The Venezuelan government has imposed a price ceiling on the retail price of roasted coffee beans. The accompanying diagram shows the market for coffee beans. In the absence of price controls, the equilibrium is at point E, with an equilibrium price of PE and an equilibrium quantity bought and sold of QE.

a. Show the consumer and producer surplus before the introduction of the price ceiling.
After the introduction of the price ceiling, the price falls to PC and the quantity bought and sold falls to QC.
b. Show the consumer surplus after the introduction of the price ceiling (assuming that the consumers with the highest willingness to pay get to buy the available coffee beans; that is, assuming that there is no inefficient allocation to consumers).
c. Show the producer surplus after the introduction of the price ceiling (assuming that the producers with the lowest cost get to sell their coffee beans; that is, assuming that there is no inefficient allocation of sales among producers).
d. Using the diagram, show how much of what was producer surplus before the introduction of the price ceiling has been transferred to consumers as a result of the price ceiling.
e. Using the diagram, show how much of what was total surplus before the introduction of the price ceiling has been lost. That is, how great is the deadweight loss?

Transcribed Image Text:

Price of coffee beans Pnce ceiung Pc ac Quantity of coffee beans