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). Service Full price Discount Demand for Service Strong $940 $650 Weak -$500 $310 (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--- ---Select--- . The consequence is ---Select--- How many decision alternatives are there? How many outcomes are there for the chance event? ✓. The chance event is (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--- service. The recommended decision using the conservative approach is the ---Select--- service. The recommended decision using the minimax regret approach is the ---Select--- ✓ 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) $ EV(discount) $ The optimal decision is the --Select--- service. thousands thousands (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---✓ service. (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.)

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). Service Full price Discount Demand for Service Strong $940 $650 Weak -$500 $310 (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--- ---Select--- . The consequence is ---Select--- How many decision alternatives are there? How many outcomes are there for the chance event? ✓. The chance event is (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--- service. The recommended decision using the conservative approach is the ---Select--- service. The recommended decision using the minimax regret approach is the ---Select--- ✓ 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) $ EV(discount) $ The optimal decision is the --Select--- service. thousands thousands (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---✓ service. (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.)

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter9: Decision Making Under Uncertainty

Section9.2: Elements Of Decision Analysis

Problem 2P

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