A newly created airline, Wolverine Air, has begun to offer service from Chicago to San Francisco with 300 seats. The high fare on the flight is $800 and the restricted/low fare is $400. There is ample demand for the low fare class but high fare demand is random. Further, the customers who buy low fares buy their tickets well in advance before high fare customers. Assume the demand for the high fare is normally distributed with mean 120 and standard deviation of 60.
1. Will your optimal protection level for the high fare be more or less than the average expected demand for the high fare? Why?
2. Wolverine Air has noticed that no shows on the flight have begun to be a problem. Therefore it has decided to implement a policy of overbooking. The number of no-shows is normally distributed with mean of 6 and standard deviation of 5. But overbooking may require bumping passengers off the flight, which has a net cost estimated at $800 per bumped passenger.
What is the optimal maximum number of reservations to accept on the flight? A. 120 B. 121 C. 124 D. 126 E. 128.