Case Studies
1. SOLUTION TO STARTING RIGHT CASE, CH. 3, PAGE 110
This is a decision-making-under-uncertainty case. There are two events: a favorable
market (event 1) and an unfavorable market (event 2). There are four alternatives,
which include do nothing (alternative 1), invest in corporate bonds (alternative 2),
invest in preferred stock (alternative 3), and invest in common stock (alternative 4).
The decision table is presented. Note that for alternative 2, the return in a good market
is $30,000 (1 + 0.13)5 = $55,273. The return in a good market is $120,000, (4 x
$30,000) for alternative 3, and $240,000, (8 x $30,000) for alternative 4.
Payoff table
Laplace
Hurwicz
He should invest in common stock.
f. Julia Day can eliminate the preferred stock alternative and still offer
alternatives to risk seekers (common stock) and risk avoiders (doing nothing or
investing in corporate bonds).
2. North–South Airline, Ch. 4, page 145
Northern Airline Data
Airframe Cost
Engine Cost
Average Age
Year
per Aircraft
per Aircraft
(Hours)
2001
51.80
43.49
6,512
2002
54.92
38.58
8,404
2003
69.70
51.48
11,077
2004
68.90
58.72
11,717
2005
63.72
45.47
13,275
2006
84.73
50.26
15,215
2007
78.74
79.60
18,390
Southeast Airline Data
Average Age
Airframe Cost
Engine Cost
Year
Per Aircraft
per Aircraft
(Hours)
2001
13.29
18.86
5,107
2002
25.15
31.55
8,145
2003
32.18
40.43
7,360
2004
31.78
22.10
5,773
2005
25.34
19.69
7,150
2006
32.78
32.58
9,364
2007
35.56
38.07
8,259
Utilizing QM for Windows, we can develop the following regression equations for the
variables of interest.
Northern Airline—airframe maintenance cost:
Cost = 36.10 + 0.0025 (airframe age)
Coefficient of determination = 0.7694
Coefficient of correlation = 0.8771
Northern Airline—engine maintenance cost:
Cost = 20.57 + 0.0026 (airframe age)
Coefficient of determination = 0.6124
Coefficient of correlation = 0.7825
Southeast Airline—airframe maintenance cost:
Cost = 4.60 + 0.0032 (airframe age)
Coefficient of determination = 0.3904
Coefficient of correlation = 0.6248
Southeast Airline—engine maintenance cost:
Cost = −0.671 + 0.0041 (airframe age)
Coefficient of determination = 0.4599
Coefficient of correlation = 0.6782
The graphs below portray both the actual data and the regression lines for airframe
and engine maintenance costs for both airlines. Note that the two graphs have been
drawn to the same scale to facilitate comparisons between the two airlines.
Northern Airline: There seem to be modest correlations between maintenance
costs and airframe age for Northern Airline. There is certainly reason to conclude,
however, that airframe age is not the only important factor.
Southeast Airline: The relationships between maintenance costs and airframe age
for Southeast Airline are much less well defined. It is even more obvious that airframe
age is not the only important factor—perhaps not even the most important factor.
Overall, it would seem that:
1. Northern Airline has the smallest variance in maintenance costs, indicating that
the day-to-day management of maintenance is working pretty well.
2. Maintenance costs seem to be more a function of airline than of airframe age.
3. The airframe and engine maintenance costs for Southeast Airline are not only
lower but more nearly similar than those for Northern Airline, but, from the
graphs at least, appear to be rising more sharply with age.
4. From an overall perspective, it...
