Assume That Flood Insurance Premiums Are Determined in the Competitive

question 31

Multiple Choice

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.

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Definitions:

Avoidance Strategies

Coping strategies designed to distract us from thinking about the source of anxiety.

Reality Anxiety

The fear or apprehension caused by real, external threats or situations, distinct from neurotic or moral anxiety.

Neurotic Anxiety

is a psychological term for a chronic sense of anxiety that arises from unresolved internal conflicts and anxieties, according to psychoanalytic theory.

Freud

Sigmund Freud, an Austrian neuroscientist who established psychoanalysis as a technique for addressing mental disorders through conversational interactions between a therapist and a patient.