Suppose we are interested in investing in one of three investment opportunities:

Question

Suppose we are interested in investing in one of three investment opportunities: d1, d2, or d3.

The following profit payoff table shows the profits (in thousands of dollars) under each of the 3 possible

economic conditions–s1, s2, and s3.

The probability of the occurrence of s1 is 0.1, and the probability of the occurrence of s2 is 0.3.

Determine the best decision based on the maximax decision criterion.

                                            State of Nature

Decision                            s1         s2           s3

d1                                     18           28         30

d2                                     19           17         -5

d3                                      3              40         16

a- D2 OR D3

b- D3

c- D2 OR D1

d- D2

e- D1

Explanation / Answer

c- D2 OR D1

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