IAI Actuarial Core Principles · Business Economics · Relationship between economics and business
A life insurer's analyst says, 'Increasing the sales force by 10% will raise sales, but each additional agent beyond a point will add less to premium than the previous one.' Which core economic idea does this best illustrate?
The statement illustrates diminishing marginal returns. As more agents are added to fixed resources such as management, offices and the market, each extra agent contributes less additional premium than the one before.
- AComparative advantage
- BDiminishing marginal returnsCorrect
- CMoral hazard
- DPositive externality
- Money illusion
Explanation
Adding units of a variable input to fixed inputs eventually yields smaller increments of output, which is diminishing marginal returns. The other terms concern trade, information asymmetry, spillovers and nominal values.
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