IAI Actuarial Core Principles · Business Economics · Relationship between economics and business
In the economic way of thinking, what does the assumption of 'ceteris paribus' allow an analyst studying demand for a motor insurance policy to do?
Ceteris paribus lets the analyst hold all other influences, such as income, tastes and competitor prices, constant while varying only the premium. This isolates the effect of the premium on the quantity of motor insurance demanded.
- AAssume that all other factors stay unchanged, so the effect of a premium change alone can be isolatedCorrect
- BAssume that consumers always act irrationally
- CAssume that the premium has no effect on the quantity demanded
- DAssume that firms can set any price they wish
- Assume that income and tastes change at the same rate as price
Explanation
Ceteris paribus means 'other things being equal'. It holds other influences such as income and tastes constant so the effect of one variable, here the premium, can be isolated.
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