Aaron’sAir (Exercises) could purchase a market survey from a firm that has advised the island tourist and conference bureau. He thinks their projections would help him determine whether the probability of high demand might be as high as .5 or as low as .2, with the corresponding probabilities for medium demand being .3 and .4. If he doesn’t purchase the market survey, he’ll make a decision based on his previous best estimates (Exercise).
In exercise
They typically charge $150 for a one-way flight between a resort island they serve and the mainland. In times of low, medium, and high demand, Aaron (the owner and pilot) estimates that he’ll sell 100, 200, or 500 seats per week, respectively. He is considering offering two different fares based on whether his customers stay over a Saturday night on the island. He thinks that business travelers coming to the island for conferences and retreats would typically not stay, but vacationers would. He expects that the low fare will attract additional customers. However, he anticipates that some of his regular customers will also pay less. The two fares would be $90 and $210. Aaron estimates that in times of low demand he’d sell 30 high-fare and 80 low-fare tickets—revenue of 30 * +210 + 80 * + 90 = +13,500. In times of medium demand, he estimates 110 high-fare and 250 low-fare tickets, for an estimated revenue of $45,600. And in times of high demand, he expects 500 low-fare customers and 250 high-fare customers, yielding $97,500.
a) Draw the decision tree.
b) Aaron thinks the market survey is likely to be optimistic. He’d estimate a 65% probability that it would predict the higher (.5) probability of high demand. What would be the EVwSI?
c) If the consultant’s report costs $2000, should Aaron pay for it?