The local operations manger for the IRS must decide whether

The local operations manger for the IRS must decide whether to hire 1, 2, or 3 temporary workers. He estimates that net revenues (in thousands) will vary with how well taxpayers comply with the new tax code.

1. If he uses the maximin criterion, how many new workers will he hire?

2. If he uses the minimax regret criteria, how many workers will he hire?

3.If he thinks the chances of low, medium, and high compliance are 20%, 30%, and %50%, resepectively, what are the expected net revenue for the number of workers he will decide to hire?

4. If he thinks the chances of low, medium, and high compliance are 20%, 30%, and 50%, respectively, what is the expected value of perfect information?

Solution

1.

Using the maximin criteria, he will hire 1 worker.

2.

Using the minimax regret criteria , he will hire 1 worker.

3.

The expected net revenue will be 50.

4.

EVwPI = 0.2*150+0.3*70+0.5*50= 76.

EVPI = EVwPI - EVwoPI = 76 - 50 = 26