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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).

 Demandfor ServiceServiceStrongWeakFull price$960-$490Discount$670$320\begin{matrix} \text{ } & \text{Demand} & \text{for Service}\\ \hline \text{Service} & \text{Strong} & \text{Weak}\\ \text{Full price} & \text{\$960} & \text{-\$490}\\ \text{Discount} & \text{\$670} & \text{\$320}\\ \end{matrix}

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?

Question

Suppose management is concerned about the probability assessments when demand for Chardonnay wine is strong. Some believe it is likely for Riesling demand to also be strong in this case. Suppose that the probability of strong demand for Chardonnay and weak demand for Riesling is 0.05 and that the probability of strong demand for Chardonnay and strong demand for Riesling is 0.40 . How does this change the recommended decision? Assume that the probabilities when Chardonnay demand is weak are still 0.05 and 0.50 .

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In this exercise, we have to determine if the best decision obtained in part c) will change if probability assessments change. To do so, we will calculate the expected values for each decision alternative using the new given probabilities and choose the decision with the greatest expected profit.

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