Question

Kathy Jones has promised her parents that she will visit them over the summer. The normal roundtrip airfare for a direct flight is $625 but the airline serving her parentsâ hometown is offering a reduced airfare of $300. The reduced fare tickets must be purchased within the next three days and they are non-refundable. Travel dates may be changed at a cost of $50 if the airline has space available. Kathy would really like to take advantage of the low airfare, but since summer is still 3 months away, she is concerned that she may not be able to get away from her job on the travel dates she selects. She estimates that there is a 30% chance that she will not encounter this difficulty. If she has to change her travel dates. Kathy estimates that there is a 50% chance that the airline will have space available. If space is not available, Kathy will have to buy an additional full-fare ticket.

Another option is for Kathy to wait two months to buy the ticket. By that time she will know exactly when she can take summer vacation. Kathy estimates that there is a 60% chance that the airline will offer a reduced fare of$350 at that time and a 40% chance that the fare will be $625.

Instructions

Use a decision tree to represent the problem faced by Kathy. Using the expected value approach, find the best course of action for her. In particular, should Kathy purchase the $300 discount ticket?

Answer 1

Based on Earned Value approach, Kathy must book the flight later after 2 months) as the earned value is $460 (lesser the better in this case as the amount is being paid out by her). Therefore, Kathy need not purchase the $300 discount ticket.

(Assumption Made : In case Kathy has booked the $300 ticket but has to reschedule later and tickets aren't available at that point, then Kathy has to buy an additional full fare ticket ($625) and loses the earlier $300 paid entirely. Therefore total money spent in this case is= $625 + $300 = $925)

Explanation:

The probability for each outcome is given in a bracket. eg: for No rescheduling later, the probability is 0.3.

The earned value computation are shown in bracket below the node. eg: For Book later scenario , earned value is : (0.4 x 625 + 0.6 x 350 = $460)