As CEO of J&J, a huge pharmaceutical company, you and your management team face the decision of whether to undertake a $150 million R&D effort to create a new mega-medicine. Your research scientists estimate that there is a 35 percent chance of successfully creating the drug. Success means securing a worldwide patent worth $500 million (implying a net profit of $350 million). However, firm BigMed (your main rival) has just announced that it is spending $100 million to pursue the development of the same medicine (by a scientific method completely independent of yours). You judge that BigMed’s chance of success is 40 percent. Furthermore, if both firms are successful, they will split equally the available worldwide profits ($250 million each) based on separate patents. Assume that firms J&J and BigMed are risk neutral. Use decision trees and the expected profits criterion to justify your answer for the following problems.Should firm J&J undertake the R&D effort to create a new medicine?Suppose that firm J&J can wait for the results of BigMed's programme and then decide. Calculate the expected profits resulting from this decision. Would you recommend this course of action? 4. As CEO of J&J, a huge pharmaceutical company, you and your management team face the decision ofwhether to undertake a $150 million R&D effort to create a new mega-medicine. Your research scientistsestimate that there is a 35 percent chance of successfully creating the drug. Success means securing aworldwide patent worth $500 million (implying a net profit of $350 million). However, firm BigMed(your main rival) has just announced that it is spending $100 million to pursue the development of thesame medicine (by a scientific method completely independent of yours). You judge that BigMed'schance of success is 40 percent. Furthermore, if both firms are successful, they will split equally theavailable worldwide profits ($250 million each) based on separate patents. Assume that firms J&J andBigMed are risk neutral. Use decision trees and the expected profits criterion to justify your answer forthe following problems.a) Should firm J&J undertake the R&D effort to create a new medicine?b) Suppose that firm J&J can wait for the results of BigMed's programme and then decide. Calculate theexpected profits resulting from this decision. Would you recommend this course of action?

A decision tree is a graphical representation of a decision-making process or a sequence of events…

Answered: As CEO of J&J, a huge pharmaceutical…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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As CEO of J&J, a huge pharmaceutical company, you and your management team face the decision of whether to undertake a $150 million R&D effort to create a new mega-medicine. Your research scientists estimate that there is a 35 percent chance of successfully creating the drug. Success means securing a worldwide patent worth $500 million (implying a net profit of $350 million). However, firm BigMed (your main rival) has just announced that it is spending $100 million to pursue the development of the same medicine (by a scientific method completely independent of yours). You judge that BigMed’s chance of success is 40 percent. Furthermore, if both firms are successful, they will split equally the available worldwide profits ($250 million each) based on separate patents. Assume that firms J&J and BigMed are risk neutral. Use decision trees and the expected profits criterion to justify your answer for the following problems.

Should firm J&J undertake the R&D effort to create a new medicine?
Suppose that firm J&J can wait for the results of BigMed's programme and then decide. Calculate the expected profits resulting from this decision. Would you recommend this course of action?

4. As CEO of J&J, a huge pharmaceutical company, you and your management team face the decision of
whether to undertake a $150 million R&D effort to create a new mega-medicine. Your research scientists
estimate that there is a 35 percent chance of successfully creating the drug. Success means securing a
worldwide patent worth $500 million (implying a net profit of $350 million). However, firm BigMed
(your main rival) has just announced that it is spending $100 million to pursue the development of the
same medicine (by a scientific method completely independent of yours). You judge that BigMed's
chance of success is 40 percent. Furthermore, if both firms are successful, they will split equally the
available worldwide profits ($250 million each) based on separate patents. Assume that firms J&J and
BigMed are risk neutral. Use decision trees and the expected profits criterion to justify your answer for
the following problems.
a) Should firm J&J undertake the R&D effort to create a new medicine?
b) Suppose that firm J&J can wait for the results of BigMed's programme and then decide. Calculate the
expected profits resulting from this decision. Would you recommend this course of action?

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