Question

Suppose demand is perfectly elastic, and the supply of the good in question decreases. As a result, a. the equilibrium quantity decreases, and the equilibrium price is unchanged. b. the equilibrium price increases, and the equilibrium quantity is unchanged. c. the equilibrium quantity and the equilibrium price both are unchanged. d. buyers’ total expenditure on the good is unchanged.

Answer 1

Answer:

The correct answer is a. the equilibrium quantity decreases, and the equilibrium price is unchanged.

Explanation:

A perfectly elastic demand is an extreme case in which quantity demanded falls to zero with any increase in price, and increases to infinity when price drops.

Now we have this relation clear, it is important to notice that the question is introducing a third variable, which is quantity supplied. When supply decreases, the price remains the same, since only at this price consumers buy the good. The only change that ocurred is related to the availability of the product in the market.

In a normal scenario, an elastic demand would respond to this decrease in supply, pushing the price up, since consumers are willing to pay more. But given that we assume that the demand is perfectly elastic, the price remains the same, otherwise demand would fall to zero.