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

​

The probabilities for the demand levels are P(High) = 0.3, P(Medium) = 0.5, and P(Low) = 0.2, respectively.

Using the expected value approach, what is the recommended decision for Meega Airlines?

a. Offering high demand

b. Offering Medium demand

c. Offering low demand

d. Offering full price

e. Offering discounted price

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

a. 665

b. 91

c. 70

d. 720

Answer 1

Answer:

1)

From the given data

	High	Medium	Low
Full Price	900	760	-430
Discount	720	650	350
Probability	0.3	0.5	0.2

expected value of full price=0.3*900+0.5*760+0.2*(-450) = 560

expected value of Discount =0.3*720+0.5*650+0.2*(350) = 611

1) Correct Answerp: (e) Offering discounted price

2)

expected value with  perfect information = 900*0.3+760*0.5+350*0.2 = 720

expected value of perfect information = 720 - 611 = 109

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