Question

A rock concert promoter has scheduled an outdoor concert on July 4th. If it does not rain, the promoter will make $30,000. If it does rain, the promoter will lose $15,000 in guarantees made to the band and other expenses. The probability of rain on the 4th is .4.

(a) What is the promoter's expected profit? Is the expected profit a reasonable decision criterion? (Round your answers to 1 decimal place. Omit the "$" sign in your response.)

(b) How much should an insurance company charge to insure the promoter's full losses?

Answer 1

Their expected profit is $12,000. I'd say it's reasonable, because the event wouldn't have been organized if the profit is expected to be negative.

The insurance company should charge $6,000.

Explanation:

(a) 30,000 × .6 + (-15,000) × .4 = 12,000.

(b) 15,000 × .4 = 6,000.

Answer 2

Explanation:

Given that on July 4th a rock concert promoter has scheduled an outdoor concert.

Probability for rain = 0.4

If it rains earnings would be -15000

if it does not rain earning would be +30000

Let X be the earning

X 30000 -15000

p 0.6 0.4

x*p 18000 -6000

a)Expected profit =
`18000-6000=12000`

b) Insurance company has to refund for the losses if it rains.

Hence insurance company will charge 15000 *prob = 6000