The pricing of pharmaceutical products can be controversial. A recent example is EpiPen

Question

produced by Mylan which is used to treat anaphylaxis. The retail price of an EpiPen is
$300, while industry sources estimate that it costs around $30 to produce each unit (i.e.
one dose). Despite this high price, Mylan sells 1 million units a year.
Questions
1) Use the Lerner index to determine the elasticity of demand for the EpiPen at its
equilibrium price. Is this elasticity consistent with the producer of the EpiPen, Mylan,
maximizing profits? Explain your answer. [2 points]
2) Assume Mylan's indirect demand function is linear: P = a – bQ, where Q is measured
in millions of units. Using the definition of the point elasticity of demand, the elasticity
you calculated in part 1 and the unit sales of EpiPen, find the values of “a” and “b” in the
above equation. [4 points]
3) Derive the marginal revenue function. If the marginal cost of production is constant at
$30, calculate the producer surplus, consumer surplus, and deadweight loss from
monopoly pricing. [4 points]
4) Use a diagram to illustrate the profit maximizing price, quantity sold, producer surplus,
consumer surplus and deadweight loss. [3 points]
5) Analyze the implications for the EpiPen market if the government imposes a price
ceiling on the EpiPen. Assume that the price ceiling is below $300 but above $30. [2
points]

Answer 1

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