A manager is deciding whether or not to build a small facility. Demand is uncert

Question

A manager is deciding whether or not to build a small facility. Demand is uncertain and can be either at a high or low level. If the manager chooses a small facility and demand is low, the payoff is $300. If the manager chooses a small facility and demand is high, the payoff is $100. On the other hand, if the manager chooses a large facility and demand is low, the payoff is -$200, but if demand is high, the payoff is $800.

(a) What would be the best decision based on the maximax criterion?

(b) What would be the best decision based on the maximin criterion?

(c) What would be the best decision based on the minimax regret?

Explanation / Answer

(a) Best decision based on maximax criterion= large facility

maximum in the two facilities is $300 and $800 of which $800 is the maximum, So larger facility satisfies maximax.

(b) Best decision based on maximin criterion= small facility

minimum in the two facilities is $100 and -$200 of which $100 is the maximum, So smaller facility satisfies maximin.

(c) Best decision based on minimax regret= large facility

maximum in the two facilities is $300 and $800 of which $300 is the minimum, So larger facility satisfies minimax regret.

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