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 $1260 -$570 Discount $930 $420 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 = 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 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. Optimal Decision : 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? Optimal Decision : Use graphical 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 best choice if probability of strong demand is less than or equal to .

Explanation / Answer

The payoff table is ,

What is the decision to be made, what is the chance event, and what is the consequence for this problem?

The decision is to be made from the alternatives that whether Full price service or discount service to be provided.

The chance events are the demands - Strong or Weak.

The consequence for this problem are the estimated quarterly profits (in thousands of dollars).

How many decision alternatives are there?

There are 2 decision alternatives - Full price service or discount service

Number of decision alternatives = 2

How many outcomes are there for the chance event?

There are 2 possible outcomes - Strong demand or Weak demand

Number of outcomes = 2

Optimistic approach -

Best Payoffs for Full Price decision is $1260

Best Payoffs for Discount decision is $930

Maximum of best payoffs is $1260 (for Full Price decision). So, the optimistic approch is to take Full Price decision.

Conservative approach -

Worst Payoffs for Full Price decision is -$570

Best Payoffs for Discount decision is $420

Maximum of best payoffs is $420 (for discount decision). So, the Conservative approch is to take discount service decision.

Minimax regret approach -

Regret = Best Payoff - Payoff received.

The regret table is ,

Max regret for Full Price decision is 990

Max regret for Discount decision is 330

Minimum of max payoffs is $330 (for discount decision). So, the Minimax regret approch is to take discount service decision.

Given, the probability of strong demand is 0.7 and the probability of weak demand is 0.3

Expected profit for full price service = 0.7 * 1260 - 0.3 * 570 = $711

Expected profit for discount service = 0.7 * 930 + 0.3 * 420 = $777

By expected value approach, the maximum profit is for discount service decision.

Optimal Decision : Discount service decision

Given, the probability of strong demand is 0.8 and the probability of weak demand is 0.2

Expected profit for full price service = 0.8 * 1260 - 0.2 * 570 = $894

Expected profit for discount service = 0.8 * 930 + 0.2 * 420 = $828

By expected value approach, the maximum profit is for full price service decision.

Optimal Decision : Full price

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