Question

Northeast airlines has a flight with a capacity of 175 passengers, which meets the average demand for this route. The standard deviation for the demand for this route is 25. The revenue from a ticket is $350. If the flight is overbooked the airline gives a free ticket on the next flight. The cost of the free flight is $125 (this is the variable cost per passenger). The fixed cost of flying the plane is a sunk cost. By how many seats should Northeast airlines overbook the flight?

Answer 1

The question pertains to determining the appropriate overbooking strategy for an airline by considering revenues from ticket sales and the costs of compensating overbooked passengers. It requires calculations to achieve a profit-maximizing balance.

Step-by-step explanation:

The student is asking a Mathematics question in the context of Business specifically related to overbooking strategy in airlines. The objective is to determine by how many seats Northeast airlines should overbook their flight, considering the revenue from selling a ticket and the cost of providing a free flight in case of overbooking. This involves performing calculations that can include probability distributions and expected value analyses to maximize profit while minimizing loss due to compensating overbooked passengers.

Answer 2

The question asks for the number of seats Northeast Airlines should overbook to maximize expected revenue. This involves a balance between lost revenue from unsold seats and cost of compensating bumped passengers. Accurate determination requires additional flight demand data and an expected value analysis.

Step-by-step explanation:

The question on how many seats Northeast Airlines should overbook involves calculating the overbooking level that maximizes expected revenue, considering both the cost of unoccupied seats and the cost of compensating passengers when flights are overbooked. To find this level, the airline needs to balance the lost revenue from unsold seats against the cost of giving away free tickets due to overbooking.

Mathematically, the airline estimates demand and makes overbooking decisions based on probability distributions (commonly, the normal distribution is used) to minimize the expected total costs (lost revenue from empty seats and the cost of compensating bumped passengers). However, the question lacks specific information such as the cost of a seat if unsold vs. the cost of overbooking, which is critical for calculating the optimal number of overbooked seats.

Since the specific data required to compute the overbook decision is not provided, I cannot accurately determine the number of overbooked seats. To solve this question in practice, the airline would perform an expected value analysis, using data on demand distribution and the costs associated with unfilled seats and overbooking.