ANSWER 1

(a) Maximax Criterion:

• Maximax criterion selects the decision with the maximum possible payoff
(optimistic approach).

• Highest Payoff:
Expand: $56,000
Move: $70,000
No Change: $30,000

Decision: Move ($70,000)

(b) Maximin Criterion:

• Maximin criterion selects the decision with the maximum of the minimum payoffs
(pessimistic approach).

• Minimum Payoffs:
Expand: $-29,000
Move: $-45,000
No Change: $5,000

Decision: No Change ($5,000)

(c) LaPlace Criterion:

• LaPlace criterion assumes equal probability for all states of nature. Average the
payoffs for each alternative.

• Averages:
Expand: (56,000+21,000−29,000)/3=16,000
Move: (70,000+35,000−45,000)/3=20,000
No Change: (30,000+10,000+5,000)/3=15,000

Decision: Move ($20,000)

(d) Hurwicz Criterion (α = 0.6):

• Hurwicz criterion uses a weighted average of the best and worst payoffs for each
alternative.

• H=α⋅Best Payoff+(1−α) ⋅Worst Payoff

 • Calculations:
Expand: 0.6⋅56,000+0.4⋅ (−29,000) =33,600−11,600=22,0000.
Move: 0.6⋅70,000+0.4⋅ (−45,000) =42,000−18,000=24,0000.
No Change: 0.6⋅30,000+0.4⋅5,000=18,000+2,000=20,000.

• Decision: Move ($24,000)

(e) Minimax Regret:

• Regret Table is calculated by finding the difference between the best outcome in
each state and the outcomes for each decision.

• Payoff Table:

Step 1: Identify the best payoffs for each state of nature:

Favorable: $70,000 (Move)$
Average: $35,000 (Move)$
Unfavorable: $ 5,000 (No Change) $

Step 2: Calculate regrets for each decision:

Step 3: Determine the maximum regret for each decision:

Expand: $34,000$
Move: $50,000$
No Change: $40,000$

Step 4: Choose the decision with the minimum of the maximum regrets:
Decision: Expand ($34,000)

(f) Expected Monetary Value (EMV):

 • EMV is calculated as EMV=∑ (Payoff. Probability).

• Probabilities:
Favorable = 25%, Average = 45%, Unfavorable = 30%

• Calculations:
Expand: 0.25⋅56,000+0.45⋅21,000+0.30⋅ (−29,000) =14,000+9,450−8,700=14,7500
Move: 0.25⋅70,000+0.45⋅35,000+0.30⋅ (−45,000) =17,500+15,750−13,500=19,7500
No Change: 0.25⋅30,000+0.45⋅10,000+0.30⋅5,000=7,500+4,500+1,500=13,5000.

Decision: Move ($19,750)

(g) Expected Value of Perfect Information (EVPI):

• EVPI is the difference between the expected value with perfect information (EVwPI)
and the EMV.

• EVwPI Calculation:
Favorable: 0.25⋅70,000=17,500.
Average: 0.45⋅35,000=15,750.
Unfavorable: 0.30⋅5,000=1,500.
EVwPI=17,500+15,750+1,500=34,750

• EVPI:
EVPI=EVwPI−EMV (Best Decision) =34,750−19,750=15,000

• Most Bob would pay: $15,000

(h) Verify EVPI using EOL:

• Expected Opportunity Loss (EOL): Calculate regret table as shown in (e), then
multiply each regret by probabilities.

• EOL Calculations:
Expand: 0.25⋅14,000+0.45⋅14,000+0.30⋅34,000=3,500+6,300+10,200=20,000.
Move: 0.25⋅0+0.45⋅0+0.30⋅50,000=0+0+15,000=15,000.
No Change: 0.25⋅40,000+0.45⋅25,000+0.30⋅0=10,000+11,250+0=21,250.

• Minimum EOL: $15,000

EVPI: Matches $15,000.

ANSWER 2

Step 1: Complete the Payoff Table

We calculate the profits using the following rules:

• Revenue: Selling price ($30) × Quantity demanded

• Cost: Purchase price ($20) × Quantity ordered

• Salvage Value: $4 × (Quantity ordered - Quantity demanded) if unsold copies exist.

• Profit Formula: Revenue + Salvage Value - Cost

Example Calculation for 50 Books Ordered:

1. Demand = 50: Revenue = 50×30=1500, Cost = 50×20=1000, Profit =1500−1000=500.

2. Demand = 100: Revenue = 50×30=1500, Cost = 50×20=1000, Profit =1500−1000=500

(as no additional books sold beyond 50).

3. Demand = 150 or 200: Same logic applies (max sold = 50).

Compute for all values and fill the table:

(b) Maximax Criterion (Optimistic Approach)

• Choose the highest possible profit for each quantity and select the maximum:

50 Books: 500
100 Books: 1000
150 Books: 1500
200 Books: 2100

• Decision: Order 200 books (Profit = $2,100).

(c) Maximin Criterion (Pessimistic Approach)

• Choose the minimum profit for each quantity and select the maximum:

50 Books: 500
100 Books: 300
150 Books: 600
200 Books: 1100
 • Decision: Order 50 books (Profit = $500).

(d) LaPlace Criterion (Equally Likely)

• Average the profits for each quantity:

50 Books: (4500+500+500+500)/4=500

100 Books: (−300+1000+1000+1000)/4=675

150 Books: (−600+700+1500+1500)/4=775

200 Books: (-1100+400+1300+2100)/4=675

• Decision: Order 150 books (Average Profit = $775).

(e) Hurwicz Criterion (α=0.7)

• Weighted average of the best and worst profits for each quantity:
Hurwicz = α⋅Best+(1−α) ⋅Worst

• Calculations:

50 Books: 0.7⋅500+0.3⋅500=500

100 Books: 0.7⋅1000+0.3⋅ (−300) =700−90=610

150 Books: 0.7⋅1000+0.3⋅ (−300) =1050−180=870

200 Books: 0.7⋅2100+0.3⋅ (−1100) =1470−330=1140

• Decision: Order 200 books (Profit = $1,140).

(f) Minimax Regret

Construct the Regret Table:

Regret = Maximum payoff for each state - Payoff for the alternative.
Find the Maximum Regret for each alternative:

50 Books: 1600

100 Books: 1100

150 Books: 1100

200 Books: 1600

Decision: Order 100 or 150 books (Minimum Regret = $1,100).

(g) Expected Monetary Value (EMV)

Probabilities: 20%, 35%, 25%, 20%

EMV = ∑(Payoff⋅Probability)

Calculations:

50 Books: 500⋅0.2+500⋅0.35+500⋅0.25+500⋅0.2=500

100 Books: −300⋅0.2+1000⋅0.35+1000⋅0.25+1000⋅0.2=700

150 Books: −600⋅0.2+700⋅0.35+1500⋅0.25+1500⋅0.2=875

200 Books: −1100⋅0.2+400⋅0.35+1300⋅0.25+2100⋅0.2=865

Decision: Order 150 books (EMV = $875)

(h) Expected Value of Perfect Information (EVPI)

• EVPI = EVwPI - EMV

• EVwPI: Weighted average of best outcomes for each demand:

EVwPI = (500*0.2+ 1000*0.35+1500*0.25+2100.0.2)=1125

• EMV: Best EMV = $875

• EVPI = 1125 - 875 = $250

ANSWER 3

(i) Maximin Criterion (Pessimistic Approach)

1. Find the minimum payoff for each strategy:

o S1: min (40,60) =40

o S2: min (10, −20) =−20

o S3: min (−40,150) =−40

2. Select the maximum value among these minimum payoffs:

max (40, −20, −40) =40

Decision: Choose S1.

(ii) Minimax Regret Criterion

1. Calculate the regret matrix:

o Regret = Maximum payoff for each state - Payoff for each strategy.

For E1 (maximum = 40):

S1:40−40=0, S2:40−10=30, S3:40−(−40) =80

For E2 (maximum = 150):

S1:150−60=90, S2:150−(−20) =170, S3:150−150=0

Regret matrix:
2. Find the maximum regret for each strategy:

o S1:max (0,90) =90

o S2:max (30,170) =170

o S3: max (80,0) =80

3. Select the minimum value among these maximum regrets:

min (90,170,80) =80

Decision: Choose S3.

Final Answer:

1. Maximin Criterion: Choose S1.

2. Minimax Criterion: Choose S3.

ANSWER 4

Payoff Matrix:

(i) Maximin Criterion (Pessimistic Approach)

1. Find the minimum profit for each crop across all rainfall levels:

o Crop A: min (8000,4500,2000) =2000

o Crop B: min (3500,4500,5000) =3500

o Crop C: min (5000,5000,4000) =4000

2. Select the maximum value among these minimum profits:

max (2000,3500,4000) =4000

• Decision: Plant Crop C.

(ii) Minimax Criterion (Regret Approach)

1. Calculate the regret matrix:

o Regret = Maximum profit for each rainfall level - Profit for each crop at that
level.

For High rainfall (maximum = 8000):

Crop A: 8000−8000=0, Crop B: 8000−3500=4500, Crop C: 8000−5000=3000

For Medium rainfall (maximum = 5000):

Crop A: 5000−4500=500, Crop B: 5000−4500=500, Crop C: 5000−5000=0

For Low rainfall (maximum = 5000):

Crop A: 5000−2000=3000, Crop B: 5000−5000=0, Crop C: 5000−4000=1000

Regret matrix:

1. Find the maximum regret for each crop:

o Crop A: max (0,500,3000) =3000

o Crop B: max (4500,500,0) =4500

o Crop C: max (3000,0,1000) =3000

2. Select the crop with the minimum value among these maximum regrets:

min (3000,4500,3000) =3000

• Decision: Plant Crop A or Crop C (both have equal regret).

Final Answer:
1. Maximin Criterion: Plant Crop C.

2. Minimax Criterion: Plant Crop A or Crop C (tie based on regret).

ANSWER 5

Payoff Matrix (Estimated Sales in Units):

(i) Maximin Criterion (Pessimistic Approach)

1. Find the minimum payoff for each shampoo type across all sales levels:

o Egg Shampoo: min (30,10,10) =10

o Clinic Shampoo: min (40,15,5) =5

o Deluxe Shampoo: min (55,20,3) =3

2. Select the maximum value among these minimum payoffs:

max (10,5,3) =10

Decision: Choose Egg Shampoo.

(ii) Minimax Criterion (Regret Approach)

1. Calculate the regret matrix:

o Regret = Maximum payoff for each sales level - Payoff for each shampoo type
at that level.

For 15,000 units (maximum = 55):

Egg Shampoo: 55−30=25, Clinic Shampoo: 55−40=15, Deluxe Shampoo: 55−55=0

For 10,000 units (maximum = 20):

 Egg Shampoo: 20−10=10, Clinic Shampoo: 20−15=5, Deluxe Shampoo: 20−20=0

For 5,000 units (maximum = 10):

Egg Shampoo: 10−10=0, Clinic Shampoo: 10−5=5, Deluxe Shampoo: 10−3=7

Regret matrix:

1. Find the maximum regret for each shampoo type:

o Egg Shampoo: max (25,10,0) =25

o Clinic Shampoo: max (15,5,5) =15

o Deluxe Shampoo: max (0,0,7) =7

2. Select the shampoo type with the minimum regret:

min (25,15,7) =7

Decision: Choose Deluxe Shampoo.

Final Answer:

1. Maximin Criterion: Choose Egg Shampoo.

2. Minimax Criterion: Choose Deluxe Shampoo.