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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
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 Spring '06
 RLLOYD

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