Perfectly Elastic Demand Maintains Constant Price

Steps:

• A decrease in supply shifts the supply curve leftward, reducing quantity supplied at each price.
• If equilibrium price remains unchanged, the demand curve must be horizontal to intersect the new supply curve at the same price.
• A horizontal demand curve indicates perfectly elastic demand, where quantity demanded adjusts infinitely to supply changes without price variation.
• Thus, price elasticity of demand is infinite in absolute value.

Why D is correct:

• Infinite elasticity means demand is perfectly elastic; per the elasticity formula (|%ΔQ_d / %ΔP| = ∞), quantity demanded changes infinitely for any price change, but here price doesn't change despite supply shift, fitting horizontal demand.

Why the others are wrong:

• A. –1: Unit elastic demand would cause proportional price increase with supply decrease.
• B. zero: Perfectly inelastic demand would cause infinite price rise with any supply decrease.
• C. +1: Positive elasticity implies upward-sloping demand, which doesn't exist for normal goods and wouldn't stabilize price.

Final answer: D