A company is expanding its production capacity. The decision will depend upon whether the increase in demand is low, medium or high. The company's choices for expansion are small, medium, large or very large. The following table provides an estimate of profits over the next two years.
$\begin{array}{l|ccc}
&\text { Demand Values }\
\text { Decision } & \text { Low } \left.S_{1}\right) & \text { Medium } \left.S_{2}\right) & \text { High } \left.S_{3}\right) \
\hline
\text { Small Expansion } d_{1} \text { ) } & \$ 5,000 & \$ 10,000 & \$ 10,000 \
\text { Medium Expansion } d_{2} \text { ) } & \$ 2,000 & \$ 12,000 & \$ 14,000 \
\text { Large Expansion } d_{3} \text { ) } & -0- & \$ 6,000 & \$ 13,000 \
\text { Very Large Expansion } d_{4} \text { ) } & -\$ 5,000 & \$ 8,000 & \$ 20,000
\end{array}$
a. Which decision variable would be picked using maximax?
b. Which decision variable would be picked using maximin?
c. Which decision variable would be picked using minimax regrets criteria?
d. Suppose the decision-maker assigns the probability of low-demand as 0.2, medium-demand as 0.5 and high-demand as 0.3. Which decision variable would be picked using the expected value criterion?

Question

A company is expanding its production capacity. The decision will depend upon whether the increase in demand is low, medium or high. The company's choices for expansion are small, medium, large or very large. The following table provides an estimate of profits over the next two years.
 $\begin{array}{l|ccc}
&\text { Demand Values }\
\text { Decision } & \text { Low } \left.S_{1}\right) & \text { Medium } \left.S_{2}\right) & \text { High } \left.S_{3}\right) \
\hline
\text { Small Expansion } d_{1} \text { ) } & \$ 5,000 & \$ 10,000 & \$ 10,000 \
\text { Medium Expansion } d_{2} \text { ) } & \$ 2,000 & \$ 12,000 & \$ 14,000 \
\text { Large Expansion } d_{3} \text { ) } & -0- & \$ 6,000 & \$ 13,000 \
\text { Very Large Expansion } d_{4} \text { ) } & -\$ 5,000 & \$ 8,000 & \$ 20,000
\end{array}$ 
a. Which decision variable would be picked using maximax?
b. Which decision variable would be picked using maximin?
c. Which decision variable would be picked using minimax regrets criteria?
d. Suppose the decision-maker assigns the probability of low-demand as 0.2, medium-demand as 0.5 and high-demand as 0.3. Which decision variable would be picked using the expected value criterion?

Quizplus · Accepted Answer

The Answer of A company is expanding its production capacity. The decision will depend upon whether the increase in demand is low, medium or high. The company's choices for expansion are small, medium, large or very large. The following table provides an estimate of profits over the next two years.
 $\begin{array}{l|ccc}
&\text { Demand Values }\
\text { Decision } & \text { Low } \left.S_{1}\right) & \text { Medium } \left.S_{2}\right) & \text { High } \left.S_{3}\right) \
\hline
\text { Small Expansion } d_{1} \text { ) } & \$ 5,000 & \$ 10,000 & \$ 10,000 \
\text { Medium Expansion } d_{2} \text { ) } & \$ 2,000 & \$ 12,000 & \$ 14,000 \
\text { Large Expansion } d_{3} \text { ) } & -0- & \$ 6,000 & \$ 13,000 \
\text { Very Large Expansion } d_{4} \text { ) } & -\$ 5,000 & \$ 8,000 & \$ 20,000
\end{array}$ 
a. Which decision variable would be picked using maximax?
b. Which decision variable would be picked using maximin?
c. Which decision variable would be picked using minimax regrets criteria?
d. Suppose the decision-maker assigns the probability of low-demand as 0.2, medium-demand as 0.5 and high-demand as 0.3. Which decision variable would be picked using the expected value criterion?

A Company Is Expanding Its Production Capacity A Which Decision Variable Would Be Picked Using Maximax? B

A Company Is Expanding Its Production Capacity A Which Decision Variable Would Be Picked Using Maximax?
B