Question

Problem 5. (Decision Tree) company trying to purchase tickets for its employees to participate in a business meeting There is a 7% of options, Opt $450 (but $410 only will be refunded, will cost $40 actually) chance that the meeting gets canceled. Delta airline provided two different types ion 1: a non-refundable $400 ticket or Option 2: a refundable ticket that costs Delta prices changes weekly and the company can postpone the purchase of the ticket to the next week. Also, the probability of cancelation will historical data shows that in one week reduce to 5% if we wait one week. The past closer to the flight, with 50% probability, the cost will be reduced to $300 and with 50% probability, the cost will be $600. The tickets purchased next week will be non-refundable. What is your suggestion for the company to minimize their ticket expenses? Write the problem as a decision tree and solve it.

Answer 1

Note: The 5% chance of meeting cancellation for the next week is pretty much useless information because, in the next week, there is no option to buy a refundable ticket. So, whether the meeting is canceled or not, one will be paying the cost of tickets.

0.07 Meeting cancelled -40 Buy refundable 410 -40 -450 421.3 0.93 Not cancelled Buy tickets now -450 -450 -400 Buy non-refundable -400 -400 -400 -400 0.5 Cost = $300 -300 Buy next week -300 -300 -450 0.5 Cost = $600 -600 -600 -600

As marked in the decision tree, the best option is to book non-refundable tickets now at a minimum expected cost of -400.