3. ABC Hut, Ltd sells goat milk in Kidapawan. Juan Dela Cruz, the manager is fil

Question

3. ABC Hut, Ltd sells goat milk in Kidapawan. Juan Dela Cruz, the manager is filling out the orders for next week's supply of goat milk. He is uncertain what sales will be Juan has the table below as a historical representation of profits given sales and buying-level combinations. Weekly Sales 400 300 200 ACTIONS Buy 300 P 35 P 80 P 80 Buy 400 P 0 P 50 P 100 Buy 200 P 60 P 60 P 60 What advice can you give Juan about quantities of goat milk to buy next week using: a. Maximin decision criterion (5 pts) b. Maximax decision criterion (5 pts) c. LaPlace Decision Criterion (5 pts)

Explanation / Answer

a) maximin

Here we look at the profits for each buy levels of 200, 300 and 400. and find out the minimum profit for each.

For 200 buy minimum profit = 60 for all

For 300 buy minimum profit = 35 for weekly sales 400

For 400 buy minimum profit = 0 for weekly sales 400

The maximum profit among this is at buy level 200.

Hence buy 200 for maximin criteria.

b) maximax criteria

here we select the maximum profit possible among all the options.

profit of 100 is the maximum among all the options hence we select buy 400, in maximx criteria

c) Laplace

Here we assign equal probability to all the buy levels and find which one has the maximum expected return

since there are 3 levels we assign probability of 1/3 to all.

buy 200 level expected value = 60*1/3 + 60*1/3 + 60*1/3

= 20 + 20 + 20

= 60

buy 300 level expected value = 35*1/3 + 80*1/3 + 80*1/3

= 195/3

= 65

buy 400 level expected value = 0*1/3 + 50*1/3 + 100*1/3

= 150/3

= 50

maximum expected value is for buy 300 = 65

Hence choose buy 300 for laplace decision

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