8.12 Practice Problems and 9.3 Practice Problems

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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.
Payoffs 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 ($250,000) $100,000 $625,000
Subcontract $100,000 $150,000 $415,000
Do nothing $50,000 $80,000 $300,000
Decision:

b) Pessimistic or Maximin Criterion
Payoffs 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
Decision:

c) Criterion of realism with coefficient of realism = 0.7
Payoffs 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
Decision:

d) Equally likely or Principle of Insufficient Reason Criterion
Payoffs 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
Decision:

e) Minimax Regret Approach
Regrets Demand For Home Improvements
Alternative Low Moderate High
Hire
Subcontract
Do nothing
Decision: