Question

The quantity of coffee sold fell sharply last month, while the price remained the same. Five people suggest various explanations:Lorenzo: Supply decreased, but demand was unit elastic.Neha: Supply decreased, but it was perfectly inelastic.Sam: Supply decreased, but demand was perfectly elastic.Teresa: Demand decreased, but supply was perfectly elastic.Andrew: Demand decreased, but supply decreased at the same time.Who could possibly be right? A) LorenzoB) NehaC) SamD) TeresaE) Andrew

Answer 1

Answer:

Sam: Supply decreased, but demand was perfectly elastic.

Explanation:

Sam is right because the only possible explanation is that the demand is perfectly elastic and the supply decreased. When the price elasticity of demand is perfectly elastic, the demand curve is completely horizontal. Since the price of coffee remained the same, that means that the quantity demanded will decrease only if the supply of coffee decreased.