Problem

Insurance costs $\$500$; without it, a $\$20,000$ loss occurs with probability $0.04$. Under these simplified terms, compute expected costs, compare them, and retain the limits of an expected-cost analysis.

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Insurance costs $500 versus expected uninsured cost .04($20000) = $800, so expected monetary cost favors insurance under these simplified terms.

Insurance costs $500 versus uninsured EV $800, but call no insurance cheaper merely because the 4% loss is rare; ignore the $300 expected advantage.

Use costs $500 and $800, favor insurance, but claim expected cost makes exclusions, limits, and risk preference irrelevant.

Treat insurance expected cost as the full $20000 loss versus $800 uninsured; favor no insurance on this reversed comparison.

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