An airline decided to offer direct service from City A to City B. Management must decide between a full price service us

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An Airline Decided To Offer Direct Service From City A To City B Management Must Decide Between A Full Price Service Us 1 (104.33 KiB) Viewed 25 times

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 City B: strong and weak. The following table shows the estimated quarterly profits (in thousands of dollars). Demand for Service Service Strong Weak Full price $940 -$510 Discount $660 $ $310 The consequence is the amount of quarterly profit (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 the type of service to provide . The chance event is the level of demand for the service How many decision alternatives are there? ? 2 How many outcomes are there for the chance event? 2 (b) If nothing 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 full price v service. The recommended decision using the conservative approach is the discount discount service. service. The recommended decision using the minimax regret approach is the (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) $ 505 thousands EV(discount) $ 555 thousands The optimal decision is the discount service. (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) $ 650 thousands EV(discount) $ 590 thousands The optimal decision is the full price service. (e) Use sensitivity analysis to determine the range of demand probabilities for which each of the decision alternatives has the largest expected value. (Round your answers to four decimal places.) If the probability of strong demand falls below 0.7450 x , the discount V service is the best choice. If the probability of strong demand is greater than 0.7450 |x , the full price v service is the best choice. .