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Question :
A company is deciding which of four potential selling prices it should charge for a new product.
Market conditions are uncertain and demand may be good, average or poor. The company has calculated the contribution that would be earned for each of the possible outcomes and has produced a regret matrix as follows :
Regret matrix
Selling price
$140 $160 $180 $200
Demand levelGood $20,000 $60,000 $0 $10,000
Average $50,000 $0 $40,000 $20,000
Poor $0 $30,000 $20,000 $30,000
If the company applies the minimax regret criterion to make decisions, which selling price would be chosen?
My answer :
First thing I did was create a table of regret for Good, Average and Poor :
140 160 180 200
Good 40.000,00 – 60.000,00 50.000,00
Average – 50.000,00 10.000,00 30.000,00
Poor 30.000,00 – 10.000,00 –Then I selected the biggest regret for each choice :
140 160 180 200
40.000,00 50.000,00 60.000,00 50.000,00Which then I selected $140 as it is the lowest of them all.
Can you please tell me what I did wrong in my workings?
The correct answer is $200.
Thank you !
The question as you have typed it already gives the regret table. (You would only have to prepare a regret table if the question had given the contributions, which is not the case).
Therefore the maxim regrets are:
for $140: 50,000
for $160: 60,000
for $180: 40,000
for $200: 30,000The lowest of them is when the selling price is $200.
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