Question: Problem 2. Next week, Super Discount Airlines has a flight from New York to Los Angeles that will be booked to capacity. Revenue from a

Problem 2.

Next week, Super Discount Airlines has a flight from New York to Los Angeles that will be booked to capacity. Revenue from a ticket on the flight is $125. If the flight is overbooked, the airline has a policy of getting the customer on the next available flight and giving the person some coupons, which in total incurs a cost of $250. Assume that in this case the customer does not need to pay for the original ticket.

Past history show that the number of no-shows has the following distribution

No-shows: Probability

1 0.2

2 0.3

3 0.25

4 0.1

5 0.15

a. What are the unit underage cost and overage cost?

b. By how many seats should Super Discount overbook the flight?

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