Question

Give small explanation:

5. Flight 641 from Potsdam to Madstop has 100 seats and two classes of tickets: Elite class ($60) and Value class ($45). Elite class demand follows a uniform distribution between 30 and 60. Value class demand follows a uniform distribution between 80 and 140. There is no overbooking for this flight. If the price of Elite class is reduced by $8, how should the booking limit of Value Class ticket be changed?

A. Decrease

B. Increase

C. Keep the same

D. Depending on the Value Class demand

Answer 1

Initially, the newsvendor critical ratio was (60 - 45) / 60 = 0.25

After the reduction, the critical ratio is (52 - 45) / 52 = 0.13

For the optimal reserved capacity of elite class tickets, the probability of elite class demand being less than or equal to reserved quantity equals the critical ratio.

So, since the critical ratio is reducing, the protection level for the high fare passengers will reduce and so the booking limit for the value class tickets should increase.