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Decision Under Uncertainty: Suppose the management at somaya Inc., is considering changing the size (capacity) of its manufacturing plant. Management has narrowed the decision to three choices. The plant's capacity will be (1) expanded by 20 percent, (2) maintained at the current capacity, or (3) reduced by 20 percent. The outcome of this decision depends crucially on how the economy performs during the upcoming year. Thus the performance of the economy is the "state of nature" in this decision problem. For each possible decision and state of nature, the managers determine the profit outcome, or payoff, shown in the payoff matrix in table 1. Table 1 The Payoff Matrix for somaya Inc. States of Nature Recovery AED 15 million AED 6 million AED 2 million Decision Expand Plant Capacity of 20 % Stagnation Recession -AED 2 million AED 4 million AED 1 million - AED 6 million Maintain same Plant Capacity Reduce Plant Capacity of 20 % AED 1 million AED 1.5 million The managers do not know which state of nature will actually occur. Evaluate what decision should managers of somaya Inc. make by using each of the following rules? a) Maximax Rule b) Maximin Rule Minimax Regret Rule Equal Probability Rule

Decision Under Uncertainty: Suppose the management at somaya Inc., is considering changing the size (capacity) of its manufacturing plant. Management has narrowed the decision to three choices. The plant's capacity will be (1) expanded by 20 percent, (2) maintained at the current capacity, or (3) reduced by 20 percent. The outcome of this decision depends crucially on how the economy performs during the upcoming year. Thus the performance of the economy is the "state of nature" in this decision problem. For each possible decision and state of nature, the managers determine the profit outcome, or payoff, shown in the payoff matrix in table 1. Table 1 The Payoff Matrix for somaya Inc. States of Nature Recovery AED 15 million AED 6 million AED 2 million Decision Expand Plant Capacity of 20 % Stagnation Recession -AED 2 million AED 4 million AED 1 million - AED 6 million Maintain same Plant Capacity Reduce Plant Capacity of 20 % AED 1 million AED 1.5 million The managers do not know which state of nature will actually occur. Evaluate what decision should managers of somaya Inc. make by using each of the following rules? a) Maximax Rule b) Maximin Rule Minimax Regret Rule Equal Probability Rule

Practical Management Science
Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter9: Decision Making Under Uncertainty
Section: Chapter Questions
Problem 46P
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Decision Under Uncertainty: Suppose the management at somaya Inc., is considering changing the size (capacity) of its manufacturing plant. Management has narrowed the decision to three choices. The plant's capacity will be (1) expanded by 20 percent, (2) maintained at the current capacity, or (3) reduced by 20 percent. The outcome of this decision depends crucially on how the economy performs during the upcoming year. Thus the performance of the economy is the "state of nature" in this decision problem. For each possible decision and state of nature, the managers determine the profit outcome, or payoff, shown in the payoff matrix in table 1. Table 1 The Payoff Matrix for somaya Inc. States of Nature Decision Recovery AED 15 million AED 6 million AED 2 million Stagnation Recession -AEĎ 2 million - AED 6 million Expand Plant Capacity of 20 % Maintain same Plant Capacity AED 4 million AED 1 million Reduce Plant Capacity of 20 % AED 1 million AED 1.5 million The managers do not know which state of nature will actually occur. Evaluate what decision should managers of somaya Inc. make by using each of the following rules? Maximax Rule a) Maximin Rule Minimax Regret Rule Equal Probability Rule
Transcribed Image Text:Decision Under Uncertainty: Suppose the management at somaya Inc., is considering changing the size (capacity) of its manufacturing plant. Management has narrowed the decision to three choices. The plant's capacity will be (1) expanded by 20 percent, (2) maintained at the current capacity, or (3) reduced by 20 percent. The outcome of this decision depends crucially on how the economy performs during the upcoming year. Thus the performance of the economy is the "state of nature" in this decision problem. For each possible decision and state of nature, the managers determine the profit outcome, or payoff, shown in the payoff matrix in table 1. Table 1 The Payoff Matrix for somaya Inc. States of Nature Decision Recovery AED 15 million AED 6 million AED 2 million Stagnation Recession -AEĎ 2 million - AED 6 million Expand Plant Capacity of 20 % Maintain same Plant Capacity AED 4 million AED 1 million Reduce Plant Capacity of 20 % AED 1 million AED 1.5 million The managers do not know which state of nature will actually occur. Evaluate what decision should managers of somaya Inc. make by using each of the following rules? Maximax Rule a) Maximin Rule Minimax Regret Rule Equal Probability Rule
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