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• A firm is considering the decision of investing in new plants.  The following is the profit

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• A firm is considering the decision of investing in new plants.  The following is the profit payoff matrix under three conditions:  it does not expand, it builds two new plants, or it builds one new plant.  Three possible states of nature can exist--no change in the economy, the economy contracts and the economy grows.  The firm has no idea of the probability of each state.

	State of Economy
	expands	contracts	unchanged
no new plants 1 new plant 2 new plants	$20 million $30 million $40 million	-$ 3 million -$ 6 million -$12 million	$4 million $6 million $8 million

Which option would the firm choose under each of the following rules?

a.    Maximax rule                     _________________________________________________

b.    Maximin rule                      __________________________________________________

c.     Minimax regret rule            _________________________________________________

d.    Equal probability rule         _________________________________________________

 

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Oct 14, 2020

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