Small Building Contractor

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  • Topic: Decision theory, General contractor, Minimax
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  • Published : August 27, 2012
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A small building contractor has recently experienced two successive years in which work opportunities exceeded the firm’s capacity. The contractor must now make a decision on capacity for next year. Estimated profits under each of the two possible states of nature are as shown in the table below. Which alternative should be selected if the decision criteria is: Indicate and incorporate recommendations to management in 200 words. You must respond to at least two of your classmates’ postings. 

                                                                 Next Year's Demand Alternative| Low| High |
Do nothing| $50*| $60*|
Expand| 20| 80|
Subcontract| 40| 70|
*Profit in $ thousands.

a. Maximax- Determine the best possible payoff, and choose the alternative with that payoff. The best payoff. Do Nothing – 60,000|
Expand – 80,000|
Subcontract – 70,000|
Expanding would be the most beneficial.

b. Maximin- - Determine the worst possible payoff of each alternative, and choose the alternative that has the “best worst”. Do Nothing – 50,000|
Expand – 20,000|
Subcontract – 40,000|
With this option I would recommend to do nothing.

a. Laplace- choosing the best average.
Do Nothing – 55,000|
Expand – 50,000|
Subcontract –55,000|

I would choose Do nothing or subcontract they are equally good decisions.

b. Minimax regret

Determines the worst regret for each alternative.

Minimax Regret 
Alternative Low High|
Do Nothing $0 $20,000|
Expand $30,000 0|
Subcontract $10,000 $10,000|

Based on all the scenarios I would suggest that subcontracting especially in the state that the economy is in which a state of uncertainty I would suggest subcontracting it looks to be the one with least risk.

Reference
 
Stevenson, W.J. (2011). Operations management (11th ed). New York, NY: McGraw...
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