Question

When the monthly average premium for life insurance was set at $100, 14000 policies were sold....

When the monthly average premium for life insurance was set at $100, 14000 policies were sold. When the premiums were raised

to $110 monthly, only 13,000 policies were maintained.

a) What is the price elasticity of demand for life insurance

b) TRUE or FALSE " All things being equal, based on the price elasticity from from a), insurance companies must have recorded higher profits (than losses)

as a result of increased premiums" please explain answer

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Answer #1

(a) Price elasticy of demand = Percentage change in quantity demanded / Percentage change in pricr

Percentage change in quantity demanded= (13000 -14000)/14000 × 100

Percentage change in quantity demanded = -7.14

Percentage change in price = (110 -100)/100 × 100

Percentage change in price = 10

Therefore ,

Price elasticity of demand = -7.14/10 = -0.714

(b) answer = True

Reason = All things remaining equal, insurance companies will record higher Profits due to increased premium because the price elasticity of demand is = -0.714 which show it is inelastic demand , So if there will be increase in price then the demand will not decrease and hence there will be rise in total revenue

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