Question

A manager has developed a payoff table that indicates the profits associated with a set of alternatives under two possible states of nature.

              Alt                S1                    S2

                                                                       

              1                    10                     2

              2                    -2                     8

              3                      8                     5

If the manager uses maximin as the decision criterion, which of the alternatives should she choose?

	A.	Alternative 1
	B.	Alternative 2
	C.	Alternative 3
	D.	None of the above

Answer 1

Question: A manager has developed a payoff table that indicates the profits associated with a set of alternatives under two possible states of nature.

If the manager uses maximin as the decision criterion, which of the alternatives should she choose?

Answer: Alternative 3

Snippets: According to Maximin's rule, the maximin individual selects the largest payoff after looking at the worst which could happen in each action. In other words, selecting the maximum of the minimums. Here in the given question, the largest payoff is under Alternative 3.

That is:

Minimum payoffs of alternatives:

Alternative 1 = 2

Alternative 2 = -2

Alternative 3 = 5

And, the maximum of these minimums is at Alternative 3 = 5. Hence, Alternative 3 should be chosen.