Question 1: Southwest Airlines

Southwest airlines decided to offer direct service from Chicago to Clearwater beach, Florida. Management must decide between a full-price service using a company's new fleet of jet aircraft and a discount service using smaller-capacity commuter planes. Management developed estimates of the contribution to profit for each type of service based upon two possible levels of demand for service: high, medium, and low. The following table shows the estimated quarterly profits (in thousands of dollars):

Service	Demand for service
High	Medium	Low
Full price	900	760	-430
Discount	719	650	350

The probabilities for the demand is P(High) = 0.3, P(Medium) = 0.5, and P(Low) = 0.2, respectively.

a. Using the expected value approach, what is the recommended decision without perfect information? What is its expected value?

b. What is the expected value of perfect information?

c. A test market study of the potential demand for the service in that area is expected to report either a favorable (F) or unfavorable (U) condition. The relevant conditional probabilities are as follows:

P(F|High) = 0.8; P(U|High) = 0.2

P(F|Medium) = 0.7; P(U|Medium) = 0.3

P(F|Low) = 0.1; P(U|Low) = 0.9

Using the test market study, determine the decision strategy the airline should follow and the expected value of this strategy.

d. What is the efficiency of the information provided by the test market study?