Problem 13-09 (Algorithmic)

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):

	Demand for Service
Service	Strong	Weak
Full price	$1020	-$490
Discount	$720	$340

1. What is the decision to be made, what is the chance event, and what is the consequence for this problem? The input in the box below will not be graded?

How many decision alternatives are there, what is the number of decision alternatives = __?__ How many outcomes are there for the chance event what is the number of outcomes = __?__

1. If nothing is known about the probabilities of the chance outcomes, what is the recommended decision using the optimistic, conservative and minimax regret approaches?

Optimistic approach	(Full price service) or (Discount service)
Conservative approach	(Full price service) or (Discount service)
Minimax regret approach	(Full price service) or (Discount service)

1. 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. Optimal Decision : (Full price service) or (Discount service)
2. 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? Optimal Decision : (Full price service) or (Discount service)
3. Determine the range of demand probabilities for which each of the decision alternatives has the largest expected value. If required, round your answer to four decimal places. (Full price service) or (Discount service) is the best choice if probability of strong demand is less than or equal to __?__. For values of p greater than __?__, the full price service is (the best) or (the worst) choice.