Fairco,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 Fairco 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

Fairco,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 Fairco 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 has the maximum possible payoff. Looking at the payoff table, the maximum payoff for each investment decision under each future demand scenario is as follows:

- Large investment: 120, 50, 0
- Medium investment: 70, 40, 10
- Small investment: 50, 20, -10

Based on these maximum payoffs, the best decision using the maximax criterion would be to make the large investment, as it has the highest maximum payoff of 120.

Fairco,a Family Business,is Considering Making an Investment in Its Manufacturing