Insurance Compensation for Lost Revenues

In July 1990, a rock-and-roll museum opened in Atlanta, Georgia. The museum was located in a large city block containing a variety of stores.In late July 1992, a fire that started in one of these stores burned the entire block, including the museum. Fortunately, the museum had taken out insurance to cover the cost of rebuilding as well as lost revenue.

As a general rule, insurance companies base their payment on how well the company performed in the past. However, museum management argued that the revenues were increasing, and hence they were entitled to more money under their insurance policy. The argument was based on the revenues and attendance figures of an amusement park that was opened nearby, featuring rides and other similar attractions. The amusement park opened in December 1991. The two entertainment facilities were operating jointly during the last four weeks of 1991 and the first 28 weeks of 1992, at which point the museum closed but the amusement park continued its operation without interruption. In September 1995, the museum reopened with considerably more features than the original one (as previously planned).

The weekly attendance for both facilities for December 1991 to October 1995, are listed in columns 1 (museum) and 2 (amusement park) in file Insurance comp. During the period when the museum was closed, the data show zero attendance. The museum argued weekly attendance from the twenty-ninth week of 1992 to the sixteenth week of 1995 (the time the museum was closed) should be estimated using the most current data (seventeenth to forty-second week of 1995). The insurance company argued that the estimates should be based on the four weeks of 1991 and the 28 weeks of 1992, when both facilities were operating and before the museum reopened with more features than the original museum. Judge Goodwill had a completely different idea: He suggested the weekly average museum attendance before and after the fire combined would be the basis for the compensation determination. Nothing was decided until a study was completed. Your job is to help conduct the study.

  1. Use 95% confidence intervals to answer:Should the judge approach be used?
  2. Perform the following tasks:
  3. Predict the museum's weekly attendance figures week by week, when the museum was closed following the insurance company argument.
  4. Make sure (by testing at 5% significance level) that the amusement park figures can be used to make the prediction. Show your work.
  5. Make apoint prediction of the total attendance that was lost because of the fire. Use EXCEL.
  6. Construct a confidence interval to the total lost attendance. Hint: You’ll need to base this interval on a confidence interval for the average attendance per week you construct first.
  7. Write and run a linear regression model from which you can answer the question: Is there significant difference between the museum’sweekly attendance before the fire and after the fire? To do this you need to add a dummy variable to your model. Test at alpha = .05.