Myrtle Air Express decided to offer direct service from Cleveland to Myrtle Beac
ID: 362387 • Letter: M
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):
(a) What is the decision to be made, what is the chance event, and what is the consequence for this problem?
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 = (Full Service or Discount)
Conservative approach = (Full Service or Discount)
Minimax regret approach = (Full Service or Discount)
(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.
Optimal Decision: (Full Service or Discount)
(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?
Optimal Decision: (Full Service or Discount)
(e) 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.
(Full Service or Discount) is the best choice if probability of strong demand is less than or equal to _____
* Select answer inside the parentheses or fill in blank ____ *
Demand For Service Service Strong Weak Full Price $1380 -$600 Discount $1070 $460Explanation / Answer
Answer:
a.
The choice decision management administration needs to make is to pick what sort of service to give, existing suburbanite planes or new jetliners; the possibility occasion is the level of demand interest for the Myrtle Air benefit, marketing department is enter in increasing beginning piece of the overall industry; and the outcome is the measure of quarterly benefit being diminished with the wrong decision.. There are two decision alternatives options, the maximum and rebate benefit discount service; while there are two outcomes results for the shot occasion, solid and weak demand.
b.
High Demand
Low Demand
Maximum Regret
Full Service
0
810
810
Discount Service
290
0
290
The optimistic approach would decide to use the new jetliners while the conservative approach would decide to use the commuter planes. The minimax regret approach would agree with the conservative approach and use the discount service as well.
c.
The optimal decision is the discount service
EV (Full) = 0.7(1380) + 0.3(-600) = 786
EV (Discount) = 0.7(1070) + 0.3(460) = 887
d.
EV (Full) = 0.8(1380) + 0.2(-600) = 984
EV (Discount) = 0.8(1070) + 0.2(460) = 984
The optimal decision is the full & Discount price service.
e.
p = prob. strong demand EV (Full) = 1380p + (1 – p) (-600)
=1380p -600 – 600p
= 780p – 600
V (Discount) = 1070p + (1 –p) (460)
= 1070p + 460 – 460p
= 610p + 460
EV (Full) = EV (Dis) 1450p – 600 = 350p + 460
1100p = 1060 p = 0.9636
It has been determined the two decision alternatives have the same expected value of 0.9636. If the probability of strong demand for Myrtle Air falls below this value; they should use the discount service otherwise the full price service is the best for profits.
High Demand
Low Demand
Maximum Regret
Full Service
0
810
810
Discount Service
290
0
290
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