AP® Microeconomics · Free response

A binding price ceiling on kayak rentals: the shortage, the quantity rented and deadweight loss

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 binding price ceiling on kayak rentals: the shortage, the quantity rented and deadweight loss (5 points)

In Lake Mirren, an invented resort town, the market for hourly kayak rentals is in equilibrium at $30 an hour with 200 rentals a day. The town council sets a maximum price of $20 an hour. At $20, visitors want 260 rentals a day and rental shops offer 140.

  1. (A) Draw a correctly labeled graph of the market for kayak rentals and show the price ceiling. [2 points]

  2. (B) Calculate the size of the shortage. Show your work. [1 point]

  3. (C) Identify the number of kayak rentals that take place each day under the ceiling, and explain. [1 point]

  4. (D) Shade the deadweight loss caused by the price ceiling. [1 point]