Trey Leeman, Operations Manager at National Consumers, Inc.(NCI), is evaluating alternatives for increasing capacity at NCI's Fountain Hill plant.He has identified four alternatives, and has constructed the following payoff table which shows payoffs (in $1,000,000's)for the three possible levels of market demand. $\begin{array}{r}
\text { Market Demands }\
\begin{array}{|c|c|c|c|}
\hline \text { Alternative } & \text { Low } & \text { Medium } & \text { High } \
\hline \text { Lease New Equipment } & -0.5 & 2 & 4 \
\hline \text { Purchase New Equipment } & -3 & 0.5 & 6 \
\hline \text { Add Third Shift } & 0.5 & 0.75 & 1 \
\hline \text { Do Nothing } & 0 & 0 & 0 \
\hline
\end{array}\end{array}$

If Trey uses the Hurwicz criterion with alpha = 0.4, the appropriate alternative would be: _____________.
A)Lease New Equipment
B)Purchase New Equipment
C)Add Third Shift
D)Do Nothing
E)Do everything

Question

Trey Leeman, Operations Manager at National Consumers, Inc.(NCI), is evaluating alternatives for increasing capacity at NCI's Fountain Hill plant.He has identified four alternatives, and has constructed the following payoff table which shows payoffs (in $1,000,000's)for the three possible levels of market demand. $\begin{array}{r}
\text { Market Demands }\ 
\begin{array}{|c|c|c|c|}
\hline \text { Alternative } & \text { Low } & \text { Medium } & \text { High } \
\hline \text { Lease New Equipment } & -0.5 & 2 & 4 \
\hline \text { Purchase New Equipment } & -3 & 0.5 & 6 \
\hline \text { Add Third Shift } & 0.5 & 0.75 & 1 \
\hline \text { Do Nothing } & 0 & 0 & 0 \
\hline 
\end{array}\end{array}$

If Trey uses the Hurwicz criterion with alpha = 0.4, the appropriate alternative would be: _____________.
A)Lease New Equipment
B)Purchase New Equipment
C)Add Third Shift
D)Do Nothing
E)Do everything

Quizplus · Accepted Answer

The Hurwicz criterion is a decision-making rule that involves an element of risk. It uses an alpha factor to strike a balance between the best and worst payoff by considering both the best-case and worst-case scenarios. The alpha factor represents the decision maker's attitude toward risk. 
Using alpha = 0.4 means that Trey is risk-averse, and he wants to ensure that the worst-case scenario is minimized. To apply the Hurwicz criterion, we need to calculate the weighted average payoff for each alternative.

For Lease New Equipment:
Expected payoff = (0.4 × -0.5) + (0.6 × 2) = 1.1

For Purchase New Equipment:
Expected payoff = (0.4 × -3) + (0.6 × 0.5) = -1.18

For Add Third Shift:
Expected payoff = (0.4 × 0.5) + (0.6 × 0.75) = 0.65

For Do Nothing:
Expected payoff = 0

Therefore, based on the Hurwicz criterion, the appropriate alternative would be the one with the highest expected payoff, which is Lease New Equipment with an expected payoff of 1.1. Therefore, the answer is A) Lease New Equipment.

Trey Leeman, Operations Manager at National Consumers, Inc If Trey Uses the Hurwicz Criterion with Alpha = 0