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Suppose a small business investor has a certain amount of money available to invest now. Four alternative investments are available. Th estimated profits of each investment under each economic condition are indicated in the following table.Alternatives States of NatureS1 S2 S3 S41 $170 $45 -$60 $1002 $30 $190 $175 -$653 $145 -$50 $120 $1104 -$40 $80 $10 $70Based on the above information, which alternative investment do you select using the maximin criterion? Note: The four alternative investments are 1, 2, 3 and 4.

Question

Suppose a small business investor has a certain amount of money available to invest now. Four alternative investments are available. Th estimated profits of each investment under each economic condition are indicated in the following table.Alternatives States of NatureS1 S2 S3 S41 170170 45 -6060 1002 3030 190 175175 -653 145145 -50 120120 1104 -4040 80 1010 70Based on the above information, which alternative investment do you select using the maximin criterion? Note: The four alternative investments are 1, 2, 3 and 4.

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Solution 1

The maximin criterion is a decision-making strategy where the decision maker looks for the maximum of the minimum payoffs. In other words, you look at the worst that could happen under each decision and then choose the decision that has the highest minimum payoff.

Here are the minimum payoffs for each investment:

  1. The minimum payoff for investment 1 is -$60.
  2. The minimum payoff for investment 2 is -$65.
  3. The minimum payoff for investment 3 is -$50.
  4. The minimum payoff for investment 4 is -$40.

Using the maximin criterion, we would select investment 4 because it has the highest minimum payoff (-$40), which is the least negative among all the minimum payoffs.

This problem has been solved

Solution 2

The maximin criterion is a decision-making strategy where the decision maker looks for the maximum of the minimum payoffs. In other words, you look at the worst that could happen under each decision and then choose the decision that has the highest minimum payoff.

Here are the minimum payoffs for each investment:

  1. The minimum payoff for investment 1 is -$60.
  2. The minimum payoff for investment 2 is -$65.
  3. The minimum payoff for investment 3 is -$50.
  4. The minimum payoff for investment 4 is -$40.

Using the maximin criterion, we would select investment 4 because it has the highest minimum payoff (-$40), which is the least negative among all the minimum payoffs.

This problem has been solved

Similar Questions

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