Professor Lijian Lu Fall 2021

ISOM2700 Operations Management

Practice Questions Set #6

1. (Capacity-based RM) Inn at Penn has 200 rooms. For regular-fare customers, rooms are priced at $300 per night
while the rooms are priced at $700 per night for the high-paying customers who generally arrive at the last minute.
The demand for such high fare customers is distributed normally with mean 60 and standard deviation 50.
Assume that there is ample demand for regular-fare customers.

a. What should the protection level for the high fare be to maximize expected profit?

b. Suppose that the Inn at Penn operates with the protection level of 80 rooms for high fare customers.
What is the probability that there are at least 5 rooms left unoccupied?

2. (Capacity-based RM) JetRed Airways flies several daily flights from Philadelphia to Chicago. Based on
historical data, the flight on Wednesday evening before Thanksgiving is always sold-out. However, there are
usually no-shows so the airline decides to improve revenues by overbooking. The no-shows are Poisson-
distributed with mean 8 and the airline estimates that the cost of bumping a passenger (including full refund of
purchase) is about 11 times as much as the ticket price.
 ISOM2700 Practice Questions Set 6

Num. No Shows x Pr (Number of No show <=

x)
1 0.00
2 0.01
3 0.04
4 0.10
5 0.19
6 0.31
7 0.45
8 0.59
9 0.72
10 0.82
11 0.89
12 0.94
13 0.97
14 0.98
15 0.99
16 1.00

a. How many seats should JetRed overbook?

b. JetRed management is dreading bad publicity around Thanksgiving so it decides instead that it does
not want to bump passengers more than 5% of the time. What is the maximum number of seats that
JetRed can overbook?

c. Suppose 6 seats are overbooked. How many seats can JetRed expect to have empty, on average?

3. (Capacity-based RM) HK4 is a television station that has 25 thirty-second advertising slots during each evening.
It is early January and the station is selling advertising for Sunday, March 24. They could sell all of the slots
right now for $4,000 each, but, because on this particular Sunday the station is televising the Oscar ceremonies,
there will be an opportunity to sell slots during the week right before March 24 for a price of $10,000. For now,
assume that a slot not sold in advance and not sold during the last week is worthless to HK4. To help make this
decision, the salesforce has created the following probability distribution for last-minute sales:

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 ISOM2700 Practice Questions Set 6

Number of slots, Pr(Exactly x

x slots are sold)
8 0.00
9 0.05
10 0.10
11 0.15
12 0.20
13 0.10
14 0.10
15 0.10
16 0.10
17 0.05
18 0.05
19 0.00

a. How many slots should HK4 sell in advance?

b. In practice, there are companies willing to place standby advertising messages: if there is an empty slot
available (i.e., this slot was not sold either in advance or during the last week), the standby message is placed
into this slot. Since there is no guarantee that such a slot will be available, standby messages can be placed
at a much lower cost. Now suppose that if a slot is not sold in advance and not sold during the last week, it
will be used for a standby promotional message that costs advertisers $2,500. Now how many slots should
HK4 sell in advance?

c. Suppose HK4 chooses a booking limit of 10 slots on advanced sales. In this case, what is the probability
there will be slots left over for stand-by messages?

d. One problem with booking for March 24 in early January is that advertisers will withdraw their commitment
to place the ad (typically this is a result of changes in promotional strategies; for example, a product may be
found to be inferior or an ad may tum out to be ineffective). Because of such opportunistic behavior by
advertisers, media companies often overbook advertising slots. HK4 estimates that in the past the number of
withdrawn ads has a distribution as follows.

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 ISOM2700 Practice Questions Set 6

S Pr(The number of
withdraws ≤ S)
0 0.00012
1 0.00123
2 0.00623
3 0.02123
4 0.05496
5 0.11569
6 0.20678
7 0.32390
8 0.45565
9 0.58741
10 0.70599

Assume each withdrawn ad slot can still be sold at a standby price of $2,500 although the company misses
an opportunity to sell these slots at $4,000 a piece. Any ad that was accepted by HK4 but cannot be
accommodated because there isn't a free slot costs the company $10,000 in penalties ($10,000 here is NET penality).
How many slots (at most) should be sold?

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 ISOM2700 Practice Questions Set 6

4. (Price-based RM) HKUST Center for the Arts is planning a concert by Hong Kong Philharmonic Orchestra. A
recent survey from staffs and students of HKUST reveals the willingness-to-pay for the concert as follows:

WTP (HKD) Demand if

price = WTP
150 1
125 10
100 32
75 72
50 97
25 113

a. What is the revenue-maximizing price for the concert?

b. Estimate the parameters (a, b) of a linear demand model, D(p) = a – bp, using the WTP information. What
is the revenue-maximizing price based on the linear demand model?

c. HKUST Center for the Arts wishes to differentiate the price for staffs and students. The following table
presents the detailed information about willingness-to-pay for staffs and students, respectively. What is the
revenue-maximizing prices for staffs and students based on the WTP information? Is it worthwhile
differentiating prices for staffs and students?

WTP (HKD) Demand if Staff demand Students demand

price = WTP if price = WTP if price = WTP
150 1 1 0
125 10 9 1
100 32 22 10
75 72 30 42
50 97 39 58
25 113 52 61

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 ISOM2700 Practice Questions Set 6

5. (Capacity-based RM) An airline offers two fare classes for coach seats on a particular flight: full-fare (H) class
at $440/ticket and discount fare (I) class at $218/ticket. There are 230 coach seats on the aircraft. Discount fare
tickets must be purchased at least three weeks in advance, and these tickets are expected to sell out. The demand
for tickets at full fare is estimated to have the following discrete distribution:

Demand for
tickets at full Probability Cum.Prob.
price
40 0.0200 0.0200
41 0.0600 0.0800
42 0.0400 0.1200
43 0.0100 0.1300
44 0.0600 0.1900
45 0.0700 0.2600
46 0.0200 0.2800
47 0.0300 0.3100
48 0.0300 0.3400
49 0.0500 0.3900
50 0.0300 0.4200
51 0.0500 0.4700
52 0.0400 0.5100
53 0.0600 0.5700
54 0.0900 0.6600
55 0.1100 0.7700

a. What’s the optimal protection level for full fare tickets?

b. What’s the optimal booking limit for low-fare seats?

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 ISOM2700 Practice Questions Set 6

6. (Capacity-based RM) Doubletree in Austin has 150 standard rooms. Doubletree generally sells those rooms
through two channels, one through their own website, call center and front desk usually at a high rate and the
other through agencies like Priceline at a low rate. Suppose Doubletree charges a high rate at $120 per room per
night through their own channel (they never mark down the price through their own explicit channel to avoid
any bad gambling image which hurts reputation) while “implicitly” sells some rooms to the agencies at a low
rate of $50 per room per night. Bargain customers who seek low rate usually will buy far in advance of the
premium customers through the agency channel.

To make it simple, suppose the customers always stay for one night, there is ample demand from the bargain
customers for the low rate, and the number of premium customers is however uncertain, which is distributed
according to the following table:

Number of high fare customers Probability

90 0.10
100 0.15
110 0.15
120 0.20
130 0.25
140 0.15

a. How many rooms shall Doubletree sell to the agencies like Priceline in advance?

b. What is expected total revenue of Doubletree from both channels (using your solution from part (a))?

c. The number of no-shows at Doubletree has a distribution as that in the following table. Doubletree estimates
the cost of bumping a high fare customer is $320 (including full refund of purchase). What is the optimal
maximum number of reservations to accept per day (suppose overbooked rooms are only sold to the agency
channel at $50)?

Number of no-shows Probability

0 0.05
1 0.05
2 0.10
3 0.15
4 0.15
5 0.20
6 0.20
7 0.10

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 ISOM2700 Practice Questions Set 6

7. (Capacity-based RM) Le Meridien in San Francisco has 160 rooms. The hotel has an ample low fare demand at
the room rate of $200 per night, but the demand from the high fare class which pays $450 per night on average,
is uncertain. The high fare demand is normally distributed with mean 60 and standard deviation 42.

a. How many rooms should Le Meridien protect for high fare customers to maximize expected revenue?
(Leave your answer in decimal form, i.e., no need to round to an integer value.)

b. Suppose Le Meridien sets a booking limit of 100 for low fare customers. How many high fare
customers does the hotel expect to turn away due to a lack of rooms?