Question

6. Three strategies and three states of nature are given and payoffs represent profits. (i) What is the optimal strategy if we apply the criterion of pessimism? State of nature. Strategy N1 N2 N3 S1 47 49 43 S2 32 25 41 S3 51 30 14​

Answer 1

Using the criterion of pessimism, also known as the Maximin criterion, the optimal strategy is Strategy S1, with a worst-case profit of 43.

Step-by-step explanation:

The optimal strategy when applying the criterion of pessimism, also known as Maximin criterion, is to choose the strategy with the best worst-case scenario payoff.

For each strategy (S1, S2, S3), we look at the lowest payoff across all states of nature (N1, N2, N3). Here are the minimum payoffs for each strategy:

S1: 43 (from N3)S2: 25 (from N2)S3: 14 (from N3)

Under the criterion of pessimism, we choose the strategy with the highest of these minimum values, which is Strategy S1, with a worst-case profit of 43.