In the context of consumer surplus and willingness to pay, how do consumers influence the behavior of insurance companies in a competitive market?

• A. Consumers directly set the premiums that insurance companies charge by voting on price levels.
• B. Consumers have no impact on insurance companies' pricing or coverage decisions.
• C. By choosing to purchase policies only when the price is less than or equal to their willingness to pay, consumers force insurance companies to offer competitive prices and better coverage.
• D. Consumers regulate insurance companies by enforcing government policies and legal requirements.

Answer: (C)

Verified step by step guidance

1. Understand the concept of willingness to pay (WTP), which is the maximum price a consumer is ready to pay for a good or service, reflecting the value they place on it.
2. Recognize that consumer surplus is the difference between what consumers are willing to pay and what they actually pay, representing the benefit consumers receive from a purchase.
3. In a competitive insurance market, consumers influence companies by deciding whether to buy a policy based on whether the premium is less than or equal to their WTP.
4. Because consumers only purchase policies that provide them with positive consumer surplus, insurance companies are incentivized to set premiums and coverage options that attract buyers, leading to competitive pricing and improved offerings.
5. Thus, consumer choices act as a market mechanism that pressures insurance companies to balance price and coverage effectively, even though consumers do not directly set prices or enforce regulations.