(a) Which alternative should the manager choose under the maximax criterion? (b) Which option should the manager choose under the maximin criterion? (c) Which option should the manager choose under the LaPlace criterion?
A company is considering a project which has three options. The payoffs are shown in the body of the
table. In this instance, the payoffs are in terms of present values, which represent equivalent current
dollar values of expected future income less costs. This is a convenient measure because it places all
alternatives on a comparable basis. If a small facility is built, the payoff will be the same for all three
possible states of nature. For a medium facility, low demand will have a present value of $7 million,
whereas both moderate and high demand will have present values of $12 million. A large facility will
have a loss of $4 million if demand is low, a present value of $2 million if demand is moderate,
and a present value of $16 million if demand is high.
The payoff table depicting revenues and is shown in the following table.
(a) Which alternative should the manager choose under the maximax criterion?
(b) Which option should the manager choose under the maximin criterion?
(c) Which option should the manager choose under the LaPlace criterion?
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