Penny’s Rent a Car offers three rental plans as shown in Table 1. Please note that the fixed cost is provided in terms of months. Later, you will be asked to construct a cost table in terms of the annual cost.

Table 1. Rental plan characteristics

Plan         Fixed Monthly Payment             Additional costs per annual miles

I                        $200                                                 $0.095 per mile

II                       $300                                $0.061 for each of the first 12,000 miles and $0.05 per mile thereafter

III                      $150                                $0.10 for each of the first 12,000 miles and $0.20 per mile thereafter

A customer is considering which option to take. This customer estimates the likely annual mileage as shown in Table 2.

Table 2. Estimated annual mileage probabilities

Annual Miles        10,000         15,000         20,000          25,000            30,000

Probability               0.1                0.1               0.2               0.3                  0.3

Create a cost matrix for this problem using total annual cost. Show all costs as negative values (i.e. accounting format).

1) What alternative is selected using the Maximax criterion?

2) What alternative is selected using the Maximin criterion?

3) What alternative is selected using the Expected Monetary Value criterion?

4) What alternative is selected using the Minimax Regret criterion?

5) What alternative is selected using the Expected Regret (or Expected Opportunity Loss) criterion?

Answer rating: 100% (QA)

Step1 Compute the payoff matrix Alternative States of nature Annual mileage 10000 15... View the full answer