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A drug company is planning to invest in a new drug. The cost of research has a uniform distribution on $300,000 to $500,000. There is a 40% chance that the drug will not be effective, in which case there will be no sales. If the drug is effective, then the total market for the drug is 400,000 people. The company expects their share of the market to have a triangular distribution with minimum 5%, maximum 30%, and most likely 20% of the people. For each person who uses the new drug, the company expects to make $100 in sales during the first year. The drug company would like to know the distribution of profit they can expect from undertaking this investment.

A drug company is planning to invest in a new drug. The cost of research has a uniform distribution on $300,000 to $500,000. There is a 40% chance that the drug will not be effective, in which case there will be no sales. If the drug is effective, then the total market for the drug is 400,000 people. The company expects their share of the market to have a triangular distribution with minimum 5%, maximum 30%, and most likely 20% of the people. For each person who uses the new drug, the company expects to make $100 in sales during the first year. The drug company would like to know the distribution of profit they can expect from undertaking this investment.

Principles of Economics 2e
Principles of Economics 2e
2nd Edition
ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:Steven A. Greenlaw; David Shapiro
Chapter16: Information, Risk, And Insurance
Section: Chapter Questions
Problem 1SCQ: For each of the following purchases, say whether you would expect the dogma of imperfect information...
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1. 4 Input Modeling in Drug Development Cost of Drug Development Revenue 6. Effectiveness Market Share Revenue per person Number of People 9. 10 Cost Total Revenue 11 12 13 Total Profit 14 A drug company is planning to invest in a new drug. The cost of research has a uniform distribution 15 on $300,000 to $500,000. There is a 40% chance that the drug will not be effective, in which case 16 there will be no sales. If the drug is effective, then the total market for the drug is 400,000 people. The company expects their share of the market to have a triangular distribution with minimum 5%, maximum 30%, and most likely 20% of the people. For each person who uses the new drug, the 20 company expects to make $100 in sales during the first year. The drug company would like to know the distribution of profit they can expect from undertaking this investment. 17 18 19 21 22 23 24 25
Transcribed Image Text:1. 4 Input Modeling in Drug Development Cost of Drug Development Revenue 6. Effectiveness Market Share Revenue per person Number of People 9. 10 Cost Total Revenue 11 12 13 Total Profit 14 A drug company is planning to invest in a new drug. The cost of research has a uniform distribution 15 on $300,000 to $500,000. There is a 40% chance that the drug will not be effective, in which case 16 there will be no sales. If the drug is effective, then the total market for the drug is 400,000 people. The company expects their share of the market to have a triangular distribution with minimum 5%, maximum 30%, and most likely 20% of the people. For each person who uses the new drug, the 20 company expects to make $100 in sales during the first year. The drug company would like to know the distribution of profit they can expect from undertaking this investment. 17 18 19 21 22 23 24 25
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