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 maximin criterion would be to
A)make the large investment.
B)make the medium investment.
C)make the small investment.
D)choose stable 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 maximin criterion would be to
A)make the large investment. 
B)make the medium investment. 
C)make the small investment. 
D)choose stable demand.

Quizplus · Accepted Answer

The maximin criterion involves identifying the minimum payoff for each decision and selecting the one with the highest minimum payoff. For Fairco, the minimum payoffs for each decision are as follows:
- Large investment: $100,000 for increasing demand, $10,000 for stable demand, -$80,000 for decreasing demand (minimum payoff is -$80,000)
- Medium investment: $50,000 for increasing demand, $20,000 for stable demand, -$50,000 for decreasing demand (minimum payoff is -$50,000)
- Small investment: $20,000 for increasing demand, $5,000 for stable demand, -$30,000 for decreasing demand (minimum payoff is -$30,000)
Therefore, the small investment has the highest minimum payoff and would be the best decision for Fairco using the maximin criterion.

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