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

Which statement best describes how informative advertising by a general insurer can affect its demand curve, compared with persuasive advertising?

Informative advertising can make demand more elastic because it helps buyers compare prices and features across rivals, whereas persuasive advertising tends to make demand less elastic by building brand loyalty and reducing perceived substitutability. Both typically also shift the demand curve rightward.

  1. AInformative advertising always makes demand more inelastic, while persuasive advertising always makes it more elastic
  2. BInformative advertising can make demand more elastic by improving price comparison, while persuasive advertising tends to make demand less elastic by building loyaltyCorrect
  3. CBoth types shift the curve left because they raise the firm's costs
  4. DInformative advertising moves the firm along its demand curve while persuasive advertising has no effect
  5. Neither type can affect demand when prices are regulated

Explanation

Information about prices and features helps buyers compare rivals, which can make demand more elastic. Persuasive advertising builds brand image and loyalty, reducing perceived substitutability and so making demand less elastic. Both usually shift demand right.

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