Practice a College Board-style free response question on Supply and Demand. Write your response, then reveal the model answer to see exactly what earns each point.
Free Response Question · Unit 2 · Excise Taxes & Deadweight Loss
The market for bottled water is currently in equilibrium at a price of $2.00 per bottle and a quantity of 1,000 bottles per day. The government imposes an excise tax of $0.50 per bottle on sellers. After the tax, the price consumers pay rises to $2.30, the price sellers receive (after remitting the tax) falls to $1.80, and the equilibrium quantity falls to 800 bottles per day.
A
Using a correctly labeled supply and demand graph, show the effect of the excise tax on the market for bottled water, including the original and new equilibrium price and quantity.
✓ Model answer (earns the point)
The graph shows the original supply curve (S1) and demand curve (D) intersecting at $2.00 and 1,000 bottles. The tax shifts supply upward/leftward to S2 by the $0.50 tax amount. The new equilibrium quantity is 800 bottles, with the price consumers pay ($2.30) read off the demand curve at Q=800, and the price sellers receive ($1.80) read off the original supply curve (S1) at Q=800.
Why it scores: Correctly labels axes (Price, Quantity), shows S1 shifting to S2 by the exact tax amount, and identifies the three key points: original equilibrium, the price buyers pay, and the price sellers receive — all at the new quantity of 800.
B
Calculate the amount of tax revenue the government collects from this excise tax.
✓ Model answer (earns the point)
Tax revenue = tax per unit × new equilibrium quantity = $0.50 × 800 = $400 per day.
Why it scores: Uses the new (post-tax) equilibrium quantity, not the original quantity, and multiplies it by the per-unit tax amount. A common error is using the original quantity of 1,000, which would not earn the point.
C
Explain why this excise tax creates deadweight loss, and identify on your graph where it would be located.
✓ Model answer (earns the point)
The tax creates deadweight loss because it reduces the equilibrium quantity from 1,000 to 800 bottles — below the efficient (no-tax) quantity where marginal benefit equaled marginal cost. The bottles that would have been traded between 800 and 1,000 units had a marginal benefit to consumers greater than their marginal cost to produce, so failing to trade them represents a pure loss of total surplus that goes to neither the government, consumers, nor producers. On the graph, deadweight loss is the triangle between the original supply and demand curves, bounded by the quantities 800 and 1,000.
Why it scores: Explains specifically why the lost trades (between 800 and 1,000 units) represented mutually beneficial exchanges, and correctly identifies deadweight loss as a triangle (not the tax revenue rectangle) located between the old and new equilibrium quantities.
How to score points on AP Microeconomics FRQs
Always draw and reference your graph precisely. Label both axes, both curves before and after any shift, and the relevant price/quantity points.
Don't confuse tax revenue with deadweight loss. Tax revenue is a rectangle (tax × quantity); deadweight loss is a triangle (the lost mutually beneficial trades).
Use the post-tax (new) quantity for tax revenue calculations — a very common point of confusion.
Explain the "why," not just the "what." Saying "deadweight loss occurs" earns fewer points than explaining specifically which trades are lost and why they represented value.
Be concise but complete. 2–4 sentences per part is usually enough. Avoid filler — every sentence should add something a grader can mark.