Which of the following is a reason a person might decide not to purchase insurance?

• A. Insurance is required by law for all purchases
• B. The expected cost of insurance exceeds the expected benefit
• C. Insurance eliminates all financial risks
• D. Insurance always guarantees a profit for the buyer

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of insurance in microeconomics. Insurance is a financial product that individuals purchase to protect themselves against uncertain losses by paying a premium.
2. Step 2: Identify the key reason why a person might decide not to purchase insurance. This decision depends on comparing the expected cost of buying insurance (the premium) with the expected benefit (the reduction in financial risk or expected loss).
3. Step 3: Recognize that if the expected cost of insurance (premium) exceeds the expected benefit (the expected reduction in loss or risk), a rational individual may choose not to buy insurance because it is not economically advantageous.
4. Step 4: Evaluate the other options: insurance is not required by law for all purchases, insurance does not eliminate all financial risks (it reduces risk but may have deductibles or limits), and insurance does not guarantee a profit for the buyer (it is a risk management tool, not an investment).
5. Step 5: Conclude that the correct reason a person might decide not to purchase insurance is when the expected cost of insurance exceeds the expected benefit.