<p>This feels like trying to read your mind, so I’m probably wrong. I will venture an answer regardless :D . I think that what is happening is that the benefit from buying the insurance is certainly the reduction in exposure: A-C. However maybe you are thinking about the remaining exposure after buying the insurance, in that case it is (A-C) + B. So I think you are thinking about the total costs after buying insurance while the question was asking about the change in costs. I prefer the term exposure, but I thought that using your terms will make the exposition  clear. </p>

<p>P.S. I hope it is understood that we are not literally adding costs, since they occur in different states of the world, but rather using it as a short hand notation to focus on the relevant issues.</p>

CC BY-SA 4.0
2019-05-17T15:22:41.520Z
Excellent answer.
Eval
CC BY-SA 4.0
2019-05-17T06:18:31.473Z
2019-05-17T06:18:31.473Z
Regio
<p>I am stuck at a very simple problem:</p>

<p>Suppose, I am running out of insurance, and as a result, I am incurring a the cost of A with event 1 + the cost of B with event 2. Now, I go ahead and buy an insurance that will protect me from event 1, but will incur me a total cost of C. I will remain vulnerable to Event 2.</p>

<p>What is the total profit I am receiving from making the investment.</p>

<p>Logical calculation is, 
Prior total cost: A+B
New total cost: B+C
Total profit: (A+B)-(B+C) = A-C</p>

<p>But my mind is constantly pesking me with the total profit to be: A-B-C.</p>

<p>I am essentially doing cost-benefit analysis.
Can someone please tell me where I am wrong?</p>

<p>I know my benefit function to be A, and not A-B. Please indicate what is wrong.</p>

<opportunity-cost>
Simple cost analysis question
Eval
# Simple cost analysis question

(Asked by: username_0 on 2019-05-14)

I am stuck at a very simple problem:

Suppose, I am running out of insurance, and as a result, I am incurring a the cost of A with event 1 + the cost of B with event 2. Now, I go ahead and buy an insurance that will protect me from event 1, but will incur me a total cost of C. I will remain vulnerable to Event 2.

What is the total profit I am receiving from making the investment.

Logical calculation is,
Prior total cost: A+B
New total cost: B+C
Total profit: (A+B)-(B+C) = A-C

But my mind is constantly pesking me with the total profit to be: A-B-C.

I am essentially doing cost-benefit analysis.
Can someone please tell me where I am wrong?

I know my benefit function to be A, and not A-B. Please indicate what is wrong.

**Tags:** opportunity-cost


---

## 1 answers

### Answer by username_1 on 2019-05-17. Score: 0 | Accepted answer

This feels like trying to read your mind, so I’m probably wrong. I will venture an answer regardless :D . I think that what is happening is that the benefit from buying the insurance is certainly the reduction in exposure: A-C. However maybe you are thinking about the remaining exposure after buying the insurance, in that case it is (A-C) + B. So I think you are thinking about the total costs after buying insurance while the question was asking about the change in costs. I prefer the term exposure, but I thought that using your terms will make the exposition clear.

P.S. I hope it is understood that we are not literally adding costs, since they occur in different states of the world, but rather using it as a short hand notation to focus on the relevant issues.

> **Comments:**
> **username_0**: Excellent answer.  

---

