2. Edwards Machine Tools needs to purchase a new machine. The basic model is slo

Question

2. Edwards Machine Tools needs to purchase a new machine. The basic model is slower but costs less, while the advanced model is faster but costs more. Profitability will depend on future demand. The following table presents an estimate of profits over the next three years Decision Basic model Advanced model Demand Volume Low Medium High $80,000$100,000 $150,000 $40,000 $110,000 $220,000 Given the uncertainty associated with the demand volume, and no other information to work with, how would you make a decision? Explain your reasoning

Explanation / Answer

Decision making under uncertainty can be through various strategies like:

Maximin -In this, worst payoff is taken for each alternative and the best of these worst choices is taken. It guarantees minimum return hence called "pessimistic" approach.

Basic model worst = 80,000

Advance model worst = 40,000

So, Basic model is the best choice

Maximax - Identify best possible payoff for each alternative and select best amongst them.

Basic model = 150,000

Advance model = 220,000

So, Advance model is the best choice

Laplace - In this, average payoff is computed for each alternative and best is chosen

Basic model = (80,000 + 100,000 + 150,000)/3 = 110,000

Advance model = (40,000 + 1,10,000 + 2,20,000)/3 = 123,333

So, advance model is best choice

So, Advance model seems to be best.

Thanks and hit like.. this and previous question also.

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