Exercise Problem

The Marriot Hotel has 150 rooms with standard queen-size beds and two rates: a full price of $200 and a
discount price of $120. To receive the discount price, customer must purchase the room at least two weeks in
advance (this helps to distinguish between leisure travelers, who tend to book early, and business travelers,
who value the flexibility of booking late). For a particular Tuesday night, the hotel estimates that the demand
from leisure travelers could fill the whole hotel while the demand from business travelers is normally
distributed with a mean of 70 rooms and a standard deviation of 29.

a) Suppose 50 rooms are protected for full-price room. What is the booking limit for the discount rooms?
b) Find the optimal protection level for full-price rooms (the number of rooms to be protected from sale
at a discount price).
c) The Sheraton declared a fare war by slashing business travelers’ price down to $150. The Marriot had
to match that fare to keep demand at the same level. Does the optimal protection level increase,
decrease, or remain the same?
d) What number of rooms (on average) remains unfulfilled if we establish a protection level of 61 for the
full-priced rooms?
e) If the Marriot were able to ensure that every full-price customer would receive a room, what would
Marriot’s expected revenue be?
f) If the Marriot did not choose to protect any rooms for the full price and leisure travelers book before
business travelers, then what would Marriot’s expected revenue be?
g) Taking the assumption in part f and assuming now that Marriot protect 50 rooms for the full price,
what is Marriot’s expected revenue?