The operations manager for a well-drilling company must recommend whether to build a new facility, expand his existing one, or do nothing. He estimates that long-run profits (in $000) will vary with the amount of precipitation (rainfall) as follows:
If he uses the minimax regret criterion, which alternative will he decide to select?
A) do nothing
B) expand
C) build new
D) either do nothing or expand
E) either expand or build new

Question

The operations manager for a well-drilling company must recommend whether to build a new facility, expand his existing one, or do nothing. He estimates that long-run profits (in $000) will vary with the amount of precipitation (rainfall) as follows: 
If he uses the minimax regret criterion, which alternative will he decide to select?
A) do nothing 
B) expand 
C) build new 
D) either do nothing or expand 
E) either expand or build new

Quizplus · Accepted Answer

Using the minimax regret criterion, we first calculate the maximum regret for each alternative by finding the difference between the maximum profit for a given level of precipitation and the profit for each alternative at that level.

For example, if precipitation is low (250 mm), the maximum profit is 90, and the profits for each alternative are: 
- Do nothing: 80 
- Expand: 120 
- Build new: 150

The regret for each alternative is: 
- Do nothing: 10 
- Expand: 30 
- Build new: 0

The maximum regret for this level of precipitation is 30, which is associated with the Expand option.

We repeat this process for each level of precipitation and find that the maximum regret for each alternative is: 
- Do nothing: 30 
- Expand: 40 
- Build new: 0

The minimax regret criterion recommends selecting the alternative with the lowest maximum regret, which in this case is Build new. Therefore, the operations manager should recommend building a new facility.

The Operations Manager for a Well-Drilling Company Must Recommend Whether