Meega airlines decided to offer direct service from Akron to Clearwater Beach, Florida. Management must decide between 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 on Clearwater Beach: high, moderate, and low. The following table shows the estimated quarterly profits (in thousands of dollars).

$$\begin{array} { | l | c | c | c | }
\hline { \text { Service } } & & { \text { Demand for service } } \
\hline & \text { High } & \text { Medium } & \text { Low } \
\hline \text { Full price } & 900 & 760 & - 430 \
\hline \text { Discount } & 710 & 650 & 350 \
\hline
\end{array}$$
The probabilities for the demand is P(High) = 0.3, P(Medium) = 0.5, and P(Low) = 0.2, respectively.
a. What is the optimal decision strategy if perfect information were available?
b. What is the expected value for the decision strategy developed in part a?
c. Using the expected value approach, what is the recommended decision without perfect information? What is its expected value?
d. What is the expected value of perfect information?

Question

Meega airlines decided to offer direct service from Akron to Clearwater Beach, Florida. Management must decide between 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 on Clearwater Beach: high, moderate, and low. The following table shows the estimated quarterly profits (in thousands of dollars).
​
​ $$\begin{array} { | l | c | c | c | } 
\hline  { \text { Service } } & & { \text { Demand for service } } \
\hline  & \text { High } & \text { Medium } & \text { Low } \
\hline \text { Full price } & 900 & 760 & - 430 \
\hline \text { Discount } & 710 & 650 & 350 \
\hline
\end{array}$$ ​
The probabilities for the demand is P(High) = 0.3, P(Medium) = 0.5, and P(Low) = 0.2, respectively. 
a. What is the optimal decision strategy if perfect information were available?
b. What is the expected value for the decision strategy developed in part a?
c. Using the expected value approach, what is the recommended decision without perfect information? What is its expected value?
d. What is the expected value of perfect information?

Quizplus · Accepted Answer

The Answer of Meega airlines decided to offer direct service from Akron to Clearwater Beach, Florida. Management must decide between 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 on Clearwater Beach: high, moderate, and low. The following table shows the estimated quarterly profits (in thousands of dollars).
​
​ $$\begin{array} { | l | c | c | c | } 
\hline  { \text { Service } } & & { \text { Demand for service } } \
\hline  & \text { High } & \text { Medium } & \text { Low } \
\hline \text { Full price } & 900 & 760 & - 430 \
\hline \text { Discount } & 710 & 650 & 350 \
\hline
\end{array}$$ ​
The probabilities for the demand is P(High) = 0.3, P(Medium) = 0.5, and P(Low) = 0.2, respectively. 
a. What is the optimal decision strategy if perfect information were available?
b. What is the expected value for the decision strategy developed in part a?
c. Using the expected value approach, what is the recommended decision without perfect information? What is its expected value?
d. What is the expected value of perfect information?

Meega Airlines Decided to Offer Direct Service from Akron to Clearwater