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): Service Demand for Service Strong Weak Full Price $900 -$470 Discount $650 $290 a. If nothing is known about the probabilities of the chance outcomes, what is the recommended decision using the pessimistic and minimax regret approaches? b. Suppose that the management of Myrtle Air Express believes that the probability of strong demand is 0.8 and the probability of weak demand is 0.2. What are the expected value for each service? What is your recommended service based on the expected value approach? c. What is the EVPI given the information in part (b)?
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):
|
Service |
Demand for Service |
|
|
Strong |
Weak |
|
|
Full Price |
$900 |
-$470 |
|
Discount |
$650 |
$290 |
a. If nothing is known about the probabilities of the chance outcomes, what is the recommended decision using the pessimistic and minimax regret approaches?
b. Suppose that the management of Myrtle Air Express believes that the probability of strong demand is 0.8 and the probability of weak demand is 0.2. What are the expected value for each service? What is your recommended service based on the expected value approach?
c. What is the EVPI given the information in part (b)?
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