Reference no: EM132977708

Most airlines practice overbooking. That is, they are willing to make more reservations than they have seats on an airplane. Why would they do this? The basic reason is simple; on any given flight a few passengers are likely to be "no-shows." If the airline overbooks slightly, it still may be able to fill the airplane. Of course, this policy has its risks. If more passengers arrive to claim their reservations than there are seats availa ble, the airline must "bump" some of its passengers. Often this is done by asking for volunteers. If a passenger with a reserved seat is willing to give up his or her seat, the airline typically will provide incentives of some sort. The fundamenta trade-off is whether the additional expected revenue gained by flying an airplane that is nearer to capacity on average is worth the additional expected cost of the incentives. To study the overbooking policy, let us look at a hypothetical situation. Mockingbird Airlines has a small commuter airplane that seats 16 passengers. The airline uses Lhis jel uu a ruule fur which iL chaq;es $225 for a one-way fare. Every flight has a fixed cost of $900 (for pilot's salary, fuel, airport fees, and so on). Each passenger costs Mockingbird an additional $100.

Finally, the no-show rate is 4%. That is, on average approximately 4% of those passengers holding confirmed reservations do not show up. If Mockingbird must bump a passenger, the passenger receives a refund on his or her ticket ($225) plus a $100 voucher toward another ticket.

Problem 1: How many reservations should Mockingbird sell on this airplane?