Suppose an airline is flying a 10-seat plane from Washington D.C. to Chicago. Su

Question

Suppose an airline is flying a 10-seat plane from Washington D.C. to Chicago. Suppose tickets on the flight cost $300 and passengers who buy tickets fail to show up for their flight 10% of the time. If a passenger doesn’t show up, they forfeit the cost of the ticket. The airline can overbook the flight, i.e., it can sell more than 10 tickets even though the plane only has 10 seats. However, if a passenger with a valid ticket arrives for the flight and cannot be seated, the airline will have to refund her $300 and pay compensation of $100. If the airline wants to maximize profits, how many tickets should it sell?

Explanation / Answer

Cost of overbooking/Cost of Underbooking = 100/300=1/3

Since cost of overbooking is lower than cost of underbooking.

It makes sense to booking 10/[0.9]=11.11 seats so that 10 passengers turn up wwho pay 3000 and compensation to be given is 1.11*100=111 dollars, resulting in net pyoff = 2889 dollars

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.