SECTION B: APPLICATIONS. 6. A drug manufacturer holds the patent rights to a new formula for lowering cholesterol levels. The manufacturer is able to sell the patent for $50,000 or proceed with intensive tests for the drug's efficacy. The cost of carrying out these tests is $10,000. If the drug is found to be ineffective, the manufacturer has the option to market it or not be market it, and if not marketed the cost of the tests is written off as a loss. If the drug is ineffective and is marketed the sales level can be $45,000 if successful, $30,000 if moderately successful and $25,000 if unsuccessful, all having equal likelihood. In the past, tests of drug of this type have shown 60% to be effective and 40% ineffective. If the tests should now reveal the drug to be effective, the manufacturer again has two options available. He can sell the patent rights and test results for $120,000, or he can market the drug himself. If the drug is marketed, it is estimated that the profits on sales will amount to $180,000 if the sales campaign is highly successful but only $90,000 if it is just moderately successful. It is estimated that these two levels of market penetration are equally likely. (Note all sales are exclusive of the cost of tests). Draw the decision tree for this problem and hence according to the expected monetary value criterion, what is the optimal decision strategy by the drug's manufacturer?
SECTION B: APPLICATIONS. 6. A drug manufacturer holds the patent rights to a new formula for lowering cholesterol levels. The manufacturer is able to sell the patent for $50,000 or proceed with intensive tests for the drug's efficacy. The cost of carrying out these tests is $10,000. If the drug is found to be ineffective, the manufacturer has the option to market it or not be market it, and if not marketed the cost of the tests is written off as a loss. If the drug is ineffective and is marketed the sales level can be $45,000 if successful, $30,000 if moderately successful and $25,000 if unsuccessful, all having equal likelihood. In the past, tests of drug of this type have shown 60% to be effective and 40% ineffective. If the tests should now reveal the drug to be effective, the manufacturer again has two options available. He can sell the patent rights and test results for $120,000, or he can market the drug himself. If the drug is marketed, it is estimated that the profits on sales will amount to $180,000 if the sales campaign is highly successful but only $90,000 if it is just moderately successful. It is estimated that these two levels of market penetration are equally likely. (Note all sales are exclusive of the cost of tests). Draw the decision tree for this problem and hence according to the expected monetary value criterion, what is the optimal decision strategy by the drug's manufacturer?
Chapter7: Matrices And Determinants
Section7.2: Operations With Matrices
Problem 12ECP
Related questions
Topic Video
Question
Transcribed Image Text:SECTION B: APPLICATIONS.
6. A drug manufacturer holds the patent rights to a new formula for lowering cholesterol levels. The
manufacturer is able to sell the patent for $50,000 or proceed with intensive tests for the drug's
efficacy. The cost of carrying out these tests is $10,000. If the drug is found to be ineffective, the
manufacturer has the option to market it or not be market it, and if not marketed the cost of the tests
is written off as a loss. If the drug is ineffective and is marketed the sales level can be $45,000 if
successful, $30,000 if moderately successful and $25,000 if unsuccessful, all having equal likelihood.
In the past, tests of drug of this type have shown 60% to be effective and 40% ineffective. If the tests
should now reveal the drug to be effective, the manufacturer again has two options available. He can
sell the patent rights and test results for $120,000, or he can market the drug himself. If the drug is
marketed, it is estimated that the profits on sales will amount to $180,000 if the sales campaign is
highly successful but only $90,000 if it is just moderately successful. It is estimated that these two
levels of market penetration are equally likely. (Note all sales are exclusive of the cost of tests).
Draw the decision tree for this problem and hence according to the expected monetary value criterion,
what is the optimal decision strategy by the drug's manufacturer?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 1 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, statistics and related others by exploring similar questions and additional content below.Recommended textbooks for you