The following diagram represents the market demand and supply curve for insurance for British merchant ships. The original equilibrium quantity of policies and the equilibrium premium price are indicated at point E on the graph. Assume that wealthy investors provide the insurance for the merchants' ships and that the ship merchants purchase these policies.
Part 1: Assume that large losses in the financial markets in Britain make investors skittish and more risk averse as a whole. Use the copy tool to show the effect of this change on the market for insurance. Label the new curve(s) as D2 or S2, as appropriate.
Part 2: Use the double drop line tool to show what happens to the equilibrium quantity of policies and equilibrium premium price. Label this new point E2.