21 May IS THE EXPECTED PROFIT A REASONABLE DECISION CRITERION?
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?
Explain.
b How much should an insurance company charge to insure the promoter’s full losses? Explain your answer.
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