Question

Concord 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 Concord 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 decision to be made, what is the chance event, and what is the consequence for this problem? How many decision alternatives are there? How many outcomes are there for the chance event?
2. If nothing is known about the probabilities of the chance outcomes, what is the recommended decision using the optimistic, conservative, and minimax regret approaches?
3. 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.
4. 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?
5. Use graphical sensitivity analysis to determine the range of demand probabilities for which each of the decision alternatives has the largest expected value.
6. PLz show details for each step and give explanations. Thank you^^

Answer 1

A. Decision to be made is, maximising the profit by choosing the best type of service to provide. Chance event can be the demand for two services, i.e. Strong and weak. Well any chnace event can lead to the deviation from optimal profit scenario for the better or worst depending upon the situation. Decision alternatives include, profit, services and demand.

B. Looking at the profits derived from services,

Optimistic approach recommend Full price services

Conservative approach recommend Discount services and,

Minmax regret approach recommend Full price services

C. P(strong) = 0.7, P(weak) = 0.3

Expected value(Full price) = 960 * (0.7) + (-490) * (0.3) = 525

Expected value(Discount) = 670 * (0.7) + 320* (0.3) = 565

As see, expected value is higher for discount services, we'll go with Discount services.

D. P(strong) = 0.8, P(weak) = 0.2

Expected value(Full price) = 960 * (0.8) + (-490) * (0.2) = 670

Expected value(Discount) = 670 * (0.8) + 320* (0.2) = 600

As see, expected value is higher for full price services, we'll go with Full price services.