Question

Q2. Yellow Airlines operates a flight from Dallas to Boston. Two fares are offered a low fare of $175 and a high fare of $550. Low-fare demand books before high-fare demand, and there is ample demand at the low fare. Demand for the high fare is estimated to be normal with a mean of 35 and a standard deviation of 20. If the flight has 90 coach seats, what is the optimal number of seats that should be reserved for the high fare? (5 points)

Answer 1

Overage cost:

If we reserve too many high fare seats, the loss in revenue is equal to the fare of low fare seat = $175

Underage cost:

If we reserve too less high fare seats, the loss in revenue is = $550 - $175 = $375

The critical ratio is given by:

Z- value from Normal distribution table corresponding to 0.3182 is -0.473

So, the corresponding demand is = = 35 + (-0.473)*20 = 25.54 = 26

So, the optimal number of seats that must be reserved for high fare is 26