An operations manager's staff has compiled the information below for four manufacturing alternatives (A, B, C, and D) that vary by production technology and the capacity of the machinery

Question

All choices enable the same level of total production and have the same lifetime. The four states of nature represent four levels of consumer acceptance of the firm's products. Values in the table are net present value of future profits in millions of dollars.

States of Nature
1 2 3 4
Alternative A 50 55 60 65
Alternative B 30 50 80 130
Alternative C 70 80 70 65
Alternative D -100 -10 150 220

a. Assuming a maximax strategy, which alternative would be chosen?
b. If maximin were used, which would be chosen?
c. If the states of nature were equally likely, which alternative should be chosen?

Answer 1

(a) The maximax strategy selects the best of the best, which is $220. This happens when Alternative D is selected.
(b) The maximin strategy selects the best of the worsts; the worsts are A = 50, B = 30, C = 65, and D = -100. The best of these is 65, associated with Alternative C.
(c) The averages for the four alternatives are A = 57.5, B = 72.5, C = 71.25, and D = 65. The highest of these is 72.5, associated with Alternative B.