Rational Decision Making: Select the Criterion to Determine the Best Alternative.

The central task of decisionmaking is choosing from among alternatives.Howis the choice made? Logically, to choose the best alternative, we must define what we mean by best.

There must be a criterion, or set of criteria, to judge which alternative is best. Now, we recognize that best is a relative adjective on one end of the following relative subjective judgment:

relative subjective judgment spectrum
 
Since we are dealing in relative terms, rather than absolute values, the selection will be the alternative that is relatively the most desirable. Consider a driver found guilty of speeding and given the alternativesof a $175 fine or 3 days injail. In absolute terms, neither alternative is good. But on a relative basis, one simply makes the best of a bad situation.

There maybe unlimited number of ways that one might judge the various alternatives.

Several possible criteria are:

- Create the least disturbance to the environment.
- Improve the distribution of wealth among people.
- Minimize the expenditure of money.
- Ensure that the benefits to thosewho gain fromthe decision are greater than the losses of those who are harmed by the decision.
- Minimize the time to accomplish the goal or objective.
- Minimize unemployment. .. .
- Maximize profit.

Selecting the criterion for choosing the best alternative will not be easy if different groups support different criteria and desire different alternatives.The criteria may conflict.

For example, minimizing unemploymentmay require increasing the expenditure of money.

Or minimizing environmental disturbance may conflict with minimizing time to complete the project. The disagreement between management and labor in collective bargaining (concerningwages andconditions of employment) reflectsa disagreement over the objective and the criterion for selecting the best alternative.

The last criterion-maximize profit-is the one normally selected in engineering decision making. When this criterion is used, all problems fall into one of three categories: fixed input, fixed output, or neither input nor output fixed.

Fixed Input. The amount of money or other input resources (like labor, materials, or equipment) are fixed.The objective is to effectively utilize them.

Examples:
· A project engineer has a budget of $350,000 to overhaul a portion of a petroleum refinery.
·Youhave $300 to buy clothes for the start of school.

For economic efficiency, the appropriate criterion is to maximize the benefits or other outputs.

Fixed Output. There is a fixed task (or other output objectives or results) to be
accomplished.

Examples:

· A civil engineering firm has been given the job of surveying a tract of land and preparing a "record of survey" map.
·Youwish to purchase a new car with no optional equipment.

The economically efficient criterion for a situation of fixed output is to minimize the costs or other inputs.

Neither Input norOutput Fixed. The third category is the general situation, in whichthe
amount of money or other inputs is not fixed, nor is the amount of benefits or other outputs.

Examples:
· A consulting engineering firm has more work available than it can handle. It is considering paying the staff for working evenings to increase the amount of design work it can perform.

· One might wish to invest in the stock market, but the total cost of the investment is
not fixed, and neither are the benefits.

·An automobile battery is needed. Batteries are available at different prices, and although each will provide the energy to start the vehicle, the useful lives of the various products are different.

What should be the criterion in this category? Obviously, to be as economically efficientas possible, we must maximize the difference between the return from the investment (benefits) and the cost of the investment.

Since the difference between the benefits and the costs is simply profit, a business person would define this criterion as maximizing profit.

For the three categories, the proper economic criteria are:


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