The national sales manager for "I colored this" (ICT) T-shirts, provides all salespersons with the payoff table shown below, giving the estimated profit when a retailer purchases from 1 to 4 dozen T-shirts. The probability of demand for each state of nature is also shown. What would be the best decision if the maximax strategy is used?
A) 1
B) 2
C) 3
D) 4

Question

The national sales manager for "I colored this" (ICT) T-shirts, provides all salespersons with the payoff table shown below, giving the estimated profit when a retailer purchases from 1 to 4 dozen T-shirts. The probability of demand for each state of nature is also shown.  What would be the best decision if the maximax strategy is used?
A) 1 
B) 2 
C) 3 
D) 4

Quizplus · Accepted Answer

The maximax strategy involves selecting the decision alternative that provides the highest possible payoff for each state of nature, and then selecting the decision alternative with the highest of these maximum payoffs.

Using this strategy, we can calculate the maximum payoff for each decision alternative as follows:

- Decision alternative 1: max(0.1*36, 0.3*18, 0.4*12, 0.2*8) = 7.2
- Decision alternative 2: max(0.1*60, 0.3*30, 0.4*20, 0.2*12) = 12
- Decision alternative 3: max(0.1*84, 0.3*42, 0.4*28, 0.2*16) = 16.8
- Decision alternative 4: max(0.1*108, 0.3*54, 0.4*36, 0.2*20) = 21.6

Therefore, the best decision is to choose alternative 4, which has the highest maximum payoff of 21.6.

The National Sales Manager for "I Colored This" (ICT) T-Shirts