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Forecasting Exercises Problem

Build-Rite Construction must decide whether to hire more employees, develop subcontracts with other contractors, or do nothing based on uncertain future demand for home improvements. The best options according to different decision criteria are: 1) Maximin - Develop subcontracts, which has the highest minimum payoff of $175,000. 2) Maximax - Hire more employees, which has the highest maximum payoff of $850,000. 3) Laplace - Develop subcontracts, which has the highest expected payoff of $338,250. 4) Minimax regret - Develop subcontracts, which minimizes the maximum regret of $225,000.

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650 views2 pages

Forecasting Exercises Problem

Build-Rite Construction must decide whether to hire more employees, develop subcontracts with other contractors, or do nothing based on uncertain future demand for home improvements. The best options according to different decision criteria are: 1) Maximin - Develop subcontracts, which has the highest minimum payoff of $175,000. 2) Maximax - Hire more employees, which has the highest maximum payoff of $850,000. 3) Laplace - Develop subcontracts, which has the highest expected payoff of $338,250. 4) Minimax regret - Develop subcontracts, which minimizes the maximum regret of $225,000.

Uploaded by

Basha World
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Problem:

Build-Rite Construction has received favorable publicity from guest appearances on a


public TV home improvement program. Public TV programming decisions seem to be
unpredictable, so Build-Rite can’t estimate the probability of continued benefits from its
relationships with the show. Demand for home improvement next year may be either
low or high. But Build-Rite must decide now whether to hire more employees, do
nothing, or develop subcontracts with other home improvement contractors. Build-Rite
has developed the following payoff table. Which alternative is best, according to each of
the following decision criteria?

Alternatives Demand for Home Improvements


Low Moderate High
Hire $0 150 000 850 000
Subcontract $ 175 000 225 000 625 000
Do Nothing $ 75 000 120 000 400 000

a. Maximin
b. Maximax
c. Laplace
d. Minimax Regret

TYPE YOUR SOLUTION HERE USING EQUATION BUTTON

A. MAXIMIN
Alternative Low
Hire $0
Subcontract $175 000
Do Nothing $75 000

The best of these worst numbers is $175000, so the pessimist would develop
subcontracts with other home improvement contractors.

Decision: Sub-contract

B. MAXIMAX

Alternative High
Hire 850 000
Subcontract 625 000
Do Nothing 400 000
The best of these best numbers is $850000, so the optimist would hire more
employees.

Decision: Hire

C. LAPLACE

Alternative Best Payoff


Hire 0(0.33) +150000(0.33) +850000(0.33) = 330000
Subcontract 175000(0.33) +225000(0.33) +625000(0.33) = 338250
Do Nothing 75000(0.33) +120000(0.33) + 400000(0.33) = 196350

The best of these is $338250, so the realist would develop subcontracts with other
home improvement contractors.

Decision: Subcontract

D. MINIMAX REGRET

REGRET
alternative Moderate Maximum
Low Demand High Demand
Demand Regret
225000-150000= 850000-850000=
Hire 175000-0= 175000 250000
75000 0
Sub- 225000-225000= 850000-625000=
175000-175000= 0 225000
contract 0 225000
175000-75000= 225000-120000= 850000- 400000=
Do Nothing 655000
100000 105000 450000

To minimize the maximum regret, choose to develop subcontract with other home
improvement contractors. The biggest regret is associated with doing nothing while
having high demand.

Decision: Subcontract

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