2025 · Q12
Which of the following statements about the relationship between price elasticity of demand and type of firm is/are correct?
- 1Perfectly elastic demand is associated with a competitive firm.
- 2Perfectly inelastic demand is associated with a monopolistically competitive firm. Select the answer using the code given below.
indian-polity-economyeconomy-fundamentals
- A1 only
- B2 only
- CBoth 1 and 2
- DNeither 1 nor 2
Explanation
A perfectly competitive firm is a price taker facing a perfectly (infinitely) elastic demand curve at the market price, so statement 1 is correct. A monopolistically competitive firm faces a downward-sloping but relatively elastic demand curve because many close substitutes exist — not a perfectly inelastic one — so statement 2 is incorrect. Hence '1 only' is correct.