TagametCase

1) Looking at the estimated demand curve equation, all of the signs of the parameters easily make sense save income. For example, as the price of Tagamet goes up, the quantity demanded decreases (why it’s negative, law of demand). As the other drugs get more expensive, it makes sense that they are positive because Tagamet looks less expensive relative to them. But, as income goes up, it hurts the quantity demanded for Tagamet. My guess for as to why it is negative, is for when income increases, maybe consumers of “anti-ulcer” drugs prefer to buy a “better” one with their higher income (maybe Zantac, i.e.), or get more expensive treatment overall, so quantity demanded for Tagamet decreases accordingly.

2) Own-price elasticity of demand is calculated with the following equation: = (∆Q/∆P)*(P/Q) = (-321.83)*(.29/68.52) = -1.362
Since this absolute value is above one, this demand curve is considered elastic. I believe this makes sense, because with so many competitors to Tagamet, consumers can use a different medicine to treat their ulcers when the price of Tagamet goes up. For instance, as their price increases, the other options become more desirable to the consumers. So, this intuitively makes sense.

3) Cross-price elasticity of demand is found for Tagamet and Carafate by: = ∆Q(Tagamet)/∆P(Carafate) * P(Carafate)/Q(Tagamet) = 128.16*(.26/68.52) = .4863
Then, for Tagamet and Zantac: = 18.76*(.65/68.52) = .17796
Since the cross-price elasticity of demand between Tagamet and Carafate is higher than between Tagamet and Zantac, Carafe is seen as a closer substitute for Tagamet. From the case, while Zantac may be more chemically similar to Tagamet, taking into account the price similarities between Tagamet and Carafate (based on sample mean), it does make sense as to why Carafate is the stronger substitution. As the price of Tagamet increases, Carafate becomes the cheaper option by a more noticeable gap than does Zantac.

4) This model is relatively