## 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 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).

a. What is the decision to be made, what is the chance event, and what is the consequence for this problem? How many decision alternatives are there? How many outcomes are there for the chance event?

b. Suppose that management of Myrtle Air Express believes that the probability of strong demand is .7 and the probability of weak demand is .3. Use the expected value approach to determine an optimal decision.

c. Suppose that the probability of strong demand is .8 and the probability of weak demand is .2. What is the optimal decision using the expected value approach

Solution

Verified**(a)** This is the first part of a three-part exercise in which we are given a payoff table with two rows and two columns. The values in the payoff table represent estimated quarterly profits in ${{\$}} 1000$'s.

In this part of the exercise, we are asked to interpret the table and the problem text to answer some questions.

*What is the general form of a payoff table?*

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