2. (50 points) (This problem is similar to problem 4.0.4 in notes). Canada Rail offers direct rail service

from Toronto to Vancouver. Ticket prices depends directly on demand and there are two types of

services. Management developed estimates of the contribution to profit for each type of service based on

two possible levels of demand. The following table shows the estimated quarterly profits (in thousands

of dollars):

Demand for Service

Service Strong Weak

Full Price $1040 -$570

Discount $700 $300

1. What is the decision to be made? What is the chance event and what is the consequence for this

problem? How many decision alternatives are there? How many outcomes are there for the chance

event?

2. Suppose that management believes that the probability of strong demand is 0.7 and the probability

of weak demand is 0.3. Use the expected value approach to determine an optimal decision.

3. Determine the probability for which both the decision alternatives have the same expected value.