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IAI Actuarial Core Principles · Business Economics · How competitive markets operate

In a competitive market for term-insurance policies, a rise in household incomes increases demand at every price, while supply is unchanged. What happens to the equilibrium price and quantity, assuming a normal good and an upward-sloping supply curve?

Both equilibrium price and quantity rise. Higher income shifts demand of a normal good to the right, and with supply unchanged and upward sloping, the market moves along the supply curve to a higher price and larger quantity traded.

  1. APrice rises and quantity risesCorrect
  2. BPrice rises and quantity falls
  3. CPrice falls and quantity rises
  4. DPrice falls and quantity falls
  5. Price rises and quantity is unchanged

Explanation

A rise in income shifts the demand curve of a normal good to the right. With an upward-sloping supply curve, the new intersection lies at a higher price and a higher quantity. Price rising while quantity falls would require a leftward supply shift.

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