Trey Whitmore, Operations Manager at National Consumers, Inc.(NCI), is evaluating alternatives for increasing capacity at NCI's Fountain Hill plant.He has identified four alternatives, and has constructed the following payoff table which shows payoffs (in $1,000,000's)for the three possible levels of market demand: If Trey uses the Hurwicz criterion with alpha = 0.1, the appropriate alternative would be: ___.
A)lease new equipment
B)purchase new equipment
C)add third shift
D)do nothing
E)do everything

Question

Trey Whitmore, Operations Manager at National Consumers, Inc.(NCI), is evaluating alternatives for increasing capacity at NCI's Fountain Hill plant.He has identified four alternatives, and has constructed the following payoff table which shows payoffs (in $1,000,000's)for the three possible levels of market demand:  If Trey uses the Hurwicz criterion with alpha = 0.1, the appropriate alternative would be: ___.
A)lease new equipment 
B)purchase new equipment 
C)add third shift 
D)do nothing 
E)do everything

Quizplus · Accepted Answer

The Hurwicz criterion uses a decision coefficient (alpha) to balance the decision between the maximum and minimum payoffs. For this problem, alpha = 0.1 means that the decision maker is relatively risk averse.

To find the Hurwicz criterion for each alternative, we calculate the weighted average of the maximum and minimum payoffs:

- Lease new equipment: (0.5 x 20) + (0.5 x 5) = 12.5
- Purchase new equipment: (0.5 x 18) + (0.5 x 6) = 12
- Add third shift: (0.5 x 14) + (0.5 x 8) = 11
- Do nothing: (0.5 x 10) + (0.5 x 10) = 10

Based on the Hurwicz criterion, the highest weighted average is for leasing new equipment (12.5), but this option may not be feasible if the company is not able to lease the desired equipment. Therefore, the next best option with the highest weighted average is adding a third shift (11). The other alternatives have lower weighted averages and should not be considered based on this criterion.