A Company Is Expanding Its Production Capacity A Which Decision Variable Would Be Selected Using Maximax?
B

question 31

Essay

A company is expanding its production capacity. The decision will depend upon whether the increase in demand is low, medium, or high. The company's choices for expansion are small, medium, large, or very large. The following table provides an estimate of profits over the next two years. $\begin{array}{l|ccc}&&\text { Demand Values }\\\text { Decision } & \text { Low }\left(\mathrm{S}_{1}\right) & \text { Medium }\left(\mathrm{S}_{2}\right) & \text { High }\left(\mathrm{S}_{3}\right) \\\hline\text { Small Expansion }\left(\mathrm{d}_{1}\right) & \$ 5,000 & \$ 10,000 & \$ 10,000 \\\text { Medium Expansion }\left(\mathrm{d}_{2}\right) & \$ 2,000 & \$ 12,000 & \$ 14,000 \\\text { Large Expansion }\left(\mathrm{d}_{3}\right) & 0 & \$ 6,000 & \$ 13,000 \\\text { Very Large Expansion }\left(\mathrm{d}_{4}\right) & \$ 5,000 & \$ 8,000 & \$ 20,000\end{array}$
a. Which decision variable would be selected using maximax?
b. Which decision variable would be selected using maximin?
c. Which decision variable would be selected using minimax-regret criteria?
d. Suppose the decision maker assigns the probability of low demand as 0.2, medium demand as 0.5, and high demand as 0.3. Which decision variable would be selected using the expected value criterion?

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