For people with life-threatening allergies, carrying a device that can automatically inject epinephrine (called an autoinjector) is a necessity. In the summer of 2016, Mylan, the maker of the widely used autoinjector EpiPen, found itself with a virtual monopoly. A year earlier its primary competitor, Auvi-Q, had its product recalled amid fears that it would malfunction and deliver the wrong dose. In addition, the FDA denied the drug producer, Teva, from releasing a generic autoinjector. Prior to these events, a two-pack EpiPen sold for approximately $100. But during that summer, Mylan raised the price to over $600 per pack, leading to extensive news coverage, popular online petitions, and outrage on the part of consumers. Mylan countered that many consumers received their EpiPens through their medical insurance, hence they were protected from the price increase. For those who didn’t have insurance coverage and had to pay the full price, Mylan offered a $300 savings card.

a. Draw a graph that shows consumer and producer surplus in a competitive market for epinephrine autoinjectors. Assume firms have a constant marginal cost of $100 per pack.

b. Next, using that graph, show how much consumer surplus, producer surplus, and deadweight loss change after the Auvi-Q recall and the denied entry of Teva by the FDA.

c. How is the savings card offered to those without insurance an example of price discrimination? Draw a graph showing how consumer and producer surplus will change under the savings card program.