A company is considering a project which has three options. The payoffs are shown in the body of thetable. In this instance, the payoffs are in terms of present values, which represent equivalent currentdollar values of expected future income less costs. This is a convenient measure because it places allalternatives on a comparable basis. If a small facility is built, the payoff will be the same for all threepossible 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 willhave 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.payoffs (PV inmillions)states ofnatureLowOptionModeratehighSmall101010Medium71212Large-4216(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?(d)Which option should the manager choose with the Hurwicz criterion with a = 0.2? ((e)Using a minimax regret approach, what alternative should be chosen?(f)After reading about economic predictions, the manager has assigned the probability of low,moderate or low at 30%, 50% and 20% respectively. Using expected monetary values, whatoption should be chosen and what is the optimal expected value?

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MATLAB: An Introduction with Applications

6th Edition

ISBN:9781119256830

Author:Amos Gilat

Publisher:Amos Gilat

Chapter1: Starting With Matlab

Section: Chapter Questions

Problem 1P

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A company is considering a project which has three options. The payoffs are shown in the body of thetable. In this instance, the payoffs are in terms of present values, which represent equivalent currentdollar values of expected future income less costs. This is a convenient measure because it places allalternatives on a comparable basis. If a small facility is built, the payoff will be the same for all threepossible 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 willhave 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…
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