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 the business 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

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 the business using the maximax criterion would be to

The best decision for the business 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 best possible outcome. In this case, we evaluate the maximum payoff for each decision alternative and choose the one with the highest maximum payoff.

For the large investment, the maximum payoffs are $600,000 for increasing demand, $450,000 for stable demand, and $300,000 for decreasing demand. 
For the medium investment, the maximum payoffs are $250,000 for increasing demand, $200,000 for stable demand, and $150,000 for decreasing demand. 
For the small investment, the maximum payoffs are $100,000 for increasing demand, $50,000 for stable demand, and $0 for decreasing demand.

Therefore, the best decision using the maximax criterion is to make the large investment, which has the highest maximum payoff of $600,000 for increasing demand.

A Family Business Is Considering Making an Investment in Its