CMA Intermediate · Management Accounting · Decision Theory
Under the Hurwicz criterion with a coefficient of optimism of 0.6, the payoffs (Rs lakh) of two acts are: X has a maximum of 80 and a minimum of 10; Y has a maximum of 60 and a minimum of 30. Which act is selected and what is its Hurwicz value?
Act X is selected with a Hurwicz value of Rs 52 lakh. The value is 0.6 times the best payoff plus 0.4 times the worst payoff: X gives 48 plus 4 equals 52, while Y gives 36 plus 12 equals 48, so X is higher.
- AX with value 52Correct
- BY with value 48
- CY with value 42
- DX with value 55
Explanation
Hurwicz value = 0.6 x maximum + 0.4 x minimum. X = 0.6x80 + 0.4x10 = 48 + 4 = 52. Y = 0.6x60 + 0.4x30 = 36 + 12 = 48. X has the higher value, so X is selected with 52. Option Y at 48 is its correct value but it is the lower one.
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