In: Operations Management
Problem 13-09 (Algorithmic)
Myrtle Air Express decided to offer direct service from
Cleveland to Myrtle Beach....
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 |
Service |
Strong |
Weak |
Full price |
$1380 |
-$580 |
Discount |
$980 |
$460 |
- 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 |
Full price service |
|
|
Conservative approach |
Discount service |
|
|
Minimax regret approach |
Discount service |
- 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 : Discount service
- 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 price service
- 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.
Discount service is the best choice if probability of
strong demand is less than or equal to . For values
of greater than , the full price service is the
best choice.