65.A family business is considering making an investment in its man ufacturing o
ID: 423752 • Letter: 6
Question
65.A family business is considering making an investment in its man ufacturing operation. Three decisions are under consideration: (1) a large inves medium investment; and (3) a small investment. The business believes that there are three possible future outcomes for its product: (1) increasing demand; (2) stable demand; and (3) decreasing demand. The following payoff table tment; (2) a describes the decision situation. States of Nature Decreasing Demand Decision Increasing Demand Stable Demand 1,20,030 10.08010 $400,000 $600,000 Large Investment 300,000 -200,000 500,000 Medium Investment 25,000 250,000 125,000 Small Investment The best decision for the business using the maximax criterion would be to a. make the large investment b. make the medium investment c. make the small investment d. choose increasing demandExplanation / Answer
The correct choice is a. Make the large investment
Explanation : - The maximax criterion selects the alternative with the largest payoff value out of the best payoff values for each alternative.
The payoff of large investment = $ 1,000,000 + $ 400,000 - $ 600,000
Payoff of large investment = $ 800,000
Payoff medium investment = $ 500,000 + $ 300,000 - $ 200,000
Payoff medium investment = $ 600,000
Payoff of small investment = $ 250,000 + $ 125,000 + $ 25,000
Payoff of small investment = $ 400,000
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