Which of the following is true if the demand for a seller’s product is perfectly elastic?
A. The seller will not be able to sell any output if they try to price their product above the market price
B. The market has many substitutes for a seller’s product
C. The seller has zero incentive to sell their product below the market price
D. All of the above
The correct answer and explanation is :
The correct answer is D. All of the above.
Explanation:
In economics, the concept of perfectly elastic demand refers to a situation where the quantity demanded of a good or service is extremely sensitive to changes in its price. This means that if the price of the product increases by even the smallest amount, the quantity demanded will drop to zero. Conversely, if the price decreases, there is an infinite increase in the quantity demanded, though the seller can only sell at the market price.
Let’s break down each option:
A. The seller will not be able to sell any output if they try to price their product above the market price.
- This statement is true because under perfectly elastic demand, any price above the market price leads to no sales. Consumers are willing to purchase an unlimited quantity at the market price but will refuse to buy at a higher price. Sellers must adhere strictly to the market price to make any sales.
B. The market has many substitutes for a seller’s product.
- This is also true. Perfectly elastic demand typically occurs when a product has many perfect substitutes. If the seller charges even a slightly higher price, consumers will instantly switch to the alternative products. This high availability of substitutes contributes to the perfectly elastic demand curve.
C. The seller has zero incentive to sell their product below the market price.
- This is correct as well. Under perfect elasticity, the price is already optimized at the market price. If the seller tries to sell below this price, they would not increase the quantity demanded in any significant way (since demand is infinite at the market price). Instead, they would only be losing revenue unnecessarily. Therefore, there’s no incentive to lower the price.
D. All of the above.
- Since all the individual statements (A, B, and C) are correct, the correct answer is D. All of the above.
In summary, when the demand for a product is perfectly elastic, the price is crucial, and the seller has no room to adjust it above or below the market price. The seller is essentially a price taker, and the market determines the price at which sales occur.