Dear Students: You have been given the payoff table in your handouts on page # 27.

It will be easy for you to understand these concepts by applying these decision making criteria on the following table.
Alternatives Small Facility Medium Large Possible Future Demands Low Rs. 10 M Rs. 5 M Rs. 1 M Moderate Rs. 10 M Rs. 8 M Rs. 2 M High Rs. 10 M Rs. 12 M Rs. 15 M

Using the maximin in the given payoff table you have to choose the alternative with the best of the worst possible payoffs. Using maximin, the worst payoffs for the alternative are: Small Facility Rs.10 M Medium facility 5 M Large facility 1M Hence , since Rs.10 million is the best, choose to build the small facility using the maximin strategy Using the maximax you have to choose the alternative with the best possible payoff. Using maximax the best payoffs are: Small facility Rs.10 M Medium facility 12 M Large facility 15 M The best overall payoff is Rs.15 million. Hence, maximax criterion leads to build a large facility. Using the laplace you have to choose the alternative with the best average payoff of any of the alternatives. For this criterion, first find the row totals, and then divide each of those amounts by the number of states of nature which are three in this case. Row total (in Rupees) Row average (in Rupees) Small facility Rs.30 Rs.10.00 Medium facility 25 8.33 Large facility 18 6 Because the small facility has the highest average, it would be chosen under laplace criterion. Using minimax regret you are supposed to choose the alternatives that has the least of the worst regrets. This is calculated by the difference between a given payoff and best payoff for a state of nature. To do this, subtract every payoff in each column from the best payoff of that column. For instance, in the first column the best payoff is 10, so each of the three will be 10-10=0, 10-5=5, and 10-1=9. In the second column the best payoff is 10. Each of the three will be 10-10=0, 10-8=2, 10-2=8. And in the third column best payoff is 15 so each of the three will be 15-10=5, 15-12=3, and 15-15=0 The calculation is shown in the following table. Alternatives Regrets (in Rupees)

Possible Future Demands Worst Low Small Facility Medium Large Rs. 0 M Rs. 5 M Rs. 9 M Moderate Rs. 0 M Rs. 2 M Rs. 8 M High Rs. 5 M Rs. 3 M Rs. 0 M Rs.5 Rs.5 Rs.9

The second step is to identify the worst regret for each alternative. For the first alternative is 5; for the second is 5 and for the third, the worst regret is 9. The best of these worst regrets would be chosen using minimax regret. The lowest regret is 5 for small facility hence, that alternative would be chosen. You can calculate the payoff homework table in the same way as above payoff table has been calculated only one additional decision making approach is given in this table which is to find expected monetary value. EMV is the best expected value among the alternatives. It is calculated by multiplying the probability of occurrence for each state of nature by the payoff for that state of nature and summing them: EVd1 = .30(50) + .25(-20) + .10(75) + .35(60) = 38.5 EVd2 = .30(80) + .25(30) + .10(100) + .35(-10) = 38 Calculate d3 and d4 and choose the alternative which has the highest expected value.