Question

ANSWERS AND GRAPHS MUST BE CLEAR TO READ!

2. The market for EpiPens Consider the pharmaceutical company Mylan that produces epinephrine injection devices called EpiPens. In the presence of other firms producing substitutes for this good, the price of EpiPens is $150 Now suppose that competitors to Mylan no longer produce epinephrine injection devices, so Mylan now has pricing power in this market. As the economist on staff at Mylan, you are charged with the task of figuring out what your company's new pricing strategy should be The following graph shows the marginal cost (MC), which is assumed to be constant, and the average total cost (ATC) of Mylan. The graph also shows the demand curve (D) for EpiPens and the marginal revenue curve (MR) once the firm has market power. On the graph, use the grey point (star symbol) to indicate the quantity of EpiPens demanded if Mylan continues to charge $150. Dashed drop lines will automatically extend to both axes.

Mylan will earn POSITIVE, ZERO, NEGATIVE PROFIT??

Answer 1

(a) When Price = $150, ATC curve corresponding to QD lies above demand curve, so price is lower than ATC and Mylan will earn Negative economic profit.

Qg at $150 Profit Max PRICE (Dollars per EpiPen) ATC at Profit Max Profit ----- ATC -MC + i MRDH 0 1 9 10 2 3 4 5 6 7 8 QUANTITY (Thousands of EpiPens)

(b) True

Demand curve is inelastic in the portion from mid-point of demand curve (Q = 4,000) to the right of demand curve (upto Q = 8,000). In this elastic range, higher price will increase revenue.

(c) Profit is maximized at intersection of MR and MC curves, as shown in above graph.