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Question 2 – ​​​​​​​​​​

Concord Air Express decided to offer direct service fromCleveland to Myrtle Beach. Management must decide between afull-price service using the company’s new fleet of jet aircraftand a discount service using smaller capacity commuter planes. Itis clear that the best choice depends on the market reaction to theservice Concord Air offers. Management developed estimates of thecontribution to profit for each type of service based upon twopossible levels of demand for service to Myrtle Beach: strong andweak. The following table shows the estimated quarterly profits (inthousands of dollars):

Demand for Service

Service

Strong

Weak

Full Price

$960

-$490

Discount

$670

$320

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

b) If nothing is known about the probabilities of the chanceoutcomes, what is the recommended decision using the optimistic,conservative, and minimax regret approaches?

c) Suppose that management of Myrtle Air Express believes thatthe probability of strong demand is 0.7 and the probability of weakdemand is 0.3. Use the expected value approach to determine anoptimal decision.

d) Suppose that the probability of strong demand is 0.8 andthe probability of weak demand is 0.2. What is the optimal decisionusing the expected value approach?

e) Use graphical sensitivity analysis to determine the rangeof demand probabilities for which each of the decision alternativeshas the largest expected value.