Question

Answer the question thats attached. Choice answers are provided below
The operations manager for a well-drilling company must recommend whether to build a new facility, expand his existing one, or do nothing. He estimates that long-run profits (in $000) will vary with the amount of precipitation (rainfall) as follows: PRECIPITATION ALTERNATIVE LOW NORMAL HIGH Do Nothing (100) 100 300 Expand Build New 350 500 750300 200 If he uses the minimax regret criterion, which alternative will he decide to select?

Answer 1

Under the minimax regret approach, we need to find the opportunity cost of each alternative under different states of nature(low, normal, high). For this, we will construct an opportunity cost table.

In the table, for each cell, we subtract the payoff for that cell from the highest payoff for that state of nature. The alternative that is the minimum out of the maximum opportunity costs for the different alternatives is then selected according to the minimax regret criterion.

	States of nature
Alternatives	Low	Normal	High
Do nothing	750 - 100 = 650	500 - 100 = 400	300 - 300 = 0
Expand	750 - 350 = 400	500 - 500 = 0	300 - 200 = 100
Build new	750 - 750 = 0	500 - 300 = 200	300 - 0 = 300

The maximum opportunity cost for the 'Do nothing' alternative = $650,000

The maximum opportunity cost for the 'Expand' alternative = $400,000

The maximum opportunity cost for the 'Build new' alternative = $300,000

The minimum out of these values is for alternative Build new. Hence the correct answer is option D, i.e. Build new