Suppose that a car-rental agency offers insurance for a week that costs $10 per day. A minor fender bender will cost $1,500, whereas a major accident might cost $15,000 in repairs. Without the...

DECISION USING PAYOFF STRATEGY
Table of Contents
Analysis    3
Average Pay-off Strategy    3
Aggressive Strategy    3
Conservative Strategy    3
Opportunity Loss Strategy    4
References    5
Analysis
Average Pay-off Strategy
In this case we will simply average the payoffs and choose the best average payoff which is considered as the maximization and lower average payoff which is the minimization of insurance cost.
    Payoff Matrix
    States of Nature
    Average Payoff
    Alternatives
    No Accident
    Minor Accident
    Major Accident
    
    Take Insurance
    70
    70
    70
    70
    Don't take Insurance
    0
    1500
    15000
    8250
After constructing a payoff matrix, it can be stated that its better to buy an insurance as it will cost just $70 per week and will cover both minor and major accidents. In case we do not take the insurance, then for a minor or a major accident...