AP® Microeconomics · Free response

A competitive car wash making losses: shut down, exit and the long-run price

write it first, then score yourself point by point

Short free-response question · four-function calculator · 5 points · about 12 minutes

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The question

Name: ______________________   Date: ____________   A competitive car wash making losses: shut down, exit and the long-run price (5 points)

The market for basic car washes in a large city is perfectly competitive and constant-cost. After many drivers buy cars that need fewer washes, the market price falls. At the new price, a typical car wash makes an economic loss, but the price is above the lowest point of its average variable cost. The firms are invented, for practice.

  1. (A) Draw correctly labeled side-by-side graphs for the car wash market and a typical car wash at the new price, and show the car wash's demand curve. [2 points]

  2. (B) Shade the car wash's economic loss. [1 point]

  3. (C) Explain why the car wash keeps producing in the short run rather than shutting down. [1 point]

  4. (D) Explain what happens to the market price of car washes in the long run. [1 point]