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. :)
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
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