Scenario 5.8: Risk-Neutral Icarus Airlines Must Commit Now to Leasing 1, 2

question 77

Multiple Choice

Scenario 5.8:
Risk-neutral Icarus Airlines must commit now to leasing 1, 2, or 3 new airplanes. It knows with certainty that on the basis of business travel alone, it will need at least 1 airplane. The marketing division says that there is a 50% chance that tourism will be big enough for a second plane only. Otherwise, tourism will be big enough for a third plane. This, plus revenue information, yields the following table:
Planes Tourism Revenue Expected
Leased Light Heavy Profit
2 $90 million $30 million $60 million
3 $10 million $140 million $75 million
-Refer to Scenario 5.8. Without additional information, Icarus Airlines would

• A) lease only the one airplane it is sure it can use.
• B) lease 2 airplanes in order to guarantee it avoids the worst outcome, $10 million.
• C) lease 3 airplanes because $140 million is greater than $90 million.
• D) lease 3 airplanes because $75 million is greater than $60 million.
• E) lease 3 airplanes because heavy tourism is more likely than light tourism.

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Definitions:

Competitive Environment

The dynamic external system in which businesses compete for resources, customers, and market share.

Job Scheduling

The process of allocating resources to tasks over time, aiming to optimize performance measures such as minimizing completion time or maximizing utilization.

Strategy Change

The process of modifying the strategic direction of an organization, including changes in products, services, audience, or business model, to adapt to internal or external conditions.

Global Environment

The aggregate of climatic, biological, economic, and cultural conditions affecting collective and individual human life on a global scale.