An airline decided to offer direct service from City A to City B. 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 the airline offers. Management developed estimates of the contribution to profit for each type of service based upon two possible levels of demand for service to the airline: strong and weak. The following table shows the estimated quarterly profits (in thousands of dollars). Demand for Service Service Strong Weak Full price $950 -$510 Discount $660 $330 (a) What is the decision to be made, what is the chance event, and what is the consequence for this problem? The decision to be made is --Select-- v. The chance event is -Select-- v. The consequence is -Select--- 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? The recommended decision using the optimistic approach is the -Select--- v service. The recommended decision using the conservative approach is the -Select-. V service. The recommended decision using the minimax regret approach is the -Select-- v service. (c) Suppose that management of the airline 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. (Enter your answers in thousands of dollars.) EV(full) thousands EV(discount) 24 thousands The optimal decision is the --Select--- v service.
An airline decided to offer direct service from City A to City B. 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 the airline offers. Management developed estimates of the contribution to profit for each type of service based upon two possible levels of demand for service to the airline: strong and weak. The following table shows the estimated quarterly profits (in thousands of dollars). Demand for Service Service Strong Weak Full price $950 -$510 Discount $660 $330 (a) What is the decision to be made, what is the chance event, and what is the consequence for this problem? The decision to be made is --Select-- v. The chance event is -Select-- v. The consequence is -Select--- 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? The recommended decision using the optimistic approach is the -Select--- v service. The recommended decision using the conservative approach is the -Select-. V service. The recommended decision using the minimax regret approach is the -Select-- v service. (c) Suppose that management of the airline 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. (Enter your answers in thousands of dollars.) EV(full) thousands EV(discount) 24 thousands The optimal decision is the --Select--- v service.
Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter2: Introduction To Spreadsheet Modeling
Section: Chapter Questions
Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...
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Transcribed Image Text:(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? (Enter your answers in thousands of
dollars.)
EV(full)
$
thousands
thousands
EV(discount)
The optimal decision is the -Select-- v service.
2$
(e) Use graphical sensitivity analysis to determine the range of demand probabilities for which each of the decision alternatives has the largest expected value. (Round your answer to four decimal places.)
I, the -Select--- v service is the best choice. If the probability of strong demand is greater than
, the -Select--- ♥ service
If the probability of strong demand falls below
is the best choice.
Transcribed Image Text:An airline decided to offer direct service from City A to City B. 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 the airline offers. Management developed estimates of the contribution to profit for each type of service based
upon two possible levels of demand for service to the airline: strong and weak. The following table shows the estimated quarterly profits (in thousands of dollars).
Demand for Service
Service
Strong
Weak
Full price
$950
-$510
Discount
$660
$330
(a) What is the decision to be made, what is the chance event, and what is the consequence for this problem?
The decision to be made is --Select--
v. The chance event is --Select---
v. The consequence is -Select---
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?
The recommended decision using the optimistic approach is the -Select- v service. The recommended decision using the conservative approach is the --Select--- v service. The recommended decision
using the minimax regret approach is the -Select--- v service.
(c) Suppose that management of the airline 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. (Enter your answers in thousands of dollars.)
EV(full)
$
thousands
EV(discount)
thousands
The optimal decision is the ---Select-- v service.
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