Question

Meega Airlines decided to offer direct service from Akron to Clearwater Beach, Florida. Management must decide between full-price service using a company’s new fleet of jet aircraft and a discount-service using smaller capacity commuter planes. Management developed estimates of the contribution to profit for each type of service based upon two possible levels of demand for service on Clearwater Beach: high, moderate, and low. The following table shows the estimated quarterly profits (in thousands of dollars):

Service	Demand for service
	High	Medium	Low
Full Price	900	760	-430
Discount	710	650	350

The prior distribution for the demand is P(High) = 0.3, P(Medium) = 0.5, and P (Low) = 0.2, respectively.

(a) Calculate the expected value of each decision alternative and recommend the best strategy based on the expected value.

(b) Meega Airlines considers market research before making a decision. Market research produces the following posterior distribution of the states of nature. Calculate the expected value of each decision under each market research outcome.

Market research outcome	Posterior probability
	High	Medium	Low
Good	.75	.20	.05
Moderate	.35	.50	.15
Poor	.15	.30	.55

(c) Create a decision tree with the expected value of each decision as a payoff, including branches for each market research outcome and a branch for no market research.

Answer 1