Myrtle Air Express decided to offer direct service from Cleveland to Myrtle Beac

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 670 320

1. What is the chance event? The chance event is___________

2. How many decision alternatives are there?

3. How many State of Natures/Outcomes are there for the chance event?

4. f nothing is known about the probabilities of the chance outcomes, what is the recommended decision using the optimistic approach?

5. If nothing is known about the probabilities of the chance outcomes, what is the recommended decision using the conservative approach?

6. If nothing is known about the probabilities of the chance outcomes, what is the recommended decision using the equally likely approach? T

7. If nothing is known about the probabilities of the chance outcomes, what is the recommended decision using the minimax regret approach?

8. By using the minimax regret approach, what is the greatest Regrets/Loss for Full Service?

9. 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. What is EMV for Full price service?

10. 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. What is the recommended decision using the EMV, expected monetary value approach?

Explanation / Answer

Solution : ( 4 )

Optimistic Approach :

d1 = 960

d2 = 670

Using the optimistic approach one would choose d1 because it is the maximum of the maximum payoffs. Therefore, you want to choose the payoff with the largest value.

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Solution : ( 5 )

Conservative Approach :

d1 = 490

d2 = 320

Using the conservative approach we would choose d1 because it is the maximum of the minimum payoff values.

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Solution : ( 7 )

Minimax regret Approach :

d1 = 490 + 320 = 810

d2 = 960 - 670 = 290

Using the maximum regret approach d2 should be selected because it has a minimum loss of $290.

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Solution : ( 9 )

EV (d1) = 0.7(960) + 0.3(- 490) = 672 - 147 = 525

EV (d2) = 0.7(670) + 0.3(320) = 469 + 96 = 565

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