Problem
A firm making production plans believes there is a 30% probability the price will be $10, a 50% probability the price will be $15, and a 20% probability the price will be $20. The manager must decide whether to produce 6,000 units of output (A), 8,000 units (B) or 10,000 units (C). The following table shows 9 possible outcomes depending on the output chosen and the actual price.
|
Production
|
Profit (Loss) when price is
|
|
$10
|
$15
|
$20
|
|
6,000
|
(A)
|
-$200
|
$400
|
$1,000
|
|
8,000
|
(B)
|
-$400
|
$600
|
$1,600
|
|
10,000
|
(C)
|
-$1,000
|
$800
|
$3,000
|
For the above payoff matrix, suppose the manager has no idea about the probability of any of the three prices occurring. If the maxim in rule is used how much will the firm produce?