Assume that flood insurance premiums are determined in the competitive market.Suppose that devastating floods along the Mississippi River have increased the degree of risk aversion among the insurance investors in this market.What will happen to the market for flood insurance policies?
A)The supply of insurance shifts rightward, leading to a decrease in equilibrium premiums and an increase in the quantity of insurance bought and sold.
B)The demand for insurance shifts leftward, leading to a decrease in equilibrium premiums and a decrease in the quantity of insurance bought and sold.
C)The supply of insurance shifts leftward, leading to an increase in equilibrium premiums and a decrease in the quantity of insurance bought and sold.
D)The demand for insurance shifts rightward, leading to an increase in equilibrium premiums and an increase in the quantity of insurance bought and sold.

Question

Quizplus · Accepted Answer

An increase in risk aversion among insurance investors means that they are now less willing to supply flood insurance policies. This results in a leftward shift in the supply curve, causing equilibrium premiums to increase and quantity of insurance bought and sold to decrease. Therefore, choice C is the correct answer.

Assume That Flood Insurance Premiums Are Determined in the Competitive