A firm making production plans believes there is a 30% probability the price will be $10,a 50% probability the price will be $15,and a 20% probability the price will be $20.The manager must decide whether to produce 6,000 units of output A),8,000 units B)or 10,000 units C).The following table shows 9 possible outcomes depending on the output chosen and the actual price. For the above payoff matrix,suppose the manager has no idea about the probability of any of the three prices occurring.If the maximax rule is used how much will the firm produce?
A)6,000
B)8,000
C)10,000
D)cannot use this rule to make the decision

Question

A firm making production plans believes there is a 30% probability the price will be $10,a 50% probability the price will be $15,and a 20% probability the price will be $20.The manager must decide whether to produce 6,000 units of output A),8,000 units B)or 10,000 units C).The following table shows 9 possible outcomes depending on the output chosen and the actual price.  For the above payoff matrix,suppose the manager has no idea about the probability of any of the three prices occurring.If the maximax rule is used how much will the firm produce?
A)6,000 
B)8,000 
C)10,000 
D)cannot use this rule to make the decision

Quizplus · Accepted Answer

The maximax rule suggests choosing the option that maximizes the best possible outcome. In this case, the best possible outcome is $20 per unit, which occurs with a probability of 20%. The option that maximizes this outcome is producing 10,000 units, which gives a maximum payoff of $200,000. Therefore, the firm should choose to produce 10,000 units.

A Firm Making Production Plans Believes There Is a 30