Question

1. A plant manager is considering buying additional stamping machines to accommodate increasing demand.  The alternatives are to buy 1 machine, 2 machines, or 3 machines.  The profits realized under each alternative are a function of whether their bid for a recent defense contract is accepted or not.  The payoff table below illustrates the profits realized (in $000's) based on the different scenarios faced by the manager.
   

Alternative Bid Accepted Bid Rejected
Buy 1 machine     $10 $5
Buy 2 machines     $30 $4
Buy 3 machines     $40 $2

a. Which alternative should be chosen based on the maximax criterion?

b. Which alternative should be chosen based on the maximin criterion?

c. Which alternative should be chosen based on the Lapalce criterion?

d. Which alternative should be chosen based on criterion of realism with alpha = 0.8?

e. Which alternative should be chosen based on the minimax regret criterion?

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     Assume that based on historical bids with the defense contractor, the plant manager believes that there is a 65% chance that the bid will be accepted and a 35% chance that the bid will be rejected.

       f. Which alternative should be chosen using the expected monetary value (EMV) criterion?

       g. What is the expected value under perfect information (EVPI)?