The management of Quality Airlines has decided to base its overbooking policy on the stochastic single-period model for perishable products, since this will maximize expected profit. This policy now needs to be applied to a new flight from Seattle to Atlanta. The airplane has 125 seats available for a fare of $250. However, since there commonly are a few no-shows, the airline should accept a few more than 125 reservations. On those occasions when more than 125 people arrive to take the flight, the airline will find volunteers who are willing to be put on a later flight in return for being given a certificate worth $150 toward any future travel on this airline. Based on previous experience with similar flights, it is estimated that the relative frequency of the number of no-shows will be as shown below.
(a) When interpreting this problem as an inventory problem, what are the units of a perishable product being placed into inventory?
(b) Identify the unit cost of underordering and the unit cost of overordering.
(c) Use the model with these costs to determine how many overbooked reservations to accept.
(d) Draw a graph of the CDF of demand to show the application of the model graphically.