Q.In the following diagram, AE is the linear demand curve of a commodity. On the basis of the given diagram state whether the following statement is True or False. Give a reason for your answer.
Demand at point ‘A’ is perfectly elastic demand.

False. By the geometric (point) method, the midpoint C of a linear demand curve AE has Ed = 1, i.e. unitary elastic demand — not relatively elastic. So the statement about point C is false.

On a straight-line (linear) demand curve, elasticity is different at every point and can be found by the point (geometric) method: Ed at a point = lower segment of the curve / upper segment of the curve. With five points A, B, C, D, E from the price axis down to the quantity axis, the midpoint C divides the curve into two equal halves, so its lower and upper segments are equal and Ed = 1 (unitary elastic). Above C (points like B) demand is relatively elastic (Ed greater than 1), and below C (points like D) i …

False. Point B lies above the midpoint of the linear demand curve, so by the point method Ed is greater than 1 — demand there is relatively elastic, not unitary elastic. Unitary elasticity occurs only at the midpoint C.

By the geometric (point) method on a linear demand curve, Ed at a point equals the lower segment divided by the upper segment of the curve from that point. For point B, which lies in the upper half (between A and the midpoint C), the lower segment is longer than the upper segment, so Ed is greater than 1 — relatively elastic demand. Unitary elastic demand (Ed = 1) occurs only where the two segments are equal, …

False. Point D lies below the midpoint of the linear demand curve, so Ed is less than 1 — demand there is relatively inelastic, not perfectly inelastic. Perfectly inelastic demand (Ed = 0) occurs only where the curve touches the quantity (X) axis, i.e. at point E.

Using the point method, at any point below the midpoint C the lower segment of the demand curve is shorter than the upper segment, so Ed is less than 1 — relatively inelastic demand. Perfectly inelastic demand means Ed = 0, which occurs only at the point where the demand curve meets the quantity axis (the lowest point, E), where the lower segment is zero.

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True. Point A lies on the price (Y) axis at the top of the linear demand curve. By the point method Ed = lower segment / upper segment, and at A the upper segment is zero, making Ed infinity — perfectly elastic demand.

On a straight-line demand curve AE, elasticity increases as we move up towards the price axis. At the very top point A (where the curve meets the Y-axis), the upper segment of the curve is zero, so Ed = lower segment / upper segment = infinity. An infinite coefficient means perfectly elastic demand — an infinitely small change in price causes an in …