When a demand curve is perfectly elastic: A)marginal revenue = average revenue = price. B)marginal revenue average revenue = price. C)marginal revenue average revenue price.

Question

When a demand curve is perfectly elastic:
A)marginal revenue = average revenue = price.
B)marginal revenue > average revenue = price.
C)marginal revenue < average revenue = price.
D)marginal revenue > average revenue > price.

Quizplus · Accepted Answer

When a demand curve is perfectly elastic, the slightest change in price leads to an infinite change in quantity demanded. In other words, customers are extremely sensitive to changes in price, and will only buy at a particular price point. This means that the firm has to sell at the market price to sell anything at all; they cannot raise their price above the equilibrium since customers would immediately switch to the competition. Consequently, the demand curve is a horizontal line, with a perfectly elastic stretch of demand at the given price. This means that marginal revenue, average revenue, and price are all equal.

When a Demand Curve Is Perfectly Elastic