ExpertEasy2 marksMultiple Choice
ACCA · Question 09 · Decision-making techniques
Section A
A company is choosing between three mutually exclusive projects (A, B, and C). The outcomes depend on the state of the economy. The payoff matrix (showing profit in $000s) is as follows:
Project Weak Economy Stable Economy Strong Economy A 40 70 100 B 20 80 130 C 50 60 80
If the management team is highly risk-averse and uses the maximin decision rule, which project will they choose?
Section A
A company is choosing between three mutually exclusive projects (A, B, and C). The outcomes depend on the state of the economy. The payoff matrix (showing profit in $000s) is as follows:
| Project | Weak Economy | Stable Economy | Strong Economy |
|---|---|---|---|
| A | 40 | 70 | 100 |
| B | 20 | 80 | 130 |
| C | 50 | 60 | 80 |
If the management team is highly risk-averse and uses the maximin decision rule, which project will they choose?
Answer options:
A.
Project A
B.
Project B
C.
Project C
D.
None of the projects
How to approach this question
1. Identify the worst possible outcome (minimum payoff) for each project.
2. Choose the project that has the highest (maximum) value among those worst outcomes.
Full Answer
C.Project C✓ Correct
The maximin rule is used by risk-averse decision-makers. It involves looking at the worst possible outcome for each option and choosing the one that is the least bad (the maximum of the minimums).
Minimum for A = 40
Minimum for B = 20
Minimum for C = 50
The maximum of these minimums is 50, so Project C is chosen.
Common mistakes
Using the maximax rule (choosing B because it has 130) or calculating expected values.
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