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

Which of the following is the most likely reason that informative advertising by a new digital insurance platform shifts its demand curve to the right?

Informative advertising raises consumer awareness of the product and its features, so more people are willing and able to buy at every price. This increases demand and shifts the curve right. Cost reductions would shift supply, not demand.

  1. AIt lowers the platform's marginal cost of production
  2. BIt reduces consumers' incomes
  3. CIt makes consumers aware of the product and its features, increasing willingness to buy at each priceCorrect
  4. DIt forces competitors to raise their prices
  5. It converts the product into an inferior good

Explanation

Informative advertising reduces imperfect information, raising the number of consumers who know about and want the product at every price, which shifts demand right. Lower marginal cost affects supply, not demand. Competitors' prices and income are separate factors not caused by this advertising.

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