The New You Health Club is considering an expansion. Three proposals are being considered. Each proposal has been analyzed. The profits for three different customer responses for each proposal are shown in the table below:
Customer Response
High Moderate Low
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Add New Pool 150,000 50,000 80,000
Add New Gym 100,000 40,000 20,000
Add
(a) What is the best decision using the maximax criterion?
(b) What is the best decision using the maximin criterion?
(c) What is the best decision using the minimax regret criterion?
(d) What is the best decision using the Hurwicz’s criterion if α = 0.4?
6. For the problem given in Question 5, assume that the probability of high demand is 0.5, the probability of medium demand is 0.3, and the probability of low demand is 0.2.
(a) What is your recommendation using the expected value criterion?
(b) What is your recommendation using the expected opportunity loss criterion?
(c) What is the value of perfect information? Interpret its’ meaning.
Solution :
A) Maximax Criterion:
Maximax criterion finds alternatives that maximizes the maximum outcome of the consequences for every alternatives. Here the maximum outcome for each constructions are as below :
Maximum Outcome for:
New Pool: 150,000
New Gym: 100,000
New tennis court: 70,000
As maximax is maximum of all the maximum outcome, it is recommended to construct a new pool.
B) Maximin Criterion:
Unlike maximax, maximin criterion finds alternative.. (Get Full Answer)
