C) 20000 D) 40000 E) 60000 One local hospital has just enough space and funds cu

Question

C) 20000 D) 40000 E) 60000 One local hospital has just enough space and funds currently available to start either a cancer or heart research lab. If administration decides on the cancer lab, there is a 20 percent chance of getting $100, 000 in outside funding from the American Cancer Society next year, and an 80 percent chance of getting nothing. If the cancer research lab is funded the first year, no additional outside funding will be available the second year. However, if it is not funded the first year, then management estimates the chances are 50 percent it will get $100, 000 the following year, and 50 percent that it will get nothing again. If, however, the hospital's management decides to go with the heart lab, then there is a 50 percent chance of getting $50, 000 in outside funding from the American Heart Association the first year and a 50 percent chance of getting nothing. If the heart lab is funded the first year, management estimates a 40 percent chance of getting another $50, 000 and a 60 percent chance of getting nothing additional the second year. If it is not funded the first year, then management estimates a 60 percent chance for getting $50, 000 and a 40 percent chance for getting nothing in the following year. For both the cancer and heart research labs, no further possible funding is anticipated beyond the first two years. What is the expected value for the optimum decision alternative? A) $50000 B) $100000

Explanation / Answer

Weight each payoff by its likelihood of occurrence

for heart - $50,000

for cancer -   $60,000

$60,000 is correct

option D) is correct

Choose the option with the highest expected value

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