Question

1. Payoff Table (Profits in Thousands)

                                                       States of Nature                  

Decisions                     A           B           C

Small Building               600      550      630

Medium Building          410      570      520

Large Building               540      460      575

Show your detail work step by step calculating which decision is best using the Minimax Regret approach.

#2)  Cost Table (Costs in Thousands)

                                                 States of Nature                       

Decisions                      A           B          

Small Order                  840      780      

Large Order                    810      800

Explain which decision is best by showing your detail work step by step using the Expected Value (EV) approach with the State of Nature A having a 65% probability and State of Nature B having a 35% probability.

Answer 1

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1.

		States of Nature
Decisions	A	B	C
Small Building	600	550	630
Medium Building	410	570	520
Large Building	540	460	575
Subtract the column max from each to find the maximum regret for each state of nature
Decisions	A	B	C
Small Building	0	-20	0
Medium Building	-190	0	-110
Large Building	-60	-110	-55
If small building , max regret is 20
If medium building, max regret is 190
If large building, max regret is 110
Hence Small building is the best decision which gives minmax of regret