Question

D) 16.94% Refer to the diagram below for questions 25 and 26: The Chart Below represents the Supply and Demand for Auto Insurance policies for teenagers with bad driving records. Price represents the annual premium paid for the policy to cover the student for a calendar year. The quantity represents the number of policies actually sold by the insurance companies to teenagers who want to drive. Price $1,900 $1,400 # 980- Demand -- puantity 25) 2500 3,800 6,500 If, in an effort to help more teenagers get coverage, the U.S. Government imposes a price ceiling such that if the Auto Insurance Companies want to sell this insurance to this set of customers, they cannot sell the policies for a price higher than $1,400 each, then what will be the actual amount of policies sold by the companies? A) 2,500 B) 3,800 C) 6,500 More than 6,500

Answer 1

Price ceiling = $1400

25. The actual amount of policies sold by the companies is equal to whichever is less from the quantity demanded and quantity supplied, so amount of policies sold by the companies at the price ceiling of $1400 is 2,500. Hence,option(A) is correct.

26. At price ceiling of $1400 , Qd= 6,500 and Qs= 2,500.

So, the amount of excess demand for auto insurance policies at that price = (6500-2500)= 4000. Hence,option(D) is correct.