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Low -15 10 5
Medium 10 25 20
High 55 30 40
maximax 55 30 40
(1) The maximax criterion
(cont.)
Mathematic definition of the maximax criterion
with benefit
m m n
o'k max {o'i } max max {u j i }
i 1 i 1 j 1
Low -15 10 5
Medium 10 25 20
High 55 30 40
maximin -15 10 5
(2) The maximin criterion
(cont.)
Mathematic definition of the maximin criterion
with benefit
m m n
s'k max{s'i } max min {u j i }
i 1 i 1 j 1
Ok + (1- ) Sk
i 1 i 1 j 1 j 1
i 1 i 1 j 1 j 1
(3) The Hurwicz criterion
(cont.)
Decision
Future sales level Manufacture Buy domestic Buy abroad
(M) (BD) (BA)
Low -15 10 5
Medium 10 25 20
High 55 30 40
Maximax (Ok) 55 30 40
Maximin (Sk) -15 10 5
Hurwicz () 55 - 30 + 40 +
15 (1- ) 10 (1- ) 5 (1- )
Sensitivity analysis of
60
f()
50
BD()=30+10(1- )
40
30
20
10
BA()=40+5(1- )
0
-10 M()=55-15(1- )
-20
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
Sensitivity analysis to
Sensitivity analysis () is the study
of how the variation (uncertainty) in the
output of a mathematical model can be
apportioned, qualitatively or quantitatively, to
different sources of variation in the input of
the model.
High 1/3 55 30 40
L -15 10 5 10 L 25 0 5
M 10 25 20 25 M 15 0 5
H 55 30 40 55 H 0 25 15
Maximax 55 30 40 maximum 25 25 15
regret
Maximin -15 10 5
Hurwicz 55 - 30 + 40 +
(1- ) 15 (1- ) 10 (1- ) 5
STATES OF NATURE
Favorable Unfavorable Maximum in
ALTERNATIVES market market row (ok)
Construct large plant $200,000 ($180,000) $200,000
Construct small plant $100,000 ($20,000) $100,000
Do nothing $0 $0 $0
Maximin Criterion
STATES OF NATURE
Favorable Unfavorable Minimum in
ALTERNATIVES market market row (sk)
Construct large plant $200,000 ($180,000) ($180,000)
Construct small plant $100,000 ($20,000) ($20,000)
Do nothing $0 $0 $0
Hurwicz criterion
(or Criterion of Realism)
STATES OF NATURE
Favorable Unfavorable Weighted
ALTERNATIVES market market average a=0.7
Construct large plant $200,000 ($180,000) 380a-180 86
Construct small plant $100,000 ($20,000) 120a-20 64
Do nothing $0 $0 $0 0
Hurwicz criterion
(or Criterion of Realism)
Sensitivity analysis to :
120 -20 = 0 = 0.1667
380 -180 = 120 -20 = 0.6154
CRITERION DECISION
Maximax Construct large plant
Maximin Do nothing
Hurwicz depends on
Lapalace Construct small plant
Savage Construct small plant
The
TheMaximin
MaximinCriterion
Criterion Minimum
Minimum
Decisions
Decisions Large
LargeRise
Rise Small
Smallrise
rise NoNoChange
Change Small
SmallFall
Fall Large
LargeFall
Fall Payoff
Payoff
Gold
Gold -100
-100 100
100 200
200 300
300 00 -100
-100
Bond
Bond 250
250 200
200 150
150 -100
-100 -150
-150 -150
-150
Stock
Stock 500
500 250
250 100
100 -200
-200 -600
-600 -600
-600
C/D
C/Daccount
account 60
60 60
60 60
60 60
60 60
60 60
60
Example 2: The Hurwitz Criterion
State of Nature
Alternative Good Average Poor Maximax
Market($) Market($) Market ($)
Construct a
75,000 25,000 -40,000 75,000
small plant
Construct a
100,000 35,000 -60,000 100,000
large plant
Do nothing 0 0 0 0
In-Class Example: Maximin
State of Nature
Alternative Good Average Poor Maximin
Market($) Market($) Market ($)
Construct a
75,000 25,000 -40,000 -40,000
small plant
Construct a
100,000 35,000 -60,000 -60,000
large plant
Do nothing 0 0 0 0
In-Class Example:
Criterion of Realism
=0.6
State of Nature
Alternative Good Average Poor Maximax Maximim Hurwitz
Market($) Market ($) Market ($)
Construct a
small plant
75,000 25,000 -40,000 75,000 -40,000 29,000
Construct a 100,00
large plant
100,000 35,000 -60,000 -60,000 36,000
0
Do nothing 0 0 0 0 0 0
Sensitivity analysis to
4
x 10
10
f()
8 Nothing()=0+0(1- )
6
Large()=100,000-60,000(1- )
4
-2
-4
Small()=75,000-40,000(1- )
-6
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
In-Class Example: Equally Likely
State of Nature
Alternative Good Average Poor Avg
Market($) Market($) Market($)
Construct a
25,000 8,333 -13,333 20,000
small plant
Construct a
33,333 11,665 -20,000 25,000
large plant
Do nothing 0 0 0 0
In-Class Example:
Minimax Regret Opportunity Loss Table
State of Nature
Maximum
Alternative Good Average Poor
Opp. Loss
Market($) Market($) Market ($)
Construct a
25,000 10,000 40,000 40,000
small plant
Construct a
0 0 60,000 60,000
large plant
Do nothing 100,000 35,000 0 100,000
Homework 2: (1/2)
The chief executive officer of ABC company has to take a
decision among three alternatives, namely : (a) Expand,
(b) Build, (iii) Subcontract. Table 1 shows pay-off table for
ABC company's expansion decision (pay-off expressed in
terms of profits over next 5 years).
1) What option the company will choose with five criteria
for the decision making under uncertainty (or pure
uncertainty): (1) The maximax criterion;(2) The maximin
criterion; (3) The Hurwicz criterion (=0.4); (4) The
Laplace criterion;(5) The minimax Regret criterion.
2) Sensitivity analysis to .
Homework 2: (2/2)
Table 1pay-off table for ABC company's decision
Alternatives
Expand Build Subcontract
($) ($) ($)
High 50,000 70,000 30,000
States of Moderate 25,000 30,000 15,000
Nature
Low -25,000 -40,000 -1,000
(demand)
Failure -4,500 -80,000 -10,000
The end