Question

When the monthly average premium for life insurance was set at 100, 14000 polices were sold. When premiums were raised to 120 monthly only 9000 policies were maintained.

1.What is the price elasticity of demand for life insurance in Nabi? explain your answer

2.State whether the following statement below is True or False explain your answer

All things equal based on the price elasticity from Insurance must have recorded higher profit ( then losses) as a result of the increased premiums

Answer 1

Question 1 ) Increase in premium from 100 to 120 results in 20% increased price of insurance, which is followed by a reduction in policies maintained from 14000 to 9000 which is a reduction of 35.71%.

Price Elasticity = % change in quantity demanded / % change in price = 35.71% / 20% = 1.78

The price elasticity > 1 which means the price elasticity of demand for life insurance in Nabi is elastic in nature.

Ques 2 ) False

Old income = 100*14000 policies = 1400000

New Income = 120*9000 policies = 1080000

The increased premium is leading to a higher loss as the new income is lesser than the old monthly income.