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CMA Foundation · Fundamentals of Business Economics and Management · Decision-making - Types and Process

A firm has three alternatives with payoffs (in Rs thousand) under three states of nature: A: 50, 30, 10; B: 40, 35, 20; C: 70, 15, 5. Probabilities are unknown. Which alternative would be chosen under the maximin criterion, and which under the maximax criterion respectively?

Maximin selects B and maximax selects C. The worst payoffs are 10 for A, 20 for B and 5 for C, so the pessimist picks B. The best payoffs are 50, 40 and 70, so the optimist picks C. This is the uncertainty condition with no probabilities.

  1. AB and CCorrect
  2. BA and B
  3. CC and A
  4. DB and A

Explanation

Minimum payoffs are A 10, B 20, C 5, so maximin picks B (20). Maximum payoffs are A 50, B 40, C 70, so maximax picks C (70). Choosing A for maximin would come from picking a mid-level payoff, which is not the criterion.

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