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

A insurer's persuasive advertising successfully builds brand loyalty. Which combined effect on its demand curve is the most likely intended outcome?

The demand curve is intended to shift right and become less elastic. Advertising raises quantity demanded at every price, and brand loyalty reduces perceived substitutes, making customers less sensitive to price. A movement along a curve would come only from a price change, not from advertising.

  1. AShift left and become more elastic
  2. BShift right and become more elastic
  3. CShift right and become less elasticCorrect
  4. DShift left and become less elastic
  5. Move down along the same demand curve

Explanation

Successful advertising raises demand at each price, shifting the curve right. Brand loyalty makes buyers perceive fewer close substitutes, so demand becomes less price elastic (steeper). A movement along the curve results from a price change, not advertising. A leftward shift would mean falling demand, contrary to intention.

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