This is from this textbook: Render, B., Stair, R.M., Jr., an Hanna M.E. \"Quanti

Question

This is from this textbook:

Render, B., Stair, R.M., Jr., an Hanna M.E. "Quantitative Analysis for Management",Prentice-Hall.

Kenneth Brown is the principal owner of Brown Oil, Inc. After quitting his university teaching job, Ken has been able to increase his annual salary by a factor of over 100. At the present time. Ken is forced to consider purchasing some more equipment for Brown Oil because of competition. His alternatives are shown in the following table: For example, if Ken purchases a Sub 100 and if there is a favorable market, he will realize a profit of $300,000. On the other hand, if the market is unfavorable, Ken will suffer a loss of $200,000. But Ken has always been a very optimistic decision maker. What type of decision is Ken facing? What decision criterion should he use? What alternative is best? Although Ken Brown (discussed in Problem 3-17) is the principal owner of Brown Oil, his brother Bob is credited with making the company a financial success. Bob is vice president of finance. Bob attributes his success to his pessimistic attitude about business and the oil industry. Given the information from Problem 3-17, it is likely that Bob will arrive at a different decision. What decision criterion should Bob use, and what alternative will he select?

Explanation / Answer

a.

Ken is facing situation of decision making under condition of uncertainty, as Ken has no idea at all regarding which of the states of nature would occur in the future.

b.

Ken is optimistic decision maker, means he will not loss an opportunity to achieve largest possible profit or payoff among the alternatives. Thus, Ken should use Maximax Criterion to evaluate alternatives. For this, the decision maker takes the maximum payoff under each alternative and then selects the best of those maximum payoffs.

c.

Maximum payoffs of purchasing Sub 100, Oliver J, and Texan equipment are ($300,000, $250,000, $75,000) respectively.

Maximum payoff among the alternative’s maximum payoff is $300,000 for the Sub 100 equipment.

Thus, alternative of purchasing Sub 100 maximizes the maximum payoffs among the alternatives. Being optimistic decision maker, Ken should consider purchasing Sub 100.

3-18:

Bob is pessimistic decision maker, means he will evaluates the decision alternatives, in terms of the worst payoff that can occur or the alternative that provides the best of all possible minimum payoffs of each alternative selected. Thus, Bob should use Maximin criterion to evaluate alternatives. Under maximin principle, take the smallest payoff under each alternative and then select the largest of those minimum payoffs.

Minimum payoffs of purchasing Sub 100, Oliver J, and Texan equipment are (-$200,000, -$100,000, -$18,000) respectively.

Maximum payoff among the alternative’s minimum payoff is -$18,000 for the Texan equipment.

Thus, alternative of purchasing Texan maximizes the minimum payoffs among the alternatives. Being pessimistic decision maker, Bob should consider purchasing Texan equipment.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.