1 An airline is reconsidering their overbooking policies on

1. An airline is reconsidering their overbooking policies on transatlantic flights. The planes they fly have 175 seats, which they sell out every time. While tickets are nonrefundable, they still have a fair number of no-shows, and often fly with empty seats. Each ticket sells for $800. However, if there are more passengers than seats, they must buy a ticket for each extra customer at a net cost of $400. a) Given the following distribution of number of passengers who don’t show up, how many extra tickets should the airline sell for each flight?

Solution

Marginal Benefit = $400

Marginal Cost = $800

Extra Tickets = 400 / (400 + 800) = 0.33