Question

I got the entries for the payoff table but now face another problem: how do I work with negatives?

For maximax you pick the largest of each row, so -300, -1575, and -2650. The answer would be -300.

For maximin you'd pick the largest minimum. Wouldn't this also work out to -300 (since you're trying to find the minimum at or above zero?

Appreciate your help. :)

Pavoff Table Scenario 3 Trips 5 Trips 12 Trips 15 Trips 18 Trips Rent Each ri 300 -500 1200 -1500 -1800 Lease Per- 1575 -1625 1800 -1875 -1950 Season Buy equipment -2650 2650 2650 2650 2650 Which option should be used according to the MAXIMAX decision rule? Which option should be used according to the MAXIMIN decision rule? Which option should be used to maximize the EMV if there is an equally-likely criterion? Which option should be used to maximize the EMV using the probabilities shown in the table? (Ctrl)

Answer 1

Solution

Decision Option	Row Max	Row Min
Rent Each Trip	- 300	- 1800
Lease Each Season	- 1575	- 1950
Buy Equipment	- 2650	- 2650

Thus, maximum of row max is – 300 and hence the decision under maximax criterion is:

Rent Each Trip ANSWER 1

Maximum of row min is – 1800 and hence the decision under maximin criterion is:

Rent Each Trip ANSWER 2

For EMV under equal probability,

For each Decision Option, multiply each pay-off with the respective probability and add over all possible scenario.

Since all probabilities are equal and there are 5 possible scenario, each probability is 1/5.

Thus, EMV for the 3 Decision Options in the given order are:

- 5300 x 0.2 = - 1060; - 8825 x 0.2 = - 1765; - 13250 x 0.2 = - 2650.

Since – 1060 is the maximum of the three EMV’s, the optimum decision is:

Rent Each Trip ANSWER 3

EMV under given probability, cannot be worked out since the probability figures are not available in the question posted.

Method is identical to what was done above for equal probability.

DONE