 50
Subcontract = (40+70)/2 = 55
Ans - Do nothing or Subcontract
d) Minimax regret - —Determine the worst regret for each alternative, and choose the alternative
with the “best worst.”. subtract every payoff in each column from the best payoff in that column
Worst Regret for each options are:
Do nothing - 20
Expand - 30
Subcontract - 10
The best amongst these is the lowesst regret
Ans - Subcontract
Low High Do nothing 0 20 Expand 30 0 Subcontract 10 10