Can anyone help me with this from behavioral economics? + (d) Determine the choi

Question

Can anyone help me with this from behavioral economics?

+

(d) Determine the choice using minimax-risk criterion.

(e) If each state of the world is equally likely, what are the expected values for each choice, and which one maximizes expected value?

1. Consider the following choice under uncertainty: Large Medium Small 0 M 10 S 5 12 -2 (o) Determine the choice uasing the mascmin ceriterion (b) Determine the choice using the maximax criterion (c) Calculate the regret table which shows the regret for each state of the world and choice combination.

Explanation / Answer

Ans 1)

When Maximin criterion is considered

When Demand is Low then Minimum Payoff is 0

When Demand is Medium then Minimum Payoff is -2

When Demand is Small then Minimum Payoff is 3

Therefore Maximum payoff in these minimum payoffs will be 3

Hence Investment should be small to get payoff of 3 and demand will be Small

Answer b)

Maximax criterion

Maximum payoff of $12 is possible when the investment is Medium

Answer c)

Maximum regret if Large Demand is chosen will be $10, if Medium Demand is chosen will be $12 and for Small it is $11

therefore Minimum regret is $10 thererfore Large Investment and Large Demand to be chosen by this criteria

Answer d)

1/3 is the probability for each choice then Expected value for each scenario will be

Large 1/3(0+6+8)=14/3=5.66

Medium 1/3(10+12+3)=8.33

Small 1/3(5-2+11)=4.66

Hence Expected Value is maximum when Medium Investment is chosen

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