Tracy Johnson produces and promotes outdoor rock concerts throughout the summerm

Question

Tracy Johnson produces and promotes outdoor rock concerts throughout the summermonths in southeastern United States. This summer she has numerous concertsscheduled on different dates. The main threat to the success of these concerts is rain. If itdoes not rain, then Tracy, the producer, expects to make a profit of $20,000 from each
concert. If it does rain, then she will lose $12,000 ( rock star’s fees, advertising costs,
stadium rental, administrative costs, etc.). For this time of year the National WeatherService states that the probability of rain is 0.4.

4. How much should Worldwide have charged for this policy in order for theinsurance company’s expected value per concert to be 0. Explain.

Explanation / Answer

4) Expected loss = probability of rain x loss when it rains. 0.4x12,000 = $4800

The insurance company should charge the same amount as expected loss for policy to havean expected value per concert 0.

So, worldwide should have charged $4800 for this policy in order for the insurance company's expected value per concert to be 0

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