Question

If the supply curve for aspirin is perfectly elastic, then a reduction in demand will cause the equilibrium price to:

(A) stay the same and the equilibrium quantity to fall.
(B) fall and the equilibrium quantity to fall.
(C) rise and the equilibrium quantity to stay the same.
(D) rise and the equilibrium quantity to fall.

Answer 1

The correct answer is option A.

Step-by-step explanation:

A perfectly elastic supply curve means that the supply curve is a horizontal line parallel to x axis and the price is fixed. In such as situation a change in demand will not affect the price level, only quantity demanded will change with demand.

If there is a decrease in the demand, the demand curve will move to the left. This leftward shift in the demand curve will cause the equilibrium quantity to decline but the price will remain fixed.

This is also shown in the attached figure.