practice_8(1)

# practice_8(1) - Practice#8 Decision Analysis and Revenue...

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Practice #8 Decision Analysis and Revenue Management BUAD311 – Operations Management Spring 2011 1. Belinda Tire and Rubber, Inc. is considering expanding production to meet potential increases in the demand for one of its tire products. Belinda’s alternatives are to construct a new plant, expand the existing plant, or do nothing in the short run. The market for this particular tire product may expand, remain stable, or contract. Belinda’s marketing department estimates the probabilities of these market outcomes as 0.25, 0.35, and 0.4, respectively. Table I contains Belinda’s estimated payoff. a. Construct a decision tree for this problem. b. Identify the strategy that maximizes Belinda’s expected profit. Market Outcome (dollars) Decision Market expands Market stable Market contracts Construct a new plant 400,000 -100,000 -200,000 Expand existing plant 250,000 -50,000 -75,000 Do nothing 50,000 0 -30,000 Table I .

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2. A publishing company is trying to decide whether to publish a new business law textbook. Based on a careful reading of the latest draft of the manuscript, the publisher’s senior editor assesses the distribution of possible payoffs earned by publishing this new book. Table II contains this probability distribution. Before making a final decision regarding the publication of the book, the editor can learn more about the text’s potential for success by thoroughly surveying business law instructors teaching at universities across the country. Historical frequencies based on similar surveys administered in the past are provided in Table III. a. Construct a decision tree for this problem. b. Find the strategy that maximizes the publisher’s expected payoff. Assume here there is no cost associated with conducting the survey. c. What is the most (in dollars) that the publisher should be willing to pay to conduct the survey of business law instructors? Explain fully how you have come to your conclusion. Performance Probability Estimated Payoff if published (dollars) Very strong 0.2 100,000 Moderately strong 0.2 50,000 Fair 0.2 0 Poor 0.4 -50,000 Table II Actual Performance Very strong Moderately strong Fair Poor Su rv ey Indi ca tio n Very strong 13 12 2 3 Moderately strong 10 20 6 4 Fair 5 12 15 8 Poor 1 3 9 22 Table III
3. A flight has 50 seats left to sell. Full-fare tickets are priced at \$300 and discount tickets are priced at \$200. The airline estimates that the demand of full fare customers is uniformly distributed between 20 and 69. a. To maximize the expected revenue, should the airline sell one more discount ticket? b.

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## This note was uploaded on 09/11/2011 for the course BUAD 311 taught by Professor Vaitsos during the Spring '07 term at USC.

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practice_8(1) - Practice#8 Decision Analysis and Revenue...

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