Association of Chartered Certified Accountants (ACCA) Certification Practice Test

In which situation is the demand curve a diagonal line down from left to right?

1. When there is perfect elastic demand

2. When there is unit elasticity of demand

3. When demand is perfectly inelastic

4. When demand is completely inelastic

The correct answer is: When there is unit elasticity of demand

The situation where the demand curve is represented as a diagonal line that slopes down from left to right corresponds to a scenario of unit elasticity of demand. When demand exhibits unit elasticity, it means that a change in price results in a proportional change in the quantity demanded. Therefore, as the price decreases, the quantity demanded increases, and vice versa, maintaining a constant total revenue. This downward-sloping demand curve visually illustrates that for every price reduction, the increase in quantity demanded offsets the revenue decline, leading to constant total receipts. The direct linear relationship implied by unit elasticity allows for this diagonal representation, reflecting the balance between price and quantity. Other scenarios described do not result in a diagonal line down from left to right. Perfectly elastic demand is represented by a horizontal line, as quantity demanded responds dramatically to any price change. Conversely, perfectly inelastic demand shows a vertical line where quantity remains unchanged regardless of price fluctuations. Thus, only unit elasticity results in the specific diagonal configuration of the demand curve.