ACCA PM · Chapter 9 · Question 4 of 11
A bakery must decide the size of a daily order: small, medium or large. Daily demand may be low (probability 0.3), medium (probability 0.5) or high (probability 0.2). Profits ($) for each combination are: Small order: low 40, medium 40, high 40 Medium order: low 20, medium 60, high 60 Large order: low -10, medium 45, high 100 Which order size would be chosen using the minimax regret criterion?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) Medium
Explanation
Best payoff for each demand level: low 40, medium 60, high 100. Regrets: small 0, 20, 60 (maximum 60); medium 20, 0, 40 (maximum 40); large 50, 15, 0 (maximum 50). The lowest maximum regret is 40, for the medium order.
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