THE ANDROMEDA PHARMACEUTICAL COMPANY IS CONSIDERING THE PRODUCTION OF ONE OF THR
ID: 375596 • Letter: T
Question
THE ANDROMEDA PHARMACEUTICAL COMPANY IS CONSIDERING THE PRODUCTION OF ONE OF THREE POSSIBLE VACCINES FOR THE PREVENTION OFTHE FLU FOR THE COMING FLU SEASON. THE COMPANY HAS EVALUATED THE LIKELIHOOD OF DIFFERENT LEVELS OF THE FLU FOR THE COMING YEAR. THE POSSIBLE PRODUCTS ARE VIRANOT, RIBASTOP, AND NOVIRA. DEPENDING ON THE LEVEL OF INFLUENZA FOR THE COMING YEAR, THEOPERATIONS MANAGER HAS ESTIMATED PROFITS FOR EACH DIFFERENT PRODUCT. THE OPERATIONS MANAGER WISHES TO CHOOSE ONE AMONG THE PROPOSED PRODUCTS FOR POSSIBLE PRODUCTION.
THE TABLE BELOW SHOWS THE ESTIMATED PROFIT TO THE COMPANY FOR
EACH POSSIBLE CHOICE OF VACCINE GIVEN THE LIKELIHOODS OF A FLU
OUTBREAK.
DECISION TABLE (PROFIT IN $MILLIONS)
S(STATE OF NATURE) PRODUCT
=LEVEL OF FLU OUTBREAK P(S) VIRANOT RIBASTOP NOVIRA
MAJOR FLU OUTBREAK 0.20 $120 60 35
AVERAGE FLU SEASON 0.70 70 40 30
LIGHT FLU SEASON 0.10 -30 20 30
A) CONSTRUCT A DECISION ANALYSIS TABLE AND DETERMINE THE PROD-
UCT YOU WOULD RECOMMEND TO THE OPERATIONS MANAGER WHICH WOULD
YIELD THE GREATEST EXPECTED PROFIT.
B) DETERMINE HOW MUCH THE ANDROMEDA COMPANY WOULD BE WILLING TO
PAY TO A RESEARCH FIRM TO DETERMINE PERFECT INFORMATION (EVPI)
REGARDING THE NATURE OF THE FLU OUTBREAK FOR THE COMING YEAR.
SINCE PERFECT INFORMATION IS VERY DIFFICULT TO OBTAIN, OF WHAT
USE WOULD THIS INFORMATION BE?
Explanation / Answer
A)
To determine the greatest expected profit, we need to calculate EMV.
EMV= Weighted average of the payoffs
EMV(Viranot) = 0.2 * 120 + 0.7 * 70 + 0.1 * (-30)= $70
EMV(Ribastop) = 0.2 * 60 + 0.7 * 40 + 0.1 * 20 = $42
EMV(Novira) = 0.2 * 35 + 0.7 * 30 + 0.1 * 30 = $31
Hence, Viranot has the greatest expected profit.
B)
Lets figure out the EVPI
EVPI = Expected value of Perfect Information
EVPI = EVwPI - EVwoPI
EVwPI = Expected Value with Perfect Information
This is when we have all the information, hence we will choose the best product for each of the three levels:
Hence, EVwPI = 0.2 * 120 + 0.7 * 70 + 0.1 * 30= $76
EVwoPI = Expected Value without Perfect Information
EVwoPI = Payoff from Viranot product as seen in Part (a) = $70
Hence, EVPI = EVwPI - EVwoPI = $76 - $70 = $6
Level P(S) Viranot Ribastop Novira Major 0.2 120 60 35 Average 0.7 70 40 30 Light 0.1 -30 20 30Related Questions
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