Question:

Gerald Black of BlackFly Airline has an exclusive contract to run flights of a four-passenger aircraft to a remote mining center. His contract requires him to fly if there are any passengers wanting to make the trip. His fixed costs per day are $300.00, his fixed costs per flight are $1,300.00, the variable cost per passenger is $20.00, and he charges $800.00 per passenger.

He has tracked the number of passengers who flew with him over the past sixty days. His findings are summarized in the following table:

For example, on 17 of the 60 days during tracking, there were 2 passengers. Note that on the 3 days when there were no passengers Gerald does not fly but still incurs his daily fixed costs (primarily rent).

Assume that this sample gives a good approximation to his future demand patterns. Let G be the random variable: profit on a future day .

1. Calculate the Expected Value, E[ G ], Variance, ² [ G ] and standard deviation, [ G ], of his future daily profit. [Hint: You can calculate a profit corresponding to each number of passengers. The probabilities of those profits are then determined by the probabilities of the numbers of passengers.]
2. Comment briefly on the profitability and volatility of Gerald’s business.

Price: $2.99

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