Answered: Please do this short answer problem and…

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter2: Introduction To Spreadsheet Modeling

Section: Chapter Questions

Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...

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Related questions

Question

Please do this short answer problem and use the table in the picture A pharmaceutical company is deciding whether or not to apply to the FDA for approval of a new drug. The payoff table associated with a successful and unsuccessful application is provided below. The company has determined that the expected value of perfect information is $2,100,000. A consulting firm has offered their services to do market research to help better understand the market for the new drug. This consultant has a 95% success rate in classifying success- ful drugs and a 100% success rate in classifying unsuccessful drug applications. The firm charges $2,250,000 for his services. Determine whether or not the company should hire this consultant. Discuss your reasoning/approach in determining your answer.

Decision Alternative
Apply for FDA Approval
Don't Apply for FDA Approval
Probabilities of States
Outcome of Application Process
Successful Application Unsuccessful Application
$3,000,000
$0
.8
-$1,500,000
$0
.2

Expert Solution

Step 1: Determine given variables:

Decision alternative	Successful application	Unsuccessful application
Apply for FDA	3000000	-1500000
Don’t apply for FDA	0	0
Probabilities	0.8	0.2
Probabilities with consultation	0.95	0.05
EVwPI	2100000