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Hey Sir,
I have the below question on the captioned subject.
A company wishes to decide on a selling price for a new product. Weekly sales of each product will depend
on the price charged and also on customers’ response to the new product. The following pay-off table has
been prepared.
Probability Price P1 Price P2 Price P3 Price P4
$ $ $ $
Price 5.00 5.50 6.00 6.50
Unit contribution 3.00 3.50 4.00 4.50Weekly demand Units Units Units Units
Best possible 0.3 10,000 9,000 8,000 7,000
Most likely 0.5 8,000 7,500 7,000 6,000
Worst possible 0.2 6,000 5,000 4,000 3,000
If the choice of selling price is based on a maximin decision rule, which price would be selected?
My ques – They have applied minimax rule and to do so they have calculated weekly “contribution” and that is why they have cal demand*contribution ? So I wanted to understand why havent they used probability for that ? though I calculated the answer remains the same but wanted to understand the logic behind cal contribution instead of multiplying it by probabilityWe only multiply by the probabilities if we are using the expected value criteria.
I cannot understand whether you are asking about maximin or about minimax regret, because you mention both.
Have you watched my lectures explaining the different rules, and the logic behind them?
yes sir I re watched it. I always first watch your lecture then only jump to questions .
I get it why we use it.Hey Sir,
there is another question from BPP Revision Kit which is valid till June 2020 :
Page 51 question 133 :
As the question asked about the Minimax regret decision criteria for price:
The following contribution table has been produced showing the possible outcomes.
Price $425 $500 $600
Variable cost $170 255,000 240,900 180,600
$210 215,000 211,700 163,800
$260 165,000 175,200 142,800
Why have they calculated the minimax regret decision as per variable cost like row wise and why not column wise because as per my understanding they are asking about the price only and not abt the cost then why going row wise ?I only have the current edition of the BPP Revision Kit, and question 133 is not on page 51 (and is nothing to do with minimax regret).
If you type the first few words of the question then maybe I will be able to find it (because it likely is somewhere in the current edition ? )
Yes sir, the question starts as follows:
BDU Co is a manufacturer of baby equipment and is planning to launch a revolutionary new style of sporty
pushchair. The company has commissioned market research to establish possible demand for the pushchair and
the following information has been obtained.
If the price is set at $425, demand is expected to be 1,000 pushchairs; at $500 it will be 730 pushchairs and at
$600 it will be 420 pushchairs. Variable costs are estimated at $170, $210 or $260.
It has 5 parts in it and I have been meaning to ask the below ques –
What price would be set if BDU were to use a minimax regret decision criterion?Also, is it fine if I am using the older version of BPP kit or shall I get the new one ?
For minimax regret, we look at each uncertain item in turn and calculate for each of our choices how much would be lost by not having made the best choice.
I do suggest that you watch my free lectures on this again.
Yes I have recently watched it also but my question is that for calculating the regret table and asked in question also that we need to calculate the price and by going row wise we will calculating the regret table for VC instead of Prices ?
We calculate the ‘regret’ there would be for having chosen the wrong action, for each of the uncertain items in turn. It doesn’t matter which you have as columns or which you have as rows – it can be either, which is why the examiner is checking that you understand as opposed to just having learned rules without understanding 🙂
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