Using a minimax regret approach, what alternative should the firm choose? Econom

Question

Using a minimax regret approach, what alternative should the firm choose? Economists have assigned probabilities of 0.25, 0.40, and 0.35 to the possible economic climate of declining, same and improving respectively. Using expected monetary values, what option should be chosen and what is that optimal expected value?

Using a minimax regret approach, what alternative should the firm choose? Economists have assigned probabilities of 0.25, 0.40, and 0.35 to the possible economic climate of declining, same and improving respectively. Using expected monetary values, what option should be chosen and what is that optimal expected value?

Explanation / Answer

Using minimax regret approach:

Maximum costs are given by:

Kentucky : 44

Maryland: 38

North Carolina : 39

Tennesee : 46

Virginia : 50

If we minimise maximum cost, we go with Maryland.

Using given probabilities, expected costs:

Kentucky : (44*0.25) + (38*0.40) + (30*0.35) = 36.7

Maryland: (38*0.25) + (37*0.40) + (36*0.35) = 36.9

North Carolina : (39*0.25) + (34*0.40) + (31*0.35) = 34.2

Tennesee : (46*0.25) + (34*0.40) + (28*0.35) = 34.9

Virginia : (50*0.25) + (42*0.40) + (26*0.35) = 38,4

Hence, we choose North Carolina with expected cost = 34.2

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