Problem 13-09 (Algorithmic) Myrtle Air Express decided to offer direct service f
ID: 3225073 • Letter: P
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 Strong Weak Service Full price $1380 -$510 $980 $460 Discount 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.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 = $1380 (The maximum of best payoff for each service) - Decision is Full Price
Conservative approach = $460 (The maximum of worst payoff for each service) - Decision is Discount
Minimax approach = $980 - Decision is Discount
c. Expected value for Full price = 0.7 * $1380 + 0.3 * -$510 = $813
Expected value for Discount = 0.7 * $980 + 0.3 * $460 = $824
As the Expected value for Discount > Expected value for Full Price, the optimal Decision is Discount.
d. Expected value for Full price = 0.8 * $1380 + 0.2 * -$510 = $1002
Expected value for Discount = 0.8 * $980 + 0.2 * $460 = $876
As the Expected value for Discount < Expected value for Full Price, the optimal Decision is Full Price.