The operations manager for a well-drilling company must recommend whether to build a new facility, expand his existing one, or do nothing. He estimates that long-run profits (in $000) will vary with the amount of precipitation (rainfall) as follows: $$\begin{array} { | l | l | l | l | }
\hline { \text { ALTERNATIVE } } & { \text { PRECIPITATION } } \
\hline& \text { LOW } & \text { NORMAL } & \text { HIGH } \
\hline \text { Do Nothing } & - 100 & 100 & 300 \
\hline \text { Expand } & 350 & 500 & 200 \
\hline \text { Build New } & 750 & 300 & 0 \
\hline
\end{array}$$ If he uses the maximax criterion, which alternative will he decide to select?
A) do nothing
B) expand
C) build new
D) either do nothing or expand
E) either expand or build new

Question

The operations manager for a well-drilling company must recommend whether to build a new facility, expand his existing one, or do nothing. He estimates that long-run profits (in $000) will vary with the amount of precipitation (rainfall) as follows: $$\begin{array} { | l | l | l | l | } 
\hline   { \text { ALTERNATIVE } } & { \text { PRECIPITATION } } \
\hline& \text { LOW } & \text { NORMAL } & \text { HIGH } \
\hline  \text { Do Nothing } & - 100 & 100 & 300 \
\hline \text { Expand } & 350 & 500 & 200 \
\hline \text { Build New } & 750 & 300 & 0 \
\hline
\end{array}$$ If he uses the maximax criterion, which alternative will he decide to select?
A) do nothing
B) expand
C) build new
D) either do nothing or expand
E) either expand or build new

Quizplus · Accepted Answer

The maximax criterion requires selecting the alternative with the highest possible payout under the best possible scenario. In this case, the highest payouts for each alternative are as follows:

- Do Nothing: 300 (under high precipitation)
- Expand: 500 (under normal precipitation)
- Build New: 750 (under low precipitation)

Therefore, the best choice according to the maximax criterion is to build a new facility.

The Operations Manager for a Well-Drilling Company Must Recommend Whether