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:

1. 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)

2. 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 (don't forget to identify the IRR)

NPV=2003; IRR=.3033

	discount rate	0.15
Present value
	year	amount	PV	Cumulative PV
	0	-5,000	-5,000	-5,000
	1	2,000	1,739
	2	2,000	1,512
	3	2,000	1,315
	4	2,000	1,144
	5	2,600	1,293
IRR