MGT613

ASSIGNMENT NO 1
SOLUTION FALL 2022
Topic: Decision Making Under uncertainty
Operations manager make use of decision theory for variety of operations management
decisions. It makes use of payoff table that summarizes the various expected payoffs
under different possible states of nature.

Decision theory being a general approach to decision making considers set of possible
outcomes, list of alternatives to choose from and a known payoff table for each of the
alternative under each possible future condition.

Table: Payoff Values

Possible Future Demand (in thousand)

Alternatives Low Moderate High
Small Facility 30,000 30,000 30,000
Medium Facility 24,000 34,000 34,000
Large Facility (8000) 8000 42,000

Considering the given payoff table, determine which alternative would be chosen under each
of the following strategies?

1. Maximin
2. Maximax
3. Laplace

SOLUTION:

MAXIMIM
Maximin determines the worst payoff for each alternative; the operations manager chooses the best worst
alternative. Meaning the least (best) of the worst. Hence, the worst payoffs for each alternative are:
Small Facility 30,000
Medium Facility 24,000
Large Facility (8000)

Now, the best of all these alternatives is:

30,000 which is in Small Facility.

MAXIMAX
Maximax determines the best possible outcome. It choose the Alternative with the best possible payoff.
Hence, the best payoffs for each alternative are:

Small Facility 30,000

Medium Facility 34,000
Large Facility 42,000

Now, the best of all these alternatives is:

42,000 which is in Large Facility.

LAPLACE
Determines the Average payoff for each alternative and chooses the alternative with the best average.
Hence the average of each alternative can be calculated as:

Small Facility= (30,000+30,000+30,000)/3

= 30,000
Medium Facility= (24,000+34,000+34,000)/3
= 30,667
Large Facility= (-8000+8000+42,000)/3
= 14,000

Now, the best of all these alternatives is:

30,667 which is in Medium Facility.