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

A life insurer runs a successful advertising campaign for its term plans. Assuming the price of the plan is unchanged, which of the following best describes the effect shown on a standard demand diagram?

Successful advertising shifts the demand curve to the right. It raises awareness and preference, so more is demanded at every price, while price is held constant. A movement along the curve only happens when the product's own price changes.

  1. AA movement down along the existing demand curve
  2. BA movement up along the existing demand curve
  3. CA rightward shift of the demand curveCorrect
  4. DA leftward shift of the demand curve
  5. A steeper demand curve with no change in quantity demanded at the current price

Explanation

Advertising changes tastes and awareness, which are non-price determinants of demand. With price unchanged, more is demanded at every price, so the whole curve shifts right. A movement along the curve would require a price change, so those options are wrong.

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