Question

You are trying to get the cheapest airfare to reach your hometown. You just found on makemytrip.com that the ticket home will cost $400, and it cannot be refunded or exchanged. You also have the option of buying a ticket for $450, which can be refunded for $350 (and thus costs you $100). The price of tickets is expected to change in one week, and you will have one more chance to buy a ticket. There is a 50% chance that the ticket would cost $300, and a 50% chance that it would cost $600. Construct a decision tree and determine the best course of action to minimize the expected expense. Assume that you (decision maker) are a sensible adult who takes rational decisions!!

Answer 1

Decision tree

0.5 Actual price=300 400 Buy refundable 425 0.5 Actual price=600 Buy ticket now 450 21 0 400 Buy non-refundable 400 400 0.5 Actual price=300 300 Defer for next week 450 0.5 Actual price=600 600

If we buy the refundable ticket at $450 and the actual price of the ticket after one week becomes $300, then the ticket will be refunded and a new ticket will be bought actual cost would be 450 - 350 + 300 = $400.

If we buy the refundable ticket at $450 and the actual price of the ticket after one week becomes $600, then the ticket will not be refunded.

If we buy the non-refundable ticket at $400 there is no option to take the benefit of refund in any case.

So, based on the expected cost calculations in the decision tree, the best decision is to buy the non-refundable ticket at $400 in the first week itself.