Question

Myrtle Air Express decided to offer direct service from Cleveland to Myrtle Beach. Management must decide between a full-price service using the company's new fleet of jet aircraft and a discount service using smaller-capacity commuter planes. It is clear that the best choice depends on the market reaction to the service Myrtle Air offers. Management developed estimates of the contribution to profit for each type of service based upon two possible levels of demand for service to Myrtle Beach: strong and weak. The following table shows the estimated quarterly profits (in thousands of dollars): Demand for Service Service Strong Weak Full price $960 -$490 Discount $370 $320 (a) What is the decision to be made, what is the chance event, and what is the consequence for this problem? The input in the box below will not be graded, but may be reviewed and considered by your instructor. blank How many decision alternatives are there? Number of decision alternatives = How many outcomes are there for the chance event? Number of outcomes =

Answer 1

the decision to be made is regarding selection of one of two options of choosing either a full service airline or a discount airline.

Chance events are the two probabilities which are strong or weak demand of service.

Outcomes are two for each chance event. One for every chance event under each of the alternatives.

If the probability of strong demand is p and that of weak demand is (1-p) the payoffs

For full service airline =960p-490*(1-p) = 1450p-490

For discount airline =370p+320*(1-p) = 320+50p

when option 1 is better,

1450p-490>320+50p

p> 810/1400

p>0.5785

For discount to be better option, the p must be less than 0.5785