Build-Rite construction has received favorable publicity from guest appearances on a public TV home improvement program. Public TV programming decisions seem to be unpredictable, so Build -Rite cannot estimate the probability of continued benefits from it relationship with the show. Demand for home improvements next year may be either low or high. But Build-Rite must decide now whether to hire more employees, do nothing, or develop subcontracts with other home improvement contractors. Build-Rite has developed the following payoff table.
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Payoffs
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Demand For Home Improvements
|
|
Alternative
|
Low
|
Moderate
|
High
|
|
Hire
|
($250,000)
|
$100,000
|
$625,000
|
|
Subcontract
|
$100,000
|
$150,000
|
$415,000
|
|
Do nothing
|
$50,000
|
$80,000
|
$300,000
|
What is the decision based on each of the following criteria? Show work in making the decision for each criterion:
a) Maximax
b) Maximin
c) Criterion of realism with coefficient of realism = 0.7
d) Equally likely
e) Minimax regret
Use the tables given below.
a) Optimistic or Maximax Criterion
|
Payoffs
|
Demand For Home Improvements
|
|
|
Alternative
|
Low
|
Moderate
|
High
|
|
Hire
|
|
|
|
|
|
Subcontract
|
|
|
|
|
|
Do nothing
|
|
|
|
|
b) Pessimistic or Maximin Criterion
|
Payoffs
|
Demand For Home Improvements
|
|
|
Alternative
|
Low
|
Moderate
|
High
|
|
Hire
|
|
|
|
|
|
Subcontract
|
|
|
|
|
|
Do nothing
|
|
|
|
|
c) Criterion of realism with coefficient of realism = 0.7
|
Payoffs
|
Demand For Home Improvements
|
|
|
Alternative
|
Low
|
Moderate
|
High
|
|
Hire
|
|
|
|
|
|
Subcontract
|
|
|
|
|
|
Do nothing
|
|
|
|
|
d) Equally likely or Principle of Insufficient Reason Criterion
|
Payoffs
|
Demand For Home Improvements
|
|
|
Alternative
|
Low
|
Moderate
|
High
|
|
|
Hire
|
|
|
|
|
|
Subcontract
|
|
|
|
|
|
Do nothing
|
|
|
|
|
e) Minimax Regret Approach
|
Regrets
|
Demand For Home Improvements
|
|
|
Alternative
|
Low
|
Moderate
|
High
|
|
Hire
|
|
|
|
|
|
Subcontract
|
|
|
|
|
|
Do nothing
|
|
|
|
|