When a company decides to change the price of a product, it knows the demand for that product will change as a result. Elasticity measures this change in demand as a result in the change in price.
In an effort to increase revenue for the insurance industry, all insurance companies increased prices by 20 percent. To its dismay, only a 10% increase in revenue was received instead of the 20% increase that was expected.
Prepare an essay that addresses the following questions:
What does this say about the elasticity demand for insurance products? What were the insurance companies assuming the elasticity demand would be?