5. (6 points) The American Airlines flight from Reagan National to Dallas-Fort-W
ID: 382464 • Letter: 5
Question
5. (6 points) The American Airlines flight from Reagan National to Dallas-Fort-Worth has 200 economy seats. The airline would like to determine how many to sell as refundable tickets for a price of $500 and how many to sell as economy, non-refundable tickets for a price of $290. Demand is essentially unlimited for the economy tickets as Dallas-Fort Worth is an American hub. Demand for refundable tickets has been studied and has found to be normally distributed with a mean of 35 and a standard deviation of 10. How many tickets of each type, refundable and non-refundable, should American sell for this flight?Explanation / Answer
If one seat less than actual demand is booked as refundable, then the airlines loses the opportunity to earn higher fare ($ 500) , which is a premium of $ 210 above the nonrefundable fare. Therefore, underbooking cost, Cu = 210
If one extra seat than demand is booked as refundable, then the ticket cost has to be refuneded and the airline loses the opportunity to earn the nonrefundable fare. Therefore overbooking cost Co = 290
Optimal protection level F(z) = Cu/(Cu+Co) = 210/(290+210) = 0.42
z value = NORMSINV(0.42) = -0.2019
Number of tickets to sell as refundable = mean + z * standard deviation
= 35 - 0.2019 * 10
= 33
Number of tickets to sell as nonrefundable = 200 - 33 = 167
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.