For this assignment you will need to critically think through each answer. Use the course text and additional research to help you answer the questions below.

Be careful not to confuse value and price. The value of a drug depends first on its clinical effectiveness in treating a particular condition. This is a purely clinical measure only. To determine price, it is easiest to address this question by analyzing both parts of normal market equilibrium.

1. What determines the price of a drug (be detailed and cover all bases)?
   • Demand Side:

• Supply Side:

2. Marketing accounts for a much larger portion of the cost of pharmaceuticals than of other forms of care. Search and find an example of a pharmaceutical advertisement. Provide a description of the advertisement and who the marketing efforts are targeting. Why do you think this is? (short paragraph answer)

3. If Dr. Smith buys a machine for $5,000 as is able to improve the earnings of her practice by $2,000 a year for five years, and then can sell the machine for $600 as scrap, what is the NPV at 15%? What is the IRR? Fill in the Cumulative PV Column in the table below (dont forget to identify the IRR)

• NPV=2003; IRR=.3033