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Guys, are you absolutely sure about your maximax and maximin approach in Q3a?
My understanding is that maximax and maximin should be used under conditions of uncertainty. Here probabilities were given (75%/25%). Therefore, EV is the right approach, isn’t it?
According to my calculations all 3 options were highly profitable reason being that development costs were treated as sunk costs, were not disclosed and could thus not be included in the profit calculations.
As for directors it was clear they would go for the most profitable alternative whatever risk it takes to maximize their bonus (product 3 according to my calculations). However, development costs would have to be included to make a reasonable choice but were not disclosed.
When it comes to employees, however, they would make their choice according to their main concerns e.g. job security and work safety as stated in the text. Profitability, if at all, would not be a major criteria for them. Therefore, using maximin or EV is according to my book somewhat flawed.
Shareholders were risk neutral and therefore they would go for the most profitable solution all other risks being equal.
I have the feeling that I might have overlooked something. But where?