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.

2. For a fee of $1000 per concert, Worldwide Insurance has offered to insure theproducer against all losses from a rained out concert. If Tracy Johnson buys theinsurance, then what is her expected profit per concert? Explain and interpret

what this number means.

Explanation / Answer

Expense per concert = $1000

Income per concert = (1-0.4) x 20,000 = $12,000

So, the expected profit per concert = $11,000 per concert

It means that on an average, the profit that Tracy will make will be $11,000 per concert

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