7. DECISION ANALYSIS

An airline management has to decide between using a full-price service using the companys new fleet of jet aircrafts and a discount service using smaller capacity commuter planes. The best choice depends on the market demand. Management developed estimates of the contribution to profit for each type of service based upon two possible levels of demand for service: strong and weak. The following table shows the estimated quarterly profits (in thousands of dollars):

a) If nothing is known about the probabilities of the chance outcomes, what is the recommended decision using the optimistic, conservative, and minimax regret approaches?

b) Suppose that airline 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.

c) Suppose that the probability of strong demand is 0.8 and the probability of weak demand is 0.2. What is the optimal decision using the expected value approach?

\begin{tabular}{|c|c|c|} \hline & \multicolumn{2}{|c|}{ Demand for Service } \\ \hline Service & Strong & Weak \\ \hline Full Price & $960 & $490 \\ \hline Discount & $670 & $320 \\ \hline \end{tabular}