Problem 13-09 (Algorithmic) Myrtle Air Express decided to offer direct service f

Question

Problem 13-09 (Algorithmic) 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 Full price Discount Strong Weak $490 $440 $1320 $920

Explanation / Answer

a. Number of decision alternatives = 2 (Full Price, Discount)
Number of outcomes = 4 ( depending on decisions taken and demand for service)

b. Optimistic approach = $1320 (The maximum of best payoff for each service) - Decision is Full Price
Conservative approach = $490 (The maximum of worst payoff for each service) - Decision is Discount
Minimax approach = $920 - Decision is Discount

c. Expected value for Full price = 0.7 * $1320 + 0.3 * -$490 = $1071
Expected value for Discount = 0.7 * $920 + 0.3 * $440 = $776
As the Expected value for Discount > Expected value for Full Price, the optimal Decision is Discount.

d. Expected value for Full price = 0.8 * $1320 + 0.2 * -$490 = $1154
Expected value for Discount = 0.8 * $920 + 0.2 * $440 = $824
As the Expected value for Discount < Expected value for Full Price, the optimal Decision is Full Price.

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