Given the following conditional value table:
| Alternatives | Very Favorable Market | Average Market | Unfavorable Market |
|---|---|---|---|
| Build new plant | $250,000 | $180,000 | -$200,000 |
| Subcontract | $270,000 | $185,000 | -$220,000 |
| Overtime | $100,000 | $50,000 | -$12,000 |
| Do Nothing | $0 | $0 | $0 |
a) Using the decision making under uncertainty with the criterion of Maximax
The appropriate decision will be Subcontract
The value of the return under this decision is $ 270.000.
b) Using the decision making under uncertainty with the criterion of Maximin
The appropriate decision will be Do Nothing
The value of the return under this decision is $ 0.
c) Using the decision making under uncertainty with the criterion of Equity Likely.
The appropriate decision will be Subcontract
The value of the return under this decision is s (enter your answer as a whole number).
1) Decision making under uncertainity with Maximax criterion
| Alternatives | Favorable market | Average market | unfavorable market | Maximum in row |
| Build new plant | $250,000 | $180,000 | -$200,000 | $250,000 |
| Subcontract | $270,000 | $185,000 | -$220,000 | $270,000* |
| Overtime | $100,000 | $50,000 | -$12,000 | $100,000 |
| Do nothing | 0 | 0 | 0 | 0 |
The appropriate decision will be to Subcontract with a value of return of $270,000. Since this is the best of the best options
Explanation - The maximax looks at the best that could happen under each action and then chooses the action with the largest value. So, the best option is to subcontract . (since that is highest in the row and column)
2) Decision making under uncertainity with maximin criterion
| alternatives | favorable market | average market | unfavorable market | minimum in the row |
| Build new plant | $250,000 | $180,000 | -$200,000 | -$200,000 |
| sub contract | $270,000 | $185,000 | -$220,000 | -$220,000 |
| overtime | $100,000 | $50,000 | -$12,000 | -$12,000 |
| do nothing | 0 | 0 | 0 | 0 |
The appropriate decision will be to do nothing. Since that is the best out of the worst options.
Explanation: The maximin person looks at the worst that could happen under each action and then choose the action with the largest payoff. They assume that the worst that can happen will, and then they take the action with the best worst case scenario.
3) Decision making under uncertainity with equally likely criterion
| alternatives | favorable market | average market | unfavorable market | row average |
| build new plant | $250,000 | $180,000 | -$200,000 | $76,670 |
| sub contract | $270,000 | $185,000 | -$220,000 | $78,330* |
| overtime | $100,000 | $50,000 | -$12,000 | $54,000 |
| do nothing | 0 | 0 | 0 | 0 |
Considers all the payoffs for each alternative
Since the highest average is with sub-contract, the equally likely (Laplace) criterion is to sub-contract and the value is $78,330 (rounded)