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 minimax regret decision criterion would be to
A)make the large investment
B)make the medium investment
C)make the small investment
D)choose decreasing 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 minimax regret decision criterion would be to

The best decision for the business using the minimax regret decision criterion would be to
A)make the large investment 
B)make the medium investment 
C)make the small investment 
D)choose decreasing demand

Quizplus · Accepted Answer

Using the minimax regret decision criterion, we calculate the maximum regret for each decision and choose the decision with the minimum maximum regret. To do this, we first calculate the regret table by finding the difference between the maximum payoff for each possible outcome and the payoff for each decision as shown below:

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The maximum regret for each decision is then found by taking the maximum value in each column of the regret table. For example, the maximum regret for the large investment in case of increasing demand is 12.

Next, we find the minimum value among the maximum regrets for each decision, which is the value of 5 for the medium investment. Therefore, the best decision is to make the medium investment.

A Family Business Is Considering Making an Investment in Its