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 $70 $320

Demand for Service Strong $960 $70 Service Full price Discount Weak -$490 $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. How many decision alternatives are there? Number of decision alternatives = How many outcomes are there for the chance event? Number of outcomes =

(b) If nothing is known about the probabilities of the chance outcomes, what is the recommended decision using the optimistic, conservative, and minimax regret approaches? Optimistic approach Conservative approach Minimax regret approach

(c) Suppose that management of Myrtle Air Express believes that the probability of strong demand is 0.7 and the probability of weak demand is 0.3. Use the expected value approach to determine an optimal decision. Optimistic Decision:

(d) Suppose that the probability of strong demand is 0.8 and the probability of weak demand is 0.2. What is the optimal decision using the expected value approach? Optimistic Decision:

(e) Use sensitivity analysis to determine the range of demand probabilities for which each of the decision alternatives has the largest expected value. If required, round your answer to four decimal places. is the preferred service, if probability of strong demand is less than .

Answer 1

Anse The given informahion Demand Pr Senvice enviceSt-ong Full price 44 Discount | 4 yo | 43 weak 0 Number of decision ater nahves (CFull price Discounfj . (deendiny on deiiens taken & demand Pet sewice deendiag on e marimum of best payoff far each Service)- Deaision is Full P'ce Consenva ve afproack $ 420 e maximum of wbrst Payo Deaision ts Discount minimax afptoach 4^0 - Deaisien ts Discount (-147)-642-147 172

Expected Value Pi Discount 49t 9645 As he Expecked value PatDisuntExpcfea iscount alue Fult Price..戈e optin/ al Decisiones nt Expected Value fo Full price Expected Value R Discount 6. t 6 Expected Value Pan Discount 4 Expected Full price te oplimal De cision s Full price Let P: Probabilistm dend hauing eaual payoff Value on bot tRe alfernahve are Same Pro babilibu of weak demand. 1.ץ

Thus 1チチ0 eYanae of. denn nd proba bilih es 11 :ch e decision alkenmatives has the larges expected value, щ Pobability 04 &trong denbknd Val ut eman