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IAI Actuarial Core Principles · Business Economics · Production, costs, revenue and profit in price and output decisions

A life insurer sells 200 policies at ₹5,000 each. Cutting the price to ₹4,800 on all policies raises sales to 215. Which statement about this change is correct?

Total revenue rises by ₹32,000, from ₹10,00,000 to ₹10,32,000, and the marginal revenue is about ₹2,133 per extra policy. This is well below the new price because the price cut applies to all previously sold policies as well.

  1. AMarginal revenue over the change is ₹4,800 per extra policy
  2. BTotal revenue rises by ₹32,000 and the average marginal revenue over the change is about ₹2,133 per extra policyCorrect
  3. CTotal revenue falls by ₹32,000 and demand is inelastic over this range
  4. DTotal revenue rises by ₹15,000 and marginal revenue is ₹1,000
  5. Total revenue is unchanged because the lower price offsets higher sales

Explanation

Old TR = 200 × 5,000 = ₹10,00,000. New TR = 215 × 4,800 = ₹10,32,000. Change = +₹32,000 over 15 extra policies, giving ₹32,000/15 ≈ ₹2,133 per extra policy. MR is below the new price because the cut applies to all earlier units too, and since TR rose, demand is elastic here.

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