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

question 5

Short Answer

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.
$\begin{array}{l|ccc}&\text { Demand Values }\\\text { Decision } & \text { Low } \left.S_{1}\right) & \text { Medium } \left.S_{2}\right) & \text { High } \left.S_{3}\right) \\\hline\text { Small Expansion } d_{1} \text { ) } & \$ 5,000 & \$ 10,000 & \$ 10,000 \\\text { Medium Expansion } d_{2} \text { ) } & \$ 2,000 & \$ 12,000 & \$ 14,000 \\\text { Large Expansion } d_{3} \text { ) } & -0- & \$ 6,000 & \$ 13,000 \\\text { Very Large Expansion } d_{4} \text { ) } & -\$ 5,000 & \$ 8,000 & \$ 20,000\end{array}$
a. Which decision variable would be picked using maximax?
b. Which decision variable would be picked using maximin?
c. Which decision variable would be picked using minimax regrets 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 picked using the expected value criterion?

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Definitions:

Inductive Reasoning

A method of reasoning in which specific observations or data are analyzed to form a general conclusion or principle.

Abductive Reasoning

A type of logical inference which begins with an observation then seeks to find the simplest and most likely explanation.

Retroductive Reasoning

A form of reasoning that starts from an observed effect and works backward to hypothesize a cause; also known as abductive reasoning.

Deeper Meaning

The underlying or significant significance of a concept, action, or statement beyond its surface level interpretation.