Airlines routinely overbook flights. For example, an airline may sell "confirmed" seats to 225 passengers even when the plane has only 210 seats. Airlines do this anticipating that some confirmed passengers will not show up because their incoming flight is late, their plans change at the last minute, or they are too sick to travel.

Of course, the airline has a problem if its expectations are wrong and more than 210 passengers with confirmed tickets show up. In this case, the airline usually solicits volunteers to be "bumped" from the flight and take the next flight to their destination.

The airlines induce passengers with monetary rewards (e.g., a $200 travel certificate). It is common for the reward to increase every few minutes until such time enough people volunteer. If the flight is overbooked even after the maximum reward, then the airline takes the next step of involuntarily bumping confirmed passengers. Confidential airline policies govern who gets to fly.

Required:

a. Discuss the factors the airline considers when it decides to sell 225 confirmed seats, knowing that only 210 seats are available?

b. Why do some passengers volunteer to be "bumped" while other passengers show no interest in the airline's offers?

c. Some passengers play a wait and see game in an overbooked situation. What is the cost of waiting until the reward reaches a “satisfactory,” or high, level?

d. What cost does the airline incur when it involuntarily bumps a passenger with a confirmed ticket? Does this cost differ across passengers? Will the airlines’ ranking of passengers consider these differences, if any?