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  • Im325 Quiz 2 Lopez 2

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    fernandojr lopez
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    This document presents a decision analysis for a company choosing between constructing a large plant, small plant, or doing nothing. It evaluates the options using different decision criteria: 1. Maximax criterion suggests constructing the large plant for the highest potential payoff of $200,000. 2. Maximin criterion suggests constructing the small plant to minimize losses at -$20,000 in an unfavorable market. 3. Minimax criterion suggests doing nothing to minimize regret of $0 in an unfavorable market. 4. Applying a 0.8 probability to a favorable market, a weighted average suggests constructing the large plant for an expected payoff of $124,000. 5. Considering the

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    This document presents a decision analysis for a company choosing between constructing a large plant, small plant, or doing nothing. It evaluates the options using different decision criteria: 1. Maximax criterion suggests constructing the large plant for the highest potential payoff of $200,000. 2. Maximin criterion suggests constructing the small plant to minimize losses at -$20,000 in an unfavorable market. 3. Minimax criterion suggests doing nothing to minimize regret of $0 in an unfavorable market. 4. Applying a 0.8 probability to a favorable market, a weighted average suggests constructing the large plant for an expected payoff of $124,000. 5. Considering the

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    9 views3 pages

    Im325 Quiz 2 Lopez 2

    Uploaded by

    fernandojr lopez
    This document presents a decision analysis for a company choosing between constructing a large plant, small plant, or doing nothing. It evaluates the options using different decision criteria: 1. Maximax criterion suggests constructing the large plant for the highest potential payoff of $200,000. 2. Maximin criterion suggests constructing the small plant to minimize losses at -$20,000 in an unfavorable market. 3. Minimax criterion suggests doing nothing to minimize regret of $0 in an unfavorable market. 4. Applying a 0.8 probability to a favorable market, a weighted average suggests constructing the large plant for an expected payoff of $124,000. 5. Considering the

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    of 3

    QUIZ# 2

    DECISION MAKERS ALTERNATIVE


    Construct Large Construct Small Do nothing
    STATES OF Plant Plant
    NATURE Favorable Market 200,000 100,000 0
    Unfavorable -180,000 -20,000 0
    Market

    a. Maximax Decision

    The maximum payoff is to build/ Construct Large Plant with an associated payoff
    of 200,000

    DECISION MAKERS ALTERNATIVE


    Construct Large Construct Small Do nothing
    STATES OF Plant Plant
    NATURE Favorable Market 200,000 100,000 0
    Unfavorable -180,000 -20,000 0
    Market

    b. Maximin Decision

    The maximin payoff is to build/ Construct Small Plant with an associated payoff
    of -20,000
    c. Minimax Decision

    DECISION MAKERS ALTERNATIVE


    Construct Large Construct Small Do nothing
    STATES OF Plant Plant
    NATURE Favorable Market 200,000 100,000 0
    Unfavorable -180,000 -20,000 0
    Market

    DECISION MAKERS ALTERNATIVE


    Construct Large Construct Small Do nothing
    STATES OF Plant Plant
    NATURE Favorable Market 0 0 0
    Unfavorable 380,000 120,000 0
    Market

    The minimum regret is to Do nothing with an associated regret of 0

    d. Criterion of Realism

    a= 0.8 1-a = 0.2

    DECISION MAKERS ALTERNATIVE


    Construct Large Construct Small Do nothing
    STATES OF Plant Plant
    NATURE Favorable Market 200,000 100,000 0
    Unfavorable -180,000 -20,000 0
    Market

    WEIGHTED AVERAGE

    LARGE PLANT 0.8(200,00) + 0.2(-180,00) = 124,000

    SMALL PLANT 0.8(100,00) + 0.2(-20000) = 76,000

    DO NOTHING 0.8(0) + .2(0) = 0

    For criterion of realism the best approach is to Construct Large Plant


    e. Criterion of Rationality

    DECISION MAKERS ALTERNATIVE


    Construct Large Construct Small Do nothing
    STATES OF Plant Plant
    NATURE Favorable Market 200,000 100,000 0
    Unfavorable -180,000 -20,000 0
    Market
    10,000 40,000 0

    The optimal solution is to Construct a Small Plant

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