Managerial Economics 12th Edition by Christopher Thomas,Charles Maurice

Exercise 1

Consider a firm that is deciding whether to operate plants only in the United States or also in either Mexico or Canada or both. Congress is currently discussing an overseas investment in new capital (OINC) tax credit for U.S. firms that operate plants outside the country. If Congress passes OINC this year, management expects to do well if it is operating plants in Mexico and Canada. If OINC does not pass this year and the firm does operate plants in Mexico and Canada, it will incur rather large losses. It is also possible that Congress will table OINC this year and wait until next year to vote on it. The profit payoff matrix is shown here:

Assuming the managers of this firm have no idea about the likelihood of congressional action on OINC this year, what decision should the firm make using each of the following rules?
a. Maximax rule
b. Maximin rule
c. Minimax regret rule
d. Equal probability rule