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

A firm has three alternatives with these payoffs (Rs thousand) under three unknown states of nature, with no probabilities available. A: 50, 30, 10. B: 40, 35, 20. C: 70, 20, 5. Which alternative will be chosen under the maximin (Wald) criterion, and which under maximax?

Maximin selects B and maximax selects C. Maximin picks the alternative with the best worst-case payoff, and B's minimum of 20 beats 10 and 5. Maximax picks the best best-case payoff, and C's maximum of 70 is the highest.

  1. AMaximin: A; Maximax: C
  2. BMaximin: B; Maximax: CCorrect
  3. CMaximin: B; Maximax: A
  4. DMaximin: C; Maximax: B

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). Option A wrongly picks A for maximin, which has a minimum of only 10.

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