Question

Meega airlines decided to offer direct service from Akron, Ohio to Clearwater Beach, Florida. Management must decide between full-price service using the 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 three possible levels of demand for service: high, moderate, and low. The following table shows the estimated quarterly profits (in thousands of dollars).

​Service	Demand for service
	High	Medium	Low
Full price	900	760	–450
Discount	720	650	-350
Probability	.2	.5	.3

What is the expected value of perfect information (in thousands of dollars) for the Meega airlines problem?

Select one:

a. 30

b. 96

c. 91

d. 57

Answer 1

Expected Payofff of Full price = 900 * 0.2 + 760 * 0.5 - 450 * 0.3 = $ 425

Expected payoff for Discount = 720 * 0.2 + 650 * 0.5 - 350 * 0.3 = $ 364

Here if we have best information then we will choose full price in high demand and medium demand and discount when low demand

Expected Payoff when perfect information available = 0.2 * 900 + 0.5 * 760 + 0.3 * (-350) = $ 455

so  expected value of perfect information (in thousands of dollars) for the Meega airlines = 455 - 425 = $ 30

Option A is correct here.