Ace Corporation is sending a shipment of crystal balls from North Carolina to California. There is a chance that the shipment may be damaged, so Ace Corporation is thinking of buying insurance to cover the shipment. The possible costs that buying and not buying insurance may entail are presented in the following table.

What is the expected value of the insurance policy? If the insurance policy is not worth the cost of insurance ($100), why do people buy it?

Transcribed Image Text:

Buying Not buying Probability Shipment wrecked $100 $5,000 .01 Shipment safe $100 0 .99