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Chapter 15

(a) Based on EVs, daily supply should be 50 salads since this yields the
highest expected value of $90.

Workings:

(W1) Profit is calculated as follows = 40 salads × $2 = $80

(W2) EV is calculated as follows = (0.10 × -$160) + (0.20 × -$60) + (0.40
× $40) + (0.30 × $140) = $30

(b) The maximax rule involves selecting the alternative that maximises the
maximum pay-off achievable. Looking at the table above, the maximum
profit achievable is $140. This will be achieved if 70 salads are supplied.

(c) The maximin rule involves selecting the alternative that maximises the
minimum pay-off achievable. Looking at the table above, the maximum of
the minimum profits achievable is $80. This will be achieved if 40 salads
are supplied.

(d) Minimax regret

The minimax regret strategy is the one that minimises the maximum
regret (opportunity cost). A regret table should be used:

Daily supply regret (opportunity cost)

Daily
demand 40 salads 50 salads 60 salads 70 salads

40 salads Right decision $80 (W1) $160 (W1) $240 (W1)
Right
50 salads $20 $80 $160
decision

Right
60 salads $40 $20 $80
decision
Right
70 salads $60 $40 $20
decision

––––– ––––– ––––– –––––

Maximum
regret = $60 $80 $160 $240

Therefore, to minimise the maximum regret, 40 salads should be
supplied.

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