Question: Event insurance allows promoters of sporting and entertainment events to protect themselves from financial losses due to uncontrollable circumstances such as rain-outs. For example, each spring, Cincinnati s Downtown Council puts on the Taste of Cincinnati. This is a rainy time of year in Cincinnati, and the chance of receiving an inch or more of rain during a spring weekend is about one out of four. An article in the Cincinnati Enquirer, by Jim Knippenberg ( Chicken Pox Means 3 Dog Night Remedy, Cincinnati Enquirer, May 28, 1997, p. E1), gave the details for an insurance policy purchased by the Downtown Council. The policy would pay $100,000 if it rained more than an inch during the weekend festival. The cost of the policy was reported to be $6,500.
a. Determine whether you believe that these dollar amounts are correct. (Hint: Calculate the expected value of the profit to be made by the insurance company.)
b. Assume that the dollar amounts are correct. Is this policy a good deal for Cincinnatis Downtown Council?