Hwk2SolnFinDrtSp06 - H ADM 201 Question 1 Homework II...

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H ADM 201 Homework II Solution Spring 2006 Question 1 . A) Note that here Delta Airlines receives $6.75 for every wrap sold , while paying $2.50 (loses $2.50) for every wrap. So for example, if they buy 15 wraps but demand is only 10, profit is return – cost = (10 x $6.75) - (15 x $2.50) = $30. These types of calculations lead to the following payoff table (entries in the table represent profit based on the given decision and demand): Demand\Decision Prob D 1 =buy 15 D 2 = buy 30 D 3 = buy 45 D 4 = buy 60 Demand = 10 .18 $30 -$7.50 -$45 -$82.50 Demand = 25 .16 $63.75 $93.75 $56.25 $18.75 Demand = 38 .19 $63.75 $127.50 $144 $106.50 Demand = 40 .23 $63.75 $127.50 $157.50 $120 Demand = 60 .24 $63.75 $127.50 $191.25 $255 Expected Value $57.68 $97.80 $110.39 $97.19 The optimal decision here would be D 3 , buy 45 wraps per flight, which maximizes the expected value of profits at $110.39 per flight. B) Similar to above, but now their payoffs change if they buy more than they can sell. So for example, if they buy 15 wraps but demand is only 10, return - cost is [(10*$6.75) + (.7*5*$4.00)] - (15 x $2.50) = $44. This leads to the following payoff table: Demand\Decision Prob D 1 =buy 15 D 2 = buy 30 D 3 = buy 45 D 4 = buy 60 Demand = 10 .18 $44.00 $48.50 $53.00 $57.50 Demand = 25 .16 $63.75 $107.75 $112.25 $116.75 Demand = 38 .19 $63.75 $127.50 $163.60 $168.10 Demand = 40 .23 $63.75 $127.50 $171.50 $176.00 Demand = 60 .24 $63.75 $127.50 $191.25 $255 Expected Value $60.20 $110.12 $143.93 $162.65 So if they can sell all the sellable leftover wraps (70% of the leftovers) for $4.00, they
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