Question 2 –
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
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? How many outcomes are there for the chance
event?
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?
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.
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?
e) Use graphical sensitivity analysis to determine the range
of demand probabilities for which each of the decision alternatives
has the largest expected value.