Question: Given the following decision alternatives, determine which decision alternative is the best using the following criteria. The three states of nature represent three levels of consumer demand for the firm’s products. Values in the table are net present values of future profits in thousands of dollars. You must show your workings in a table format in order to get credit for your answers.

Alternatives High demand Medium Demand Low Demand

Build new plant 350 240 -300

Subcontract 180 90 -20

Overtime 110 60 -10

Do nothing 0 0 0

a. Which alternative is best according to maximax criterion?

b. Which alternative is best according to maximin criterion?

c. If the states of nature were equally likely, what is the expected value of each alternative and which alternative should be chosen?

d. Construct a regret table, and determine which alternative is best according to minimax regret criterion?

e. Which alternative is best according to Hurwicz criterion when the coefficient of optimism ( a) is .7?

f. If further study revealed 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, which alternative is best?

g. What is the expected value of profit with perfect information?

h. What is the value of perfect information?