A plant manager is considering buying additional stamping ma

A plant manager is considering buying additional stamping machines to accommodate increasing demand. The alternatives are to buy 1 machine, 2 machines, or 3 machines. The profits realized under each alternative are a function of whether their bid for a recent defense contract is accepted or not. The payoff table below illustrates the profits realized (in $000\'s) based on the different scenarios faced by the manager

Alternative           Bid Accepted           Bid Rejected
Buy 1 machine             $10                           $5
Buy 2 machines            $30                          $4
Buy 3 machines            $40                           $2

Using the information above, which alternative should be chosen based on the maximax criterion?

Solution

the maximax criterion:

It is based on the optimistic attitude to make the \"best\" of the best possible actions

max for each alternative

BUY 1 MACHINE $10

BUY 2 MACHINES $30

BUY 3 MACHINES $40

SO WE WILL CHOOSE THE MAX OF THE BEST OPTION THAT IS

$40 ---------> BUY 3 MACHINES