Offwego Airlines has a daily flight from Chicago to Las Vegas. On average, 16 ti

Question

Offwego Airlines has a daily flight from Chicago to Las Vegas. On average, 16 ticket holders cancel their reservations, so the company intentionally overbooks the flight. Cancellations can be described by a normal distribution with a mean of 16 passengers and a standard deviation of 4.62 passengers. Profit per passenger is $95. If a passenger arrives but cannot board due to overbooking, the company policy is to provide a cash payment of $195. Use Table B. How many tickets should be overbooked to maximize expected profit? (Round your z value to 2 decimal places. Round your other intermediate calculations to 4 decimal places and final answer to the nearest whole number.) Overbooked tickets

Explanation / Answer

Cs = 95, Ce = 195

SL = 95/(95+195) = 0.3276

From the table provided we get Z value as -0.45

Thus optimal overbooking will be = mean+(z*standard deviation)

= 16+(-0.45*4.62)

= 13.94. This will be rounded off to the nearest whole number i.e. 14.

Overbooked = 14 tickets.

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