2019, Set 1, Question 1 · 9 points
2019 AP Microeconomics FRQ 1 (Set 1) answers
Small-town gas station monopoly
Graph a profitable monopoly with its output, price, deadweight loss and the largest zero-profit output. Predict how a fixed cost increase affects deadweight loss and profit, and what a demand drop means for staying open and for price and output.
Skip to the worked answer and scoring (try the question first if you can)
This exam had three free-response questions in a 60 minute section (10 minutes of reading and 50 of writing), with about half the time suggested for Question 1 and the rest split evenly between Questions 2 and 3. The current exam has 3 free-response questions in 60 minutes. The skills these questions practice still count.
1 Read the question
The question is College Board's, from the 2019, Set 1 exam. It starts on page 2 of the PDF. College Board no longer posts this exam, so it opens from the copy of College Board's PDF that the Internet Archive saved on December 20, 2025.
2 Write your answer
Answer each part the way you would on the exam, in full sentences, with your work shown. Your writing saves as you type.
3 Score it
Score your answer against College Board's scoring guidelines, one point at a time. Give yourself a point only when your answer says what the guideline asks for.
Scoring guidelines (PDF, page 2) What the exam readers saw (Chief Reader report)
4 Worked answer and scoring
Here is how a response that earns full credit could read, part by part, and what College Board's scoring guidelines look for, put in our own words. Open a part once you have written your own answer to it. The scoring guidelines PDF above is the official word on every point.
A monopoly chooses its output where marginal revenue equals marginal cost and then charges the highest price buyers will pay for that output, read off demand. Positive economic profit means that price sits above average total cost at that output, so the graph needs ATC as well as D, MR and MC.
Part a 5 points
Model answer
Draw a downward-sloping demand curve D and a marginal revenue curve MR that starts at the same price and falls twice as steeply, so it lies below D. Add a U-shaped ATC and an MC curve that falls, then rises through the lowest point of ATC.
(i) QF is the output where MR crosses MC. Drop a dashed line from that crossing to the quantity axis and label it QF.
(ii) PF is the price on D straight above QF. Carry the dashed line up to D and across to the price axis. FillUp earns a positive economic profit, so ATC at QF must lie below PF.
(iii) The deadweight loss is the region between D (above) and MC (below), running from QF out to the quantity where D crosses MC. Shade all of it.
(iv) At any output, profit is zero where price equals average total cost, which is where D crosses ATC. D crosses ATC twice here; the larger of the two quantities is QZ.
What earns each point
- A correctly labeled monopoly graph with downward-sloping D and MR, MR below D. A single seller faces the whole market's downward-sloping demand, and to sell one more unit it must lower the price on every unit, so each extra unit adds less revenue than its price.
- QF at the output where MR equals MC. Below QF one more unit adds more to revenue than to cost; beyond it, less. The crossing of D and MC marks the efficient output, which a monopoly does not choose.
- PF on the demand curve directly above QF, with ATC below PF at QF. The firm charges what buyers will pay for QF, which is read from D, not from the height where MR meets MC. ATC below that price shows the positive profit the question states.
- The deadweight loss shaded completely: the area between D and MC from QF to the quantity where D meets MC. Each unit in that range is worth more to buyers than it costs to make, yet the monopoly does not produce it. The region lies beyond QF, bounded above by D and below by MC.
- QZ at the quantity where D crosses ATC, on the larger-output side. Profit per unit is price minus ATC, and price is read from D, so profit is zero where the two curves meet. At any output past the larger crossing, ATC is above D and total profit is negative, so that crossing is the largest output at which FillUp breaks even.
Part b 2 points
Model answer
(i) Unchanged. A higher lease payment is a fixed cost: it does not depend on how much gasoline FillUp sells, so it does not change marginal cost. MR and MC are where they were, so FillUp keeps producing QF and charging PF, and the region between D and MC beyond QF is the same.
(ii) Economic profit falls. Revenue and variable costs at QF are unchanged, but total cost is higher by the extra lease payment, so ATC shifts up and the profit rectangle shrinks.
What earns each point
- Deadweight loss stays the same, because a change in fixed cost leaves MC, and so the profit-maximizing quantity, unchanged. The output decision depends only on marginal revenue and marginal cost. Saying only that fixed costs rose repeats the question; the link to MC and to the quantity chosen is the explanation.
- Economic profit decreases. The same output sells at the same price while total cost is higher by the lease.
Part c 2 points
Model answer
(i) FillUp keeps operating in the short run only if the price it charges is greater than its average variable cost at its profit-maximizing output (equivalently, total revenue is greater than total variable cost). Then revenue covers every variable cost and has something left toward the fixed cost, which FillUp owes whether or not it operates.
(ii) Both fall. Lower demand shifts D and MR to the left. The new MR crosses MC at a smaller quantity, and the new, lower D gives a lower price at that quantity.
What earns each point
- Price must be greater than average variable cost at the profit-maximizing output. Shutting down leaves FillUp paying its whole fixed cost. Operating does better than that only when each unit sells for more than its average variable cost, so that revenue covers the variable cost with something left toward the fixed cost. The comparison has to set like against like: price against AVC, or total revenue against total variable cost.
- Both the profit-maximizing quantity and price decrease. MR shifts left with D, so it meets MC at a lower output, and the price for that output is read from the new, lower demand curve.
Common mistakes
From what the exam readers reported seeing in 2019 students' answers, in our words:
- Drawing a horizontal demand curve, as for a perfectly competitive firm, instead of the downward-sloping demand a monopoly faces.
- Drawing MR on top of the demand curve.
- Putting QF where demand meets MC.
- Reading PF straight across from the point where MR meets MC instead of up at the demand curve.
- Leaving out the ATC curve, which the graph needs to show the positive economic profit.
- Shading consumer surplus or the firm's profit in place of the deadweight loss.
- Placing QZ at the lowest point of ATC, or where demand meets MC, instead of where demand meets ATC.
- Marking QF, PF or QZ at a crossing inside the graph rather than on the axes.
- Saying the deadweight loss rises or falls, with an explanation that points to a change in the firm's quantity or price.
- Explaining that deadweight loss is unchanged by repeating that fixed costs rose, without linking that to marginal cost and the output chosen.
- Saying FillUp's economic profit rises or stays the same.
- Giving the condition to keep operating as MR greater than AVC, or as total revenue greater than total fixed cost.
- Stating only that the firm must "cover" its variable costs, with no comparison of price and AVC or of total revenue and total variable cost.
- Comparing a total with an average, such as total revenue with AVC.
- Saying quantity falls but price rises.
Question, scoring guidelines and Chief Reader report: College Board, from the Internet Archive. The title, summary and worked answer are ours.