Fairco, a family business, is considering making an investment in its manufactur

Question

Fairco, a family business, is considering making an investment in its manufacturing operation. Three decisions are under consideration: (1) a large investment; (2) a medium investment; a (3) a small investment. The business believe that there are three possible future outcomes for its product: (1) increasing demand; (2) stable demand; and (3) decreasing demand. The following payoff table describes the decision situation. 1) State of Nature Increasing Demad able Decreasing Demand Decision 0| -o-o -$600,000 -S200,000-4 $25,000-6 S oo $400,000 Large Investment$1,000,000 Medurm investment. -S500,000iA GO-0 Small Investment oo $300,000 $125,000 2x00 -$250,000 3_ Determine the best decision for Fairco using a) The minimax regret decision criterion Medim Investnen b) Equal likelihood decision criterion 3

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Answer:

a)

b)

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