Fairco, a family business, is considering making an investment in its manufacturing operation. Three decisions are under consideration: (1) a large investment; (2) a medium investment; and (3) a small investment. The business believes that there are three possible future outcomes for its product: (1) increasing demand; (2) stable demand; and (3) decreasing demand. The following payoff table describes the decision situation. The best decision for Fairco using the maximax criterion would be to
A) make the large investment.
B) make the medium investment.
C) make the small investment.
D) choose increasing demand.

Question

Fairco, a family business, is considering making an investment in its manufacturing operation. Three decisions are under consideration: (1) a large investment; (2) a medium investment; and (3) a small investment. The business believes that there are three possible future outcomes for its product: (1) increasing demand; (2) stable demand; and (3) decreasing demand. The following payoff table describes the decision situation.  The best decision for Fairco using the maximax criterion would be to
A) make the large investment. 
B) make the medium investment. 
C) make the small investment. 
D) choose increasing demand.

Quizplus · Accepted Answer

The maximax criterion involves selecting the decision alternative that maximizes the maximum possible outcome. If we look at each possible outcome for each investment option, we can see that for all three possible future outcomes, the best payoff is achieved with the large investment. Therefore, Fairco should choose to make the large investment according to the maximax criterion.

Fairco, a Family Business, Is Considering Making an Investment in Its