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# 02_09 - STAT 400 Examples for Spring 2011 5 Management of...

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STAT 400 Examples for 02/09/2011 Spring 2011 5. Management of an airline knows that 0.5% of the airline’s passengers lose their luggage on domestic flights. Management also know that the average value claimed for a lost piece of luggage on domestic flights is \$600. The company is considering increasing fares by an appropriate amount to cover expected compensation to passengers who lose their luggage. By how much should the airline increase fares? 6. A grocer has shelf space for two units of a highly perishable item that must be disposed of at the end of the day if it is not sold. Each unit costs \$1.70 and sells for \$3.50. From past experience, the grocer knows that the demand for this item could be either 0, or 1, or 2 units. The grocer has to decide whether to stock one unit of this item or two units. a) Construct the grocer's profit (payoff) in each of the following cases: demand = 0 demand = 1 demand = 2 stock 1 unit stock 2 units b) Suppose P(demand = 0) = 0.20, P(demand = 1) = 0.30, and P(demand = 2) = 0.50.

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02_09 - STAT 400 Examples for Spring 2011 5 Management of...

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