Solutions-Assignment5

Solutions-Assignment5 - Assignment 5 Solutions Problem 1...

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1 Assignment 5 Solutions Problem 1 solution a) The decision to be made is to choose the type of service to provide. The chance event is the level of demand for the Ryano Air service. The consequence is the amount of quarterly profit. There are two decision alternatives (full price and discount price). There are two outcomes for the chance event (Strong demand and Weak demand). b) Type of Service Maximum Profit Minimum Profit Full Price $480 -$245 Discount $335 $160 Optimistic Approach: Full price service Conservative Approach: Discount service Opportunity loss or Regret Table ________________|_High Demand Low Demand Maximum Regret Full Service | 0 405 405 Discount Service | 145 0 145 Minimax Regret Approach: Discount service c) EV(Full) =0.7(480)+0.3(-245) =262.5 EV (Discount) =0.7(335) +0.3(160) =282.5 Optimal Decision: Discount Service d) EV (Full)=0.8(480) +0.2(-245)= 335 EV (Discount) =0.8(335) +0.2(160) =300 Optimal Decision: Full Price Service e) Let p = probability of strong demand EV (Full) =p (480) + (1-p) (-245) = 725p-245 EV (Discount) =p (335) + (1-p) (160) =175p+160 EV (Full) =EV (Discount) 725p 245 =175p+160 550p =405 p=405/550=0.7364 If p= 0.7364, the two decision alternatives provide the same expected value.
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