Waldo Books needs to decide how many copies of a new hardcover release to purcha
ID: 454579 • Letter: W
Question
Waldo Books needs to decide how many copies of a new hardcover release to purchase for its shelves. The store has assumed that demand will be 50, 100, 150, or 200 copies next month, and it needs to decide whether to order 50, 100, 150, or 200 books for this period. Each book costs Waldo $20 and can be sold for $30. Waldo can sell any unsold books back to the supplier for $4. Which option should Waldo choose if it uses the maximum criterion? Which option should Waldo choose if it uses the maximum criterion? Which option should Waldo choose if it uses the equally likely criterion? Which option should Waldo choose if it uses the criterion of realism with a = 0.7? Which option should Waldo choose if it uses the minimum regret criterion?Explanation / Answer
(a) According to maximax criterion, Waldo must order 200 books, as it also states that the decision maker should select the course of action whose best (maximum) gain is better than the best gain of all other courses of action possible in given circumstances. See also maximin criterion.
(b) According to maximin criterion, Waldo must order 50 books, as It also states that the decision maker should select the course of action whose worst (maximum) loss is better than the least (minimum) loss of all other courses of action possible in given circumstances.
(c) According to equally likely criterion, Waldo should choose 125 books, as equally likely criterion uses average outcome.This involves finding the average outcome of all the books.
(d) Based on criterion of realism, which uses the coefficient of realism () to estimate the decision maker’s optimism •0 < < 1
x (max payoff for alternative)
+ (1- ) x (min payoff for alternative)
= Realism payoff for alternative
and he should chose and decide to take 155 books based on the calculation for alpha = 0.8
(e) Waldo should choose to buy 50 books only based on the minimax regret criterion, as The minimax regret strategy is the one that minimises the maximum regret. It is useful for a risk-neutral decision maker. Essentially, this is the technique for a 'sore loser' who does not wish to make the wrong decision.
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