Managerial Economics & Organizational Architecture 6th Edition by James Brickley , Clifford Smith ,Jerold Zimmerman

Exercise 8

Insurance companies have to generate enough revenue to cover their costs and make a normal profit - otherwise, they will go out of business. This implies that the premiums charged for insurance policies must be greater than the expected payouts to the policyholders. Why would a person ever buy insurance, knowing that the price is greater than the expected payout