1. A machine shop owner is attempting to decide whether to purchase a new drill press, a lathe, or a grinder. The profit from each purchase will be determined by whether the company succeeds in getting a government military full contract, partial contract or no contract. The profit from each purchase associated with each contract outcome is shown in the following payoff table:
Purchase Full Contract Partial Contract No Contract
Drill press $60,000 $40,000 $16,000
Lathe 40,000 30,000 24,000
Grinder 32,000 28,000 26,000
(a) What is the best decision using the maximax criterion? What is the payoff for it?
(b) What is the best decision using the maximin criterion? What is the payoff for it?
(c) What is the best decision using the minimax regret criterion? What is the regret for it?
(d) What is the best decision using the Hurwicz’s criterion if α = 0.6? What is the payoff for it?
2.. For the problem given in Question 1, assume that the probability of a full contract is 0.2, the probability of a partial contract is 0.4, and the probability of no contract is 0.4.
(a) Calculate the expected value of each decision alternative. What is your recommendation using the expected value criterion?
(b) Calculate the expected opportunity loss value of each decision alternative. What is your recommendation using the expected opportunity loss criterion?
(c) Calculate and interpret the value of perfect information.