Question

. A company is considering three options for managing its data processing operation: continuing with its own staff, hiring an outside vendor to do the managing, or using a combination of its own staff and an outside vendor. There are three levels of demand under consideration: high, medium, and low. The annual profit associated with each option (in $1,000) for each level of demand is given below:

                                                 Demand Level

Staffing Options         High      Medium       Low      

Own staff                     950          900             650

Outside vendor            850          650 500

Combination                1000         800        400

(e) What is the best decision using the Hurwicz’s criterion if α = 0.4? What is the payoff for it?

Answer 1

Ans:

weighted average=0.4*maximum+0.6*minimum

	High	medium	low	maximum	minimum	weighted average
own staff	950	900	650	950	650	770
outside vendor	850	650	500	850	500	640
Combination	1000	800	400	1000	400	640

Choose the maximum weighted average for best decision i.e. own staff with pay off 770