Discussion:
Q: The operations manager for a well-drilling company must recommend whether to build a new facility, expand this existing one, or do nothing. He estimates that long-run profit (in thousands of dollars) will vary with the amount of precipitation (rainfall) as follows.
1. If he uses the maximax criterion, which alternative is the best?
|
Alternative
|
Precipitation
|
|
Low
|
Normal
|
High
|
|
Do nothing
|
-100
|
100
|
300
|
|
Expand
|
350
|
500
|
200
|
|
Build new
|
750
|
300
|
0
|
2. If he uses the Laplace criterion, which alternative is the best?
3. If he uses the minimax regret criterion, which alternative is the best?
4. If he feels the chances of low, normal, and high precipitation are, 0.3, 0.2, and 0.5, respectively, which are expected long-run profit for the best alternative?