ufacturing 66.A family busine ss is considering making an investment in its manu

Question

ufacturing 66.A family busine ss is considering making an investment in its manuf (1) a large investment, (2) a operation. Three decisions are under medium investment; there are three possible future (2) stable demand; and (3) decreasing ment. The business believes that and (3) a small inves f demand. The following payoff table (2) stable demand: and (6) decrusomes for ts prod States of Nature Increasing Demand Stable Demand Decreasing Demand Decision $400,000 -$600,000 $1,000,000 Large Investment Medium Investment 500,000 300,000 -200,000 125,000 Small Investment 250,000 25,000 The best decision for the business using the Hurwicz criterion with a coefficient of optimism equal to 0.80 would be to a. make the large investment b. make the medium investment c. make the small investment d. choose stable demand

Explanation / Answer

The formula for Hurwicz criteria is as below:-

EV= alpha*Maximum value +(1*alpha) Minimum value

EV for large investment = 0.8*1000000 +(1-0.8)*-600000 =800000-120000=6800000

EV for medium investment = 0.8*500000 +(1-0.8)*-200000 =400000-40000=3600000

EV for Small investment = 0.8*250000 +(1-0.8)*-25000 =200000-5000=195000

As the maximum EV is associated with Large investment thus the large investment must be selected.

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