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. If Trey uses the Hurwicz criterion with alpha = 0.1,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.  If Trey uses the Hurwicz criterion with alpha = 0.1,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 with alpha = 0.1 involves a tradeoff between the best-case scenario payoff and the worst-case scenario payoff, with alpha representing the decision maker's optimism. To calculate the Hurwicz criterion for each alternative, we take the weighted average of the best-case and worst-case payoffs, with the weight of alpha given to the best-case scenario.

For the "Add Third Shift" alternative, the Hurwicz criterion is:

(0.9 x 10) + (0.1 x 3) = 9.3

For the other alternatives, the Hurwicz criteria are:

Lease New Equipment: (0.9 x 8) + (0.1 x 2) = 7
Purchase New Equipment: (0.9 x 6) + (0.1 x 5) = 5.5
Do Nothing: (0.9 x 0) + (0.1 x 0) = 0

Based on these calculations, the "Add Third Shift" alternative has the highest Hurwicz criterion of 9.3, indicating that it is the best choice.