Dan Hein owns the mineral and drilling rights to a 1,000 hectare tract of land.If he drills a well and does not strike oil his net loss will be $500,000, but if he drills a well and strikes oil his net gain will be $1,000,000.If he does not drill, his loss is the cost of the mineral and drilling rights, which amount to $10,000.The probability of the state of nature "oil in the tract" is unknown.If Dan is an optimist, he would choose the ___.
A)maximin criterion
B)maximax criterion
C)Hurwicz criterion
D)minimax regret strategy
E)maximin regret strategy

Question

Quizplus · Accepted Answer

If Dan is an optimist, he would want to maximize his potential gain. The maximax criterion would maximize potential gain by choosing the option with the highest payoff in the best-case scenario, which is drilling and striking oil with a net gain of $1,000,000. This is the most optimistic choice.

Dan Hein Owns the Mineral and Drilling Rights to a 1,000