#9) Myrtle Air Express decided to offer direct service from Cleveland to Myrtle Beach . Management must decide between a full-price service using the company's new fleet of jet aircraft and a discount service using smaller capacity commuter planes. It is clear that the best choice depends on the market reaction to the service Myrtle Air offers. Management developed estimates of the contribution to profit for each type of service based upon two possible levels of demand for service to Myrtle Beach : strong and weak. The following table shows the estimated quarterly profits (in thousands of dollars).

1. The decision to be made
2. If nothing is known about the probabilities of the chance outcomes, determine the recommended decision using the optimistic, conservative, and minimax regret approaches.
3. 
   Suppose that management of Myrtle Air Express 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.
   
4. 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?
   
5. Use sensitivity analysis to determine the range of demand probabilities for which each of the decision alternatives has the largest expected value.
   

#13) Seneca Hill Winery recently purchased land for the purpose of establishing a new vineyard. Management is considering two varieties of white grapes for the new vineyard: Chardonnay and Riesling. The Chardonnay grapes would be used to produce a dry Chardonnay wine, and the Riesling grapes would be used to produce a dry Chardonnay wine. It takes approximately four years from the time of planting before new grapes can be harvested. This length of time creates a great deal of uncertainty concerning future demand and makes the decision concerning the type of grapes to plant difficult. Three possibilities are being considered: Chardonnay grapes only; Riesling grapes only; and both Chardonnay and Riesling grapes. Seneca management decided that for planning purposes it would be adequate to consider only two demand possibilities for each type of wine: strong or weak. With two possibilities for each type of wine it was necessary to assess four probabilities. With the help of some forecasts in industry publications management made the following probability assessments.

Riesling Demand

Chardonnay Demand Weak Strong

Weak 0.05 0.50

Strong 0.25 0.20

Revenue projections show an annual contribution to profit of $20,000 if Seneca Hill only plants Chardonnay grapes and demand is weak for Chardonnay wine, and $70,000 if they only plant Chardonnay grapes and demand is strong for Chardonnay wine. If they only plant Riesling grapes, the annual profit projection is $25,000 if demand is weak for Riesling grapes and $45,000 if demand is strong for Riesling grapes. If Seneca plants both types of grapes, the annual profit projections are shown in the following table.

State of Nature

Chardonnay Demand Weak Strong

Weak $22,000 $40,000

Strong $26,000 $60,000

1. What is the decision to be made, what is the chance event, and what is the consequence? Identify the alternatives for the decisions and the possible outcomes for the chance events.
2. Develop a decision tree.
3. Use the expected value approach to recommend which alternative Seneca Hill Winery should follow in order to maximize expected annual profit.
4. Suppose management is concerned about the probability assessments when demand for Chardonnay wine is strong. Some believe it is likely for Riesling demand to also be strong in this case. Suppose the probability of strong demand for Chardonnay and weak demand for Riesling is 0.05 and that the probability of strong demand for Chardonnay and strong demand for Riesling is 0.40. How does this change the recommended decision? Assume that the probabilities when Chardonnay demand is weak are still 0.05 and 0.50.
5. Other members of the management team expect the Chardonnay market to become saturated at some point in the future, causing a fall in prices. Suppose that the annual profit projections fall to $50,000 when demand for Chardonnay is strong and Chardonnay grapes only are planted. Using the original probability assessments, determine how this change would affect the optimal decision.

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