Question

Consider a firm that is deciding whether to operate plants only in

the United States or also in either Mexico or Canada or both. Congress is currently discussing an overseas investment in new capital (OINC) tax credit for U.S. firms that operate plants outside the country. If Congress passes OINC in 2008, management expects to do well if it is operating plants in Mexico and Canada. If OINC does not pass in 2008 and the firm does operate plants in Mexico and Canada, it will incur rather large losses. It is also possible that Congress will table OINC in 2009 and wait until 2010 to vote on it. The profit payoff matrix (profits in 2008) is shown here: States of nature OINC passes OINC fails OINC stalls Operate plants in U.S. only $10 Million -$1 million $2 million Operate plants in U.S. & Mexico $15 Million -$4 million $1.5 million Operate plants in U.S., Mex. &Can. $20 million -$6 million $4 million Assuming the managers of this firm have no idea about the likelihood of congressional action on OINC in 2008, what decision should the firm make using each of the following rules?

a. Maximax rule

b. Maximin rule

c. Minimax regret rule

d. Equal probability rule

Answer 1

a. as per the maximax rule the firm should be ready to expand their firm overseas as the law passes which hepls them to gain a great profit.

b.the firm should know what can happen if the rule is being opted or not by the country and what will be the pros and cons if not adopted and alternatives sho9uld be kept in mind

c.as per the decision taken by the firm th frim should keep in mind that the firm gets the lowest of regrets by taking up a decision in the firm as per the law of the country says