## Related questions with answers

"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 on 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):

$\begin{aligned} &\text { Demand for Service }\\ &\begin{array}{lcr} \text { Service } & \text { Strong } & \text { Weak } \\ \text { Full Price } & \$ 960 & -\$ 490 \\ \text { Discount } & \$ 670 & \$ 320 \end{array} \end{aligned}$

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."

Solution

Verifiedc) In order to use **expected value approach**, first of all we need to find expected values:

**Full Price:**

$\begin{aligned} \text{EV}=& 0.7\times960+0.3\times(-490)\\ \text{EV}=&525 \end{aligned}$

**Discount:**

$\begin{aligned} \text{EV}=& 0.7\times670+0.3\times320\\ \text{EV}=&565 \end{aligned}$

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