IAI Actuarial Core Principles · Business Economics · Impact of advertising on sales and demand

A health insurer's advertising makes demand for its policies less price elastic by building brand loyalty. Which statement about the demand curve for its policies is correct?

The demand curve becomes steeper around the current price. Brand loyalty makes customers less sensitive to price, so demand is less elastic and a price increase causes a proportionately smaller fall in quantity demanded, which lets the insurer raise price with less revenue loss.

1. AThe curve becomes flatter at the prevailing price, so a price rise loses more customers
2. BThe curve becomes steeper at the prevailing price, so the firm can raise price with a smaller fall in quantityCorrect
3. CThe curve shifts left because loyalty reduces demand
4. DThe curve becomes perfectly elastic
5. The curve becomes a vertical line at every price level